NY INVESTOR RELATIONS FIRM PARTNERY CHARGED WITH INSIDER TRADING

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today charged a partner at a New York-based investor relations firm with insider trading on confidential information he learned about two clients while he helped prepare their press releases. 

The SEC alleges that Kevin McGrath sold his shares in Misonix Inc. upon learning that the company was set to announce disappointing financial results.  The SEC further alleges that McGrath bought stock in Clean Diesel Technologies Inc. when he learned about the company’s impending announcement of positive news, and he profited when its stock price nearly doubled.  McGrath’s illicit profits and avoided losses from insider trading in both companies totaled $11,776. 

McGrath, who lives in Brooklyn, N.Y., and works at Cameron Associates, agreed to settle the charges by paying disgorgement of $11,776, prejudgment interest of $1,492, and a penalty of $11,776, for a total of $25,044. 

“Investor relations firms owe their clients a duty to maintain in strict confidence the important and sensitive information that clients impart for the sole purpose of obtaining help and advice on how best to communicate forthcoming news to investors,” said Andrew M. Calamari, director of the SEC’s New York Regional Office.  “McGrath’s self-centered misconduct betrayed both his own firm and his firm’s clients whose confidential information he exploited for personal gain.”

The settlement also includes a “conduct-based injunction” that permanently requires McGrath to abstain from trading in the stock of any issuer for which he or his firm has performed any investor relations services within a one-year period.  His present or any future firm is required to provide written notice to a client upon any intent to sell shares received as compensation for services performed, and must receive written authorization for the sale from the management of that company.

“McGrath used one hand to help clients draft their press releases while using the other to trade illegally in their stock,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “This settlement imposes additional trading limitations on McGrath in the form of a conduct-based injunction to ensure that he doesn’t commit the same transgression again.”

According to the SEC’s complaint filed in federal court in Manhattan, McGrath purchased Misonix shares in April 2009.  He later performed work on a press release in which Misonix was set to announce disappointing quarterly results.  McGrath ascertained the company’s target date to release the negative news, and sold all of his Misonix shares shortly before the press release was issued on May 11, 2009.  By doing so, McGrath avoided losses of $5,400 when Misonix’s share price subsequently dropped 22 percent.

The SEC alleges that McGrath also performed work on a press release in which Clean Diesel was announcing approximately $2 million in orders it received for certain products.  Merely minutes after finding out on May 24, 2011, that the press release was bound for issuance the following day, McGrath purchased 1,000 shares of Clean Diesel stock.  The stock price rose 95 percent upon the positive news, and McGrath sold all of his Clean Diesel shares on May 27 for illicit profits of $6,376.

The SEC’s complaint charges McGrath with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Without admitting or denying the allegations, McGrath agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval. 

The SEC’s investigation was conducted by Dina Levy, Daniel Marcus, and George O’Kane.  The case was supervised by Mr. Wadhwa and Sharon Binger.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

COURT ORDERS DEFENDANTS TO PAY OVER $18 MILLION DISGORGEMENT, PENALTIES FOR MISCONDUCT IN SECURITIES MARKET

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Court Enters Final Judgment by Consent Against SEC Defendants Philip A. Falcone, Harbinger Capital Partners Offshore Manager, L.L.C., Harbinger Capital Partners Special Situations GP, L.L.C., and Harbinger Capital Partners LLC

The Securities and Exchange Commission announced that, on September 16, 2013, the Honorable Paul A. Crotty, United States District Court Judge for the Southern District of New York, entered a final judgment by consent against Defendants Philip A. Falcone, Harbinger Capital Partners Offshore Manager, L.L.C., Harbinger Capital Partners Special Situations GP, L.L.C., and Harbinger Capital Partners LLC in two related actions. No judgment was entered against Defendant Peter A. Jenson. The final judgment bars Falcone from the securities industry for at least five years. In addition, Falcone and his advisory firm Harbinger Capital Partners agreed to a settlement in which they must pay more than $18 million in disgorgement and penalties and admit wrongdoing.

The SEC filed enforcement actions in June 2012 alleging that Falcone improperly used $113 million in fund assets to pay his personal taxes, secretly favored certain customer redemption requests at the expense of other investors, and conducted an improper "short squeeze" in bonds issued by a Canadian manufacturing company. In the settlement papers filed with the court, Falcone and Harbinger admit to multiple acts of misconduct that harmed investors and interfered with the normal functioning of the securities markets.

On August 19, 2013, Falcone agreed to a settlement which requires him to pay $6,507,574 in disgorgement, $1,013,140 in prejudgment interest, and a $4 million penalty. The Harbinger entities are required to pay a $6.5 million penalty. Falcone also consented to the entry of a judgment barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization with a right to reapply after five years. The bar will allow him to assist with the liquidation of his hedge funds under the supervision of an independent monitor.

Among the set of facts that Falcone and Harbinger admitted to in settlement papers filed with the court:

Falcone improperly borrowed $113.2 million from the Harbinger Capital Partners Special Situations Fund (SSF) at an interest rate less than SSF was paying to borrow money, to pay his personal tax obligation, at a time when Falcone had barred other SSF investors from making redemptions, and did not disclose the loan to investors for approximately five months.

Falcone and Harbinger granted favorable redemption and liquidity terms to certain large investors in HCP Fund I, and did not disclose certain of these arrangements to the fund's board of directors and the other fund investors.

During the summer of 2006, Falcone heard rumors that a Financial Services Firm was shorting the bonds of the Canadian manufacturer, and encouraging its customers to do the same.

In September and October 2006, Falcone retaliated against the Financial Services Firm for shorting the bonds by causing the Harbinger funds to purchase all of the remaining outstanding bonds in the open market.

Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding transactions in the bonds and deliver the bonds that it owed. Defendants did not disclose at the time that it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver, as nearly the entire supply was locked up in the Harbinger funds' custodial account and the Harbinger funds were not offering them for sale.

Due to Falcone's and the other Defendants' improper interference with the normal interplay of supply and demand in the bonds, the bonds more than doubled in price during this period.