FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Former Silicon Valley Executive to Pay $1.75 Million to Settle Insider Trading Charges
On October 24, 2012, the Securities and Exchange Commission charged a former senior executive at a Silicon Valley technology company for illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge funds to make nearly $1 million in illicit profits.
The SEC alleges that Kris Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds. Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007.
Chellam, who lives in Saratoga, Calif., has agreed to pay more than $1.75 million to settle the SEC's charges. The settlement is subject to court approval.
According to the SEC's complaint filed in federal court in Manhattan, Xilinx announced in October 2006 the financial results for the second quarter of its 2007 fiscal year. Xilinx also provided guidance for the third quarter by projecting revenues of approximately $476 million to $490 million. Xilinx said it would update this revenue guidance on Dec. 7, 2006.
The SEC alleges that in the weeks leading up to Xilinx's December 7 update, Chellam received multiple reports indicating that the company's third quarter business results were not going to be as positive as projected in October. Chellam learned on November 21 that the top end of the projected revenue range was being lowered from $490 million to $470 million. He attended a December 4 confidential executive staff meeting where the bottom end of the revenue projection was lowered from $476 million to $455 million. On December 5, Chellam telephoned Rajaratnam and tipped him about Xilinx's worse-than-expected performance. Just minutes after the call, Galleon hedge funds controlled by Rajaratnam sold short Xilinx stock, eventually selling short more than 650,000 shares over the course of that day and the following day.
According to the SEC's complaint, the Galleon hedge funds reaped approximately $978,684 in illegal profits after the December 7 announcement by covering the substantial short position that Rajaratnam had accumulated based on Chellam's tip. Chellam had more than $1 million invested in one of the Galleon hedge funds in which Rajaratnam placed these trades. In May 2007, Chellam became the co-managing partner of the Galleon Special Opportunities Fund, a venture capital fund that focused on investments in late-stage technology companies. Chellam continued to work at Galleon until April 2009 and continued to obtain confidential information about Xilinx's financial performance and pass it along to Galleon colleagues. Chellam earned approximately $675,000 in total compensation during his employment at Galleon.
The SEC's complaint charges Chellam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. The proposed final judgment orders Chellam to pay $675,000 in disgorgement, $106,383.05 in prejudgment interest, and a $978,684 penalty. Chellam also would be barred for a period of five years from serving as an officer or director of a public company, and permanently enjoined from future violations of these provisions of the federal securities laws. Chellam neither admits nor denies the charges.
The SEC has now charged 32 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders throughout the country. The alleged insider trading has occurred in the securities of more than 15 companies for illicit profits totaling approximately $93 million.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., Oct. 29, 2012 — The Securities and Exchange Commission announced that it has instituted proceedings to determine whether to issue an order that would prevent sales of shares in Caribbean Pacific Marketing, Inc., based on allegations that the company's disclosure is misleading.
"The Division of Enforcement is seeking a stop order to protect investors by preventing any potential sales of stock under a materially misleading and deficient offering document," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.
A stop order prevents a company or its shareholders from selling privately-held shares to the public under a materially misleading or deficient registration statement. If a stop order is issued, no new shares can enter the market pursuant to that registration statement until the company has corrected the deficiencies or misleading information contained in the registration statement.
In proceedings instituted against Caribbean Pacific on October 29, 2012, the SEC's Division of Enforcement alleges that Caribbean Pacific's registration statement is materially misleading because it omits any information about William J. Reilly and his position within the company as a de facto executive officer and control person. The Division of Enforcement alleges that Reilly is a disbarred attorney subject to a court order barring him from any penny stock offering, from serving as a corporate office and director, and from violating certain federal securities laws. In addition, Reilly was suspended from appearing or practicing before the Commission as an attorney, with a right to reapply after three years.
The Commission instituted the proceedings against Caribbean Pacific to determine whether the allegations by the Division of Enforcement are true, to give the company an opportunity to respond to the allegations, and to determine whether a stop order should be issued.
On October 23, the U.S. Attorney's Office for the Southern District of Florida filed a criminal complaint against Reilly, alleging securities fraud.
