FORMER BANCO SANTANDER, S.A. OFFICIAL PAYS PENALTY TO SETTLE INSIDER TRADING CASE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

Spanish Trader Agrees to Pay Disgorgement and a Penalty to Settle Insider Trading Case

The Securities and Exchange Commission announced that Cedric Cañas Maillard, a Spanish citizen and former high-ranking official at Madrid-based Banco Santander, S.A., has agreed to pay almost $2 million to settle charges that he traded on inside information in advance of a public announcement about a proposed acquisition for which the Spanish investment bank was acting as an adviser.

The SEC’s Complaint, filed in July 2013, alleged that Cañas, who served as an executive advisor to Banco Santander’s CEO, learned confidentially that the investment bank had been asked by one of the world’s largest mining companies, BHP Billiton, to advise and help underwrite its proposed acquisition of Potash Corporation, one of the world’s largest producers of fertilizer minerals. In the days leading up to a public announcement of BHP’s bid, Cañas purchased Potash contracts-for-difference (CFDs), which were highly leveraged securities not traded in the U.S. but based on the price of U.S. exchange-listed Potash stock. The CFDs mirrored the movement and pricing of that stock. Cañas also tipped his close personal friend Julio Marín Ugedo about the potential acquisition and advised him to purchase Potash stock.

The SEC’s Complaint alleged that Cañas purchased 30,000 Potash CFDs from August 9 to August 13, 2010 based on material, non-public information he learned about BHP’s offer to acquire Potash. Marín purchased 1,393 shares of Potash common stock based on material, non-public information through two Spain-based brokerage accounts. Cañas liquidated his entire CFD position in Potash following the August 17, 2010 public announcement for an illicit profit of $917,239, and Marín sold his stock for net trading profits of $43,566.

The settlement was approved yesterday by Judge Valerie E. Caproni of the United States District Court for the Southern District of New York.

Cañas agreed to the entry of a final judgment ordering him to pay $960,806, the amount of the trading profits reaped by both Cañas and Marín, and a $960,806 civil penalty. Without admitting or denying the SEC’s allegations, he agreed to be permanently enjoined from future violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder.

The SEC’s litigation continues with respect to Marín.

FINAL JUDGMENTS ENTERED IN INSIDER TRADING CASE INVOLVING MERGERS, DRUG APPROVAL, EARNINGS REPORTS

FROM:  US. SECURITIES AND EXCHANGE COMMISSION 

Court Enters Final Judgments by Consent Against Michael Pendolino, Lawrence D. Grum, and Michael L. Castelli

The Securities and Exchange Commission announced that on June 12, 2014, in SEC v. Lazorchak et al., Civ. Act. No. 12-07164 KSH-PS, the Honorable Katharine S. Hayden, United States District Court Judge for the District of New Jersey, entered final judgments by consent against Defendants Michael Pendolino (Pendolino), of Nashua, New Hampshire; Lawrence D. Grum (Grum), of Livingston, New Jersey; and Michael L. Castelli (Castelli), of Morris Plains, New Jersey. The judgments permanently enjoin Pendolino, Grum, and Castelli from future violations of antifraud provisions of the federal securities laws and order them to pay disgorgement and prejudgment interest.

The SEC's complaint, filed on November 19, 2012, alleged an insider-trading scheme spanning five years and involving illegal tipping by insiders at three public companies: Celgene Corp. (Celgene), Sanofi-Aventis Corporation (Sanofi); and (3) Stryker Corp. (Stryker), and at least eleven material events, including mergers, a drug approval application, and quarterly earnings information. The SEC further alleged that the insiders tipped material nonpublic information about each of these corporate events to Grum and Castelli who, in turn, traded on the basis of, and tipped that information to others. As alleged, the Celgene insider also tipped material nonpublic information about two of the events to his high school friend, Pendolino, who traded on the basis of, and tipped that information to others.

