FORMER HEAD OF INVESTOR RELATIONS CHARGED WITH VIOLATION OF FAIR DISCLOSURE RULES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged the former head of investor relations for a Tempe, Ariz.-based solar energy company with violating rules requiring fair disclosure of information when he alerted certain analysts and investors about an upcoming major development.

Regulation FD requires material nonpublic information to be disclosed publicly in a broad manner and not selectively.  An SEC investigation determined that Lawrence D. Polizzotto, a former vice president at First Solar Inc., violated Regulation FD when he indicated in phone conversations with some analysts and investors that the company was unlikely to receive a much-anticipated loan guarantee from the U.S. Department of Energy.  When First Solar broadly disclosed this material information in a press release the next morning, its stock price dropped 6 percent.

Polizzotto agreed to pay $50,000 to settle the SEC’s charges.

“Polizzotto offered previously undisclosed information to select analysts and institutional investors and left the rest of First Solar’s investors in the dark,” said Michele Wein Layne, Director of the SEC’s Los Angeles Office.  “All investors, regardless of their size or relationship with the company, are entitled to the same information at the same time.”

According to the SEC’s order instituting a settled administrative proceeding, Polizzotto attended an investor conference on Sept. 13, 2011, with First Solar’s then-CEO, who publicly expressed confidence that the company would receive three loan guarantees totaling approximately $4.5 billion for which the company had received conditional commitments from the Energy Department.  However, two days later, Polizzotto and several other executives learned that the company would not be receiving at least one of the loan guarantees.  A group of employees including Polizzotto and one of First Solar’s in-house lawyers began discussing how and when the company should publicly disclose the loss of the loan guarantee.  The company lawyer specifically noted that when the company received official notice from the Energy Department, “we would not have to issue a press release or post something to our website the same day.  We would, though, be restricted by Regulation FD in any [sic] answering questions asked by analysts, investors, etc. until such time that we do issue a press release or post to our website…”

According to the SEC’s order, Polizzotto violated Regulation FD during one-on-one phone conversations with approximately 20 sell-side analysts and institutional investors on Sept. 21, 2011 – the day after a Congressional committee sent a letter to the Energy Department inquiring about its loan guarantee program and the status of conditional commitments, including three involving First Solar.  This Congressional line of inquiry caused concern within the solar industry about whether the Energy Department would be able to move forward with its conditional commitments.  Analysts began issuing research reports about the Congressional inquiry, and analysts and investors began calling Polizzotto.  Despite knowing that the company had not yet publicly disclosed anything, Polizzotto drafted several talking points that effectively signaled that First Solar would not receive one of the three loan guarantees.  His talking points emphasized the high probability of receiving two of the loan guarantees and the low probability of receiving the third.  Polizzotto delivered his talking points in the one-on-one calls with analysts and institutional investors, and he directed a subordinate to do the same.  Polizzotto went even further than his talking points when he told at least one analyst and one institutional investor that if they wanted to be conservative, they should assume that First Solar would not receive one of the loan guarantees.

Polizzotto agreed to settle the SEC’s charges without admitting or denying the findings.  In addition to the $50,000 penalty, he agreed to cease and desist from causing any violations and any future violations of Regulation FD and Section 13(a) of the Securities and Exchange Act of 1934.

The SEC has determined not to bring an enforcement action against First Solar due to the company’s extraordinary cooperation with the investigation among several other factors.  Prior to Polizzotto’s selective disclosure on September 21, First Solar cultivated an environment of compliance through the use of a disclosure committee that focused on compliance with Regulation FD.  The company immediately discovered Polizzotto’s selective disclosure and promptly issued a press release the next morning before the market opened.  First Solar then quickly self-reported the misconduct to the SEC.  Concurrent with the SEC’s investigation, First Solar undertook remedial measures to address the improper conduct.  For example, the company conducted additional Regulation FD training for employees responsible for public disclosure.

The SEC’s investigation was conducted by Marc Blau and Sara Kalin of the Los Angeles Regional Office.

SEC REACHES SETTLEMENT WITH TRADER REGARDING INSIDE TRADING IN SMITHFIELD FOODS OPTIONS

FROM:  SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced that a Bangkok-based trader whose U.S. brokerage account was frozen in an SEC emergency action in June has agreed to pay $5.2 million to settle charges that he traded on inside information in advance of a public announcement about a proposed acquisition of Smithfield Foods by a firm in China.