SEC Senior Counsels Trisha D. Sindler and Michelle I. Bougdanos are conducting the SEC's investigation under the supervision of Assistant Regional Director Chedly C. Dumornay, and Adam Schwartz and Christine Nestor will handle the litigation. All are with SEC's Miami Regional Office. The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of Florida and the FBI's Miami Division in this matter.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
SEC Charges Denver-Based Insurance Executive With Insider Trading
On October 26, 2012, the Securities and Exchange Commission charged an insurance company CEO with insider trading based on confidential information he obtained in advance of a private investment firm acquiring a significant stake in a Denver-based oil and gas company.
The SEC alleges that Michael Van Gilder learned from a Delta Petroleum Corporation insider that Beverly Hills-based Tracinda – which has previously owned large portions of companies such as MGM Resorts International, General Motors, and Ford Motor Company – was planning to acquire a 35 percent stake in Delta Petroleum for $684 million. Van Gilder subsequently purchased Delta Petroleum stock and highly speculative options contracts. He tipped several others, encouraging them to do the same, including a pair of relatives via an e-mail with the subject line "Xmas present." After Tracinda's investment was publicly announced, Delta Petroleum's stock price shot up by almost 20 percent. Van Gilder and his tippees made more than $161,000 in illegal trading profits.
The U.S. Attorney's Office for the District of Colorado today announced a parallel criminal action against Van Gilder.
According to the SEC's complaint filed in federal court in Denver, Van Gilder is the CEO of Van Gilder Insurance Company. He obtained the confidential information about Tracinda's proposed investment and loaded up on Delta Petroleum stock and options in November and December 2007. He then tipped his broker, a co-worker, and relatives.
The SEC alleges that a mere two minutes after speaking to his source at Delta Petroleum on December 22, Van Gilder e-mailed two relatives with the "Xmas present" subject line and stated, "my present (just kidding) is that I can't stress enough the opportunity right now to buy Delta Petroleum." That same day, Van Gilder contacted his broker and arranged to purchase more Delta stock and options for himself. Following the public announcement, Van Gilder reaped approximately $109,000 in illegal profits and his broker, co-worker, and a relative made approximately $52,000.
The SEC's complaint charges Van Gilder with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering him to disgorge his and his tippees' ill-gotten gains and pay prejudgment interest and a financial penalty, and permanently enjoining him from future violations of these provisions of the federal securities laws.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
On October 24, 2012, the Securities and Exchange Commission charged Michael Johnson, a divisional merchandise manager at Kohl's, which is a national department store. The complaint alleged that Johnson assisted the financial fraud at Carter's, Inc, an Atlanta-based manufacturer of children's clothing. Specifically, the SEC alleges that Johnson assisted Joseph Elles, a former Executive Vice President of Sales at Carter's, in concealing his financial fraud from senior Carter's management. That scheme caused Carter's to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.
The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles fraudulently manipulated the amount of discounts that Carter's granted to Kohl's, Carter's largest wholesale customer in order to induce Kohl's to purchase greater quantities of Carter's clothing for resale. In an effort to conceal the scheme, Elles persuaded Kohl's to defer subtracting the discounts from payments until later periods. Elles also persuaded Johnson, who handled the Carter's account at Kohl's to sign a false confirmation that misrepresented to Carter's accounting personnel the timing and amount of those discounts. By concealing the amount of discounts that had been promised to Kohl's, Elles and Johnson caused Carter's to materially understate it expenses in certain quarters and materially overstate its earnings in those quarters.
After conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.
The SEC's complaint alleges that Johnson violated Rule 13b-2 of the Securities Exchange Act of 1934 ("Exchange Act"), which prohibits any person from directly or indirectly falsifying or causing to be falsified an issuer's accounting records. The complaint also alleges that Johnson aided and abetted Elles' violations of Section 13b(5) of the Exchange Act, which among other things, prohibits any person from knowingly falsifying the books, records and/or accounts of an issuer, and Rule 13b2-1 thereunder. The SEC is seeking permanent injunctive relief and financial penalties against Johnson.
This is the third case that the SEC has filed in this continuing investigation. The Commission previously charged Joseph Elles (see SEC v. Joseph Elles, Litigation Release No. 21784 / December 20, 2010) and Joseph Pacifico (see Litigation Release No. 22517 / October 19, 2012). When the Commission announced the first case, the Commission also announced that it had entered into a non-prosecution agreement with Carter's, based in part on Carter's prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter's extensive and substantial remedial actions. See Release No. 2010-252 / December 20, 2010. Pursuant to that agreement, Carter's has continued to cooperate during the Commission's continuing investigation.
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