The Securities and Exchange Commission today charged New York-based fund manager Steven B. Hart (Hart) with repeated violations of the federal securities laws related to two distinct multi-year trading schemes, involving illegal matched trading and insider trading. In addition, the Commission charged Hart with making fraudulent representations in two securities purchase agreements.
The SEC alleges that from January 17, 2008 through June 4, 2009, Hart used his control of Octagon Capital Partners, LP, a small investment fund he controls, and his position of authority at an investment fund for which he was employed as a portfolio manager to direct thirty-one matched trades between the two investment funds, benefitting Octagon at the expense his employer's fund. Generally, Hart caused Octagon to purchase stock in small, thinly traded issuers at the going market price and, on the following day, sold the same stock to his employer's fund at a price substantially above the prevailing market price. Each of the sales from Octagon to the employer's fund occurred in premarket trading; thus, Hart ensured that the trades matched. Later that same day or within a few days of the matched trades, the employer's fund, at Hart's direction, sold the recently-acquired stock on the open market at a loss. As a result of this scheme, Hart generated ill-gotten gains of $586,338 for Octagon.
According to the SEC's complaint, Hart, after being confidentially solicited to invest in numerous securities offerings - and despite expressly agreeing to keep the information he received confidential and to not trade on it by agreeing to go "over-the-wall" - nevertheless traded on behalf of Octagon while in possession of material nonpublic information concerning the offerings. From June 19, 2007 through March 15, 2011, in breach of a duty of trust or confidence, Hart directed trades in the securities of nineteen issuers conducting twenty separate offerings, including PIPEs, registered direct offerings, and confidentially marketed public offerings. As a result of Hart's conduct, Octagon derived ill-gotten gains of $244,733.
In addition, on two occasions, in order to induce issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that, after he was solicited, Octagon had not traded the issuers' securities in the days leading up to the public announcement of the transactions. Despite going "over-the-wall" during the solicitation process for the offerings, Hart nevertheless directed short sales of the issuer's securities, realizing insider trading gains, and subsequently signed the securities purchase agreements.
The SEC filed action in the U.S. District Court for the Southern District of New York against Hart, alleging violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Without admitting or denying the allegations of the complaint, Hart consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. Hart also agreed to pay $831,071 in disgorgement and $103,424 in prejudgment interest, and a civil penalty of $394,733. The settlement is subject to court approval.
The SEC's investigation was conducted in the New York Regional Office by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz, with assistance from Frank J. Milewski. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.
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