The SEC obtained the asset freeze on June 5 after filing a complaint alleging that Badin Rungruangnavarat made more than $3 million in illicit profits just days earlier by insider trading in Smithfield securities.  Badin loaded up on out-of-the-money Smithfield call options and single-stock futures contracts in the week leading up to a May 29 public announcement about the proposed sale of Smithfield Foods to Shuanghui International Holdings.  Among his possible sources of material, non-public information about the impending deal was a Facebook friend who was an associate director at the investment bank for a different company that was considering a Smithfield acquisition.

The settlement was approved today by Judge Matthew Kennelly of the U.S. District Court for the Northern District of Illinois.

“Our quick action in June to stop Badin’s insider trading profits from leaving the U.S. made this multi-million dollar settlement possible,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.  “Once he was denied access to his trading account, Badin elected to forfeit all of his ill-gotten proceeds plus pay a $2 million penalty to settle the case against him.”

Badin agreed to the entry of a final judgment ordering him to pay $3.2 million in disgorgement and the $2 million penalty.  Without admitting or denying the SEC’s allegations, he agreed to be permanently enjoined from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The SEC’s investigation was conducted jointly by staff in the Market Abuse Unit and the Chicago Regional Office, including Kathryn A. Pyszka, Frank D. Goldman, R. Kevin Barrett, Benjamin J. Hanauer, and Steven C. Seeger.  The Market Abuse Unit is led by Chief Daniel M. Hawke and the Chicago office is led by Acting Regional Director Timothy Warren.

SEC CHARGES MONEY MANAGER WITH CONDUCTING A FREE-RIDING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission this week charged a purported money manager in New York with conducting a free-riding scheme to defraud three brokerage firms, and then bilking several investors out of nearly a half-million dollars that he stole to fund his luxurious lifestyle that included a Bentley automobile, summers in the Hamptons, and casino junkets.

The SEC alleges that Ronald Feldstein caused more than $2 million in losses for the brokerage firms that he victimized in the free-riding scheme, which occurs when customers buy or sell securities in their brokerage accounts without having the money or shares to actually pay for them.  Feldstein opened three separate brokerage accounts in the names of two purported investment funds that he created.  He had no intention to pay for the stocks that he purchased if they resulted in big losses.  Feldstein planned to walk away from any transactions where the price declined substantially after the trade date, and planned to use sales proceeds to pay for the purchases if the price of a stock increased.

The SEC further alleges that Feldstein later began soliciting investments by targeting owners of businesses that he had frequented for decades, including a dry cleaner and a car leasing and servicing company.  Feldstein convinced them to provide funds for him to invest on their behalf, promising such profitable opportunities as a successful hedge fund, a promising penny stock, and an initial public offering (IPO) of a fashion company.  However, Feldstein never invested this money, instead converting it for his personal use without their knowledge.

“Without sufficient assets to pay for his stock purchases, Feldstein illegally arranged trades in which he got the profits if he won and left brokerage firms holding the bag if he lost,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Then Feldstein used blatantly false promises to lure longtime acquaintances to pour their life savings into his investment schemes that were footing the bill for his luxurious lifestyle.”

According to the SEC’s complaint filed in U.S. District Court in the Southern District of New York, Feldstein and the two purported investment funds – Mara Capital Management LLC and Vita Health of America LLC – traded through a type of account that brokerage firms offer to customers with the understanding that the customer has sufficient assets held with a third-party custodial bank to cover the cost of the trades.  Feldstein and the funds never disclosed to three broker-dealers that they were simply gambling with the brokerage firms’ money.  Their plan was to refuse to issue instructions to settle the trades, and stick the broker-dealers with the unprofitable positions.  The free-riding scheme began in September 2008 and continued until February 2009.

According to the SEC’s complaint, Feldstein shifted his fraudulent conduct to individual investors later in 2009.  He induced investors to give him money they typically had saved for their retirement or their children’s education.  Feldstein raised approximately $450,000 based on such false investment promises as a hedge fund that he described as substantial and successful, a penny stock issuer that Feldstein described as the next AT&T/Verizon of the rural Midwest, and the IPO of a purported fashion company.  The investor funds were typically deposited into Feldstein’s personal bank account or the bank account of an entity that he owned so he could spend their money on his personal expenses.

The SEC’s complaint charges Feldstein, Mara Capital, and Vita Health of America with committing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Feldstein also is charged with violations of Section 17(a) of the Securities Act of 1933. Trademore Capital Management LLC is charged as a relief defendant.

SEC ALLEGES INVESTMENT ADVISORY FIRM AND ITS PRESIDENT PLAYED FAVORITES WITH CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION

The Securities and Exchange Commission today announced charges against a San Diego-based investment advisory firm and its president for allegedly steering winning trades to favored clients and lying about how certain money was being spent.