The judgments permanently enjoin Pendolino, Grum, and Foldy from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and order them to pay combined disgorgement and prejudgment interest as follows: Pendolino, $68,862.12; Grum, $838,758.75; Castelli, $716,208.90.

Pendolino, Grum, and Castelli were criminally charged in a parallel criminal action in federal district court in the District of New Jersey. They have since pled guilty to charges of conspiracy to commit securities fraud and/or securities fraud and have been sentenced: Pendolino to probation of one year, and Grum and Castelli to prison terms of a year and a day, and nine months, respectively. United States v. Pendolino, 2:13-00657-KSH; United States v. Grum, 2:13-00737-KSH; United States v. Castelli, 2:13-00738-KSH.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

FORMER EXECUTIVE SENTENCED FOR ROLE IN INSIDER TRADING CASE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Former Executive of Massachusetts-Based Company Sentenced in Insider Trading Case

The Commission announced today that, on January 21, 2014, Joseph M. Tocci, was sentenced for insider trading in the securities of Massachusetts-based American Superconductor Corporation.  The criminal charges against Tocci arose out of the same conduct for which the Commission filed a securities fraud action against Tocci in 2013.  Tocci pled guilty to the charges of insider trading on August 29, 2013.

According to the criminal information filed on August 12, 2013, Tocci, a former assistant treasurer of American Superconductor, learned in a call on or about March 31, 2011 with American Superconductor’s chief financial officer that the company’s primary customer, Sinovel Wind Group Co. Ltd., would not make past due payments and would not accept shipments scheduled for the end of the quarter on March 31, 2011.  The criminal information further stated that following the call and discussions with other members of the finance staff, Tocci knew that American Superconductor’s actual financial results for fiscal year 2010 (ended March 31, 2011) would likely be well below analysts’ expectations for the company.  According to the information, Tocci knew that he was not allowed to trade in American Superconductor shares based on material, nonpublic information about the company.  However, on April 1, 2011, while in possession of material, nonpublic information concerning Sinovel, he purchased 100 American Superconductor put option contracts.  In the context of stock transactions, a “put option” is the right to sell a particular stock at a certain price (the “strike price”) by a certain date (“expiration date”).  For the put options that Tocci purchased, if American Superconductor’s stock price declined significantly before May 21, 2011, Tocci stood to profit from the put option contracts.  On April 5, 2011, American Superconductor made a public announcement that Sinovel had refused to accept scheduled shipments and that the company expected Sinovel to reduce its level of inventory before accepting further shipments and that American Superconductor expected its revenues for the fourth quarter and/or fiscal year 2010 (ended March 31, 2011), and its expected earnings, to be substantially below prior forecasts.  On April 6, 2011, American Superconductor’s stock price dropped 42%, closing at $14.47 per share.  Tocci sold his put options for $95,092.37, earning a profit of approximately $82,440.  Tocci was sentenced to one year probation, a $100 fine, and was required to continue to pay disgorgement, prejudgment interest, and civil penalties he previously agreed to with the Commission.

In a parallel Complaint filed on August 12, 2013, in the U.S. District Court for the District of Massachusetts in Boston, the SEC alleges that Tocci, age 59, of Belmont, Massachusetts, used confidential information he obtained as the assistant treasurer of American Superconductor to purchase option contracts through which Tocci essentially bet that the company’s stock price would soon decrease on the release of negative news.  Tocci agreed to settle this case by consenting to a judgment enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay disgorgement of $82,439 (representing his ill-gotten gains) plus prejudgment interest of $6,109 and a civil penalty of $82,439.

The SEC’s investigation was conducted by Asita Obeyesekere, Michael Foster, and Kevin Kelcourse in the SEC’s Boston Regional Office.  The Commission acknowledges the assistance and cooperation of the U.S. Attorney’s Office for the District of Massachusetts and the Federal Bureau of Investigation’s Boston Field Office.  The Commission also thanks the Options Regulatory Surveillance Authority and the Financial Industry Regulatory Authority for their assistance.