The SEC’s Enforcement Division alleges that J.S. Oliver Capital Management and Ian O. Mausner engaged in a cherry-picking scheme that awarded more profitable trades to hedge funds in which Mausner and his family had invested.  Meanwhile they doled out less profitable trades to other clients, including a widow and a charitable foundation.  The disfavored clients suffered approximately $10.7 million in harm.

The SEC’s Enforcement Division further alleges that Mausner and J.S. Oliver misused soft dollars, which are credits or rebates from a brokerage firm on commissions paid by clients for trades executed in the investment adviser’s client accounts.  If appropriately disclosed, an investment adviser may retain the soft dollar credits to pay for expenses, including a limited category of brokerage and research services that benefit clients.  However, Mausner and J.S. Oliver misappropriated more than $1.1 million in soft dollars for undisclosed purposes that in no way benefited clients, such as a payment to Mausner’s ex-wife related to their divorce.

“Mausner’s fraudulent schemes were a one-two punch that betrayed his clients and cost them millions of dollars,” said Marshall S. Sprung, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.  “Investment advisers must allocate trades and use soft dollars consistent with their fiduciary duty to put client interests first.”

The SEC also charged Douglas F. Drennan, a portfolio manager at J.S. Oliver, for his role in the soft dollar scheme.

According to the SEC’s order instituting administrative proceedings, Mausner engaged in the cherry-picking scheme from June 2008 to November 2009 by generally waiting to allocate trades until after the close of trading or the next day.  This allowed Mausner to see which securities had appreciated or declined in value, and he gave the more favorably priced securities to the accounts of four J.S. Oliver hedge funds that contained investments from Mausner and his family.  Mausner profited by more than $200,000 in fees earned from one of the hedge funds based on the boost in its performance from the winning trades he allocated.  Mausner also marketed that same hedge fund to investors by touting the fund’s positive returns when in reality those returns merely resulted from the cherry-picking scheme.

According to the SEC’s order, the soft dollar scheme occurred from January 2009 to November 2011.  Mausner and J.S. Oliver failed to disclose the following uses of soft dollars:

More than $300,000 that Mausner owed his ex-wife under their divorce agreement.
More than $300,000 in “rent” for J.S. Oliver to conduct business at Mausner’s home.  Most of this amount was funneled to Mausner’s personal bank account.
Approximately $480,000 to Drennan’s company for outside research and analysis when in reality Drennan was an employee at J.S. Oliver.
Nearly $40,000 in maintenance and other fees on Mausner’s personal timeshare in New York City.
According to the SEC’s order, Drennan participated in the soft dollar scheme by submitting false information to support the misuse of soft dollar credits and approving some of the soft dollar payments to his own company.

The SEC’s order alleges that J.S. Oliver and Mausner willfully violated the antifraud provisions of the federal securities laws and asserts disclosure, compliance, and recordkeeping violations against them.  The SEC’s order alleges that Drennan willfully aided, abetted, and caused J.S. Oliver’s fraud violations in the soft dollar scheme.

The SEC’s investigation, which is continuing, has been conducted by Ronnie Lasky and C. Dabney O’Riordan of the Enforcement Division’s Asset Management Unit in the Los Angeles Regional Office.  The SEC’s litigation will be led by David Van Havermaat, John Bulgozdy, and Ms. Lasky.  The examination of J.S. Oliver was conducted by Ashish Ward, Eric Lee, and Pristine Chan of the Los Angeles office’s investment adviser/investment company examination program.

SEC SANCTIONS FORMER PORTFOLIO MANAGER

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today sanctioned a former portfolio manager at a Boulder, Colo.-based investment adviser for forging documents and misleading the firm’s chief compliance officer to conceal his failure to report personal trades.

An SEC investigation found that Carl Johns of Louisville, Colo., failed to pre-clear or report several hundred securities trades in his personal accounts as required under the federal securities laws and the code of ethics at Boulder Investment Advisers (BIA).  Johns concealed the trades in quarterly and annual trading reports that he submitted to BIA by altering brokerage statements and other documents that he attached to those reports.  Johns later tried to conceal his misconduct by creating false documents that purported to be pre-trade approvals, and misled the firm’s chief compliance officer in her investigation into his improper trading.

To settle the SEC’s charges – which are the agency’s first under Rule 38a-1(c) of the Investment Company Act for misleading and obstructing a chief compliance officer (CCO) – Johns agreed to pay more than $350,000 and be barred from the securities industry for at least five years.