COMPANY AND EXECUTIVES CHARGED BY SEC OVER DISCLOSURES INVOLVING LIFE SETTLEMENTS

 The following excerpt is from the SEC website:

Jan. 3, 2012 

“Washington, D.C., — The Securities and Exchange Commission today charged Texas-based financial services firm Life Partners Holdings Inc. and three of its senior executives for their involvement in a fraudulent disclosure and accounting scheme involving life settlements.

The SEC alleges that Life Partners chairman and CEO Brian Pardo, president and general counsel Scott Peden, and chief financial officer David Martin misled shareholders by failing to disclose a significant risk to Life Partners’ business: the company was systematically and materially underestimating the life expectancy estimates it used to price transactions. Life expectancy estimates are a critical factor impacting the company’s revenues and profit margins as well as the company’s ability to generate profits for its shareholders.

The SEC alleges that Life Partners and the three executives were involved in disclosure violations and improper accounting that Life Partners used to overvalue assets held on the company’s books and create the appearance of a steady stream of earnings from brokering life settlement transactions. The SEC further charged Pardo and Peden with insider trading in their shares of Life Partners stock while in possession of material, non-public information indicating that the company had systematically and materially underestimated life expectancy estimates.

“Life Partners duped its shareholders by employing an unqualified medical doctor to assign baseless life expectancy estimates to the underlying insurance policies,” said Robert Khuzami, Director of the SEC's Division of Enforcement. “This deception misled shareholders into thinking that the company's revenue model was sustainable when in fact it was illusory.”

David Woodcock, Director of the SEC’s Fort Worth Regional Office, added, “The senior-most executives at Life Partners concealed significant risks to the business, manipulated financial statements with improper accounting, and knowingly profited from their misconduct by executing insider trades based on information that was not available to the public.”

Life Partners is a Nasdaq-traded company that generates virtually all of its revenues from brokering life settlements. Life settlements involve the purchase and sale of fractional interests of life insurance policies in the secondary market. In life settlement transactions, life insurance policy owners sell their policies to investors in exchange for a lump-sum payment. The dollar amount offered by the investor takes into account the insured’s life expectancy and the terms and conditions of the insurance policy.

According to the SEC’s complaint filed in federal district court in Waco, Texas, Life Partners misrepresented and failed to disclose in public filings with the SEC that the company’s systematic use of materially underestimated life expectancy estimates constituted a material risk to the company’s revenues. Beginning in 1999, the company used life expectancy estimates provided by Dr. Donald T. Cassidy, a Reno, Nev.-based doctor with no actuarial training or prior experience rendering life expectancy estimates. The SEC alleges that Life Partners and Pardo failed to conduct any meaningful due diligence on Cassidy’s qualification to act as a life expectancy underwriter and instructed the doctor to use a life expectancy methodology that was created by the company’s former underwriter, a part-owner of Life Partners. Pardo, Peden, and Martin were aware that the Cassidy-rendered life expectancy estimates were systematically and materially short.

The SEC alleges that Life Partners materially misstated net income from fiscal year 2007 through the third quarter of fiscal year 2011 by prematurely recognizing revenues and understating impairment expense related to its investments in life settlements. Life Partners improperly accelerated revenue recognition from the closing date to the date it obtained a non-binding agreement with the policy owner to sell a life settlement. Life Partners use of Cassidy’s life expectancy estimates as part of its impairment calculations caused the company to understate millions of dollars in impairment expense.

The SEC further alleges that during this time, Pardo and Peden sold approximately $11.5 million and $300,000 respectively of Life Partners stock at inflated prices while in possession of material non-public information about the company’s dependency on short life expectancy estimates to generate revenues.

In addition to the alleged violations of the antifraud and reporting provisions of the federal securities laws by Life Partners, Pardo, Peden and Martin, the SEC’s complaint also seeks repayment to the company of stock sales profits and bonuses received by Pardo and Martin pursuant to Section 304 of the Sarbanes Oxley Act of 2002.”