“Securities industry professionals have an obligation to adhere to compliance policies, and they certainly must not interfere with the chief compliance officers who enforce those policies,” said Julie Lutz, Acting Co-Director of the SEC’s Denver Regional Office.  “Johns set out to cover up his compliance failures by creating false documents and misleading his firm’s CCO.”

According to the SEC’s order instituting settled administrative proceedings against Johns, the Investment Company Act required him to submit quarterly reports of his personal securities transactions and annual reports of his securities holdings.  His firm’s code of ethics contained further restrictions on when and how Johns could trade in securities, and required his transactions to be pre-cleared by the firm’s chief compliance officer.  From 2006 to 2010, Johns failed to comply with these obligations and did not pre-clear or report approximately 640 trades.  These included at least 91 trades involving securities held or acquired by the funds managed by the firm.  The code of ethics restricted trading in securities that the funds were buying or selling.

According to the SEC’s order, Johns submitted inaccurate quarterly and annual reports and falsely certified his annual compliance with the code of ethics.  Johns physically altered brokerage statements, trade confirmations, and pre-clearance approvals before submitting them to the firm along with these reports.  For example, he manually deleted securities holdings listed on his brokerage statements before submitting them in order to avoid disclosing securities purchases that were not pre-cleared.

The SEC’s order further finds that Johns created several documents that purported to be pre-clearance requests approved by the firm’s CCO, who had never actually reviewed or approved such trades.  Johns created these false pre-clearance approvals to cover up instances in his annual report when securities transactions were not pre-cleared.  Johns also altered the trade confirmations that he submitted to BIA by backdating the dates of the transactions, and he backdated trade confirmations to make it falsely appear as though pre-clearances were granted in advance of the transactions.

According to the SEC’s order, the firm’s CCO in late 2010 identified irregularities in the documents that Johns submitted to BIA detailing his personal securities transactions.  The irregularities prompted the CCO to make inquiries about his compliance with the firm’s code of ethics, and Johns misled the CCO in response.  Johns falsely told the CCO that he had closed certain brokerage accounts when in fact they remained open and were involved in trading that was not pre-cleared as required.  Johns also accessed the hard copy file of his previously submitted brokerage statements and physically altered them to create the false impression that his trading was in compliance.

In settling the SEC’s charges, Johns has agreed to pay disgorgement of $231,169, prejudgment interest of $23,889, and a penalty of $100,000.  Without admitting or denying the SEC’s findings, Johns consented to a five-year bar and a cease-and-desist order.

The SEC’s investigation was conducted by Michael Cates and Ian Karpel of the Denver Regional Office following an examination conducted by Craig Ellis, Bruce Ketter, and Thomas Piccone of the Denver office’s investment adviser/investment company examination program.

SEC ANNOUNCES WHISTLEBLOWER AWARDS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced that three whistleblowers have been awarded more than $25,000 combined for tips and information they provided to help the SEC and Justice Department stop a sham hedge fund.

This is the first installment of anticipated payments to the whistleblowers as additional assets are collected from the purported hedge fund manager.  The whistleblowers are expected to ultimately receive approximately $125,000 in total.

The SEC issued an order earlier this summer rewarding each of the three whistleblowers with 5 percent of the money that the SEC ultimately collects from its enforcement action against Locust Offshore Management and its CEO Andrey C. Hicks.  In cases where there are related criminal proceedings in which money is collected by another regulator, a provision in the whistleblower rules allows whistleblowers to then additionally apply for an award based off the other regulator’s collections in what qualifies as a “related action.”  The Commission subsequently approved 5 percent payouts to each whistleblower for money collected in the related criminal action.

Hicks pled guilty on Dec. 12, 2012, to five counts of wire fraud and consented to the forfeiture of his interest in property previously seized by the Justice Department.  He was sentenced to 40 months in prison.  Approximately $170,000 has been administratively forfeited in the criminal proceeding – money that is deemed collected for purposes of issuing whistleblower awards.  Therefore, the three whistleblowers will now receive $8,505 each.  Additional payments can be made to these whistleblowers upon forfeiture of the additional assets that have been seized.

The aggregate value of assets seized from Hicks is estimated to be approximately $845,000, and the whistleblowers are expected to ultimately receive 15 percent of this amount for a combined total of approximately $125,000.

The SEC’s order does not identify the whistleblowers, whose confidentiality is protected under the SEC’s whistleblower program.  The order states that two of the whistleblowers provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed.  The third whistleblower identified key witnesses and confirmed information the other two whistleblowers provided.

The SEC’s whistleblower program is authorized under the law to reward individuals who offer high-quality, original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.