Enhancing the Stability and Safety of Clearing Agencies

Enhancing the Stability and Safety of Clearing Agencies

Statement at Open Meeting Regarding Standards for Covered Clearing Agencies

Statement at Open Meeting Regarding Standards for Covered Clearing Agencies

Statement on Judge's Ruling on Sanctions for Fabrice Tourre

Statement on Judge's Ruling on Sanctions for Fabrice Tourre

SEC CHARGES FORMER ANALYST OF INSIDER TRADING

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.

The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts.  They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks.  Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses.

Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges.

“Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself,” said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office.  “His actions have cost him the privilege of working in the hedge fund industry ever again.”

According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital.  Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds.  Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm.  The SEC charged Teeple and two others last year for insider trading in Foundry stock.

The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009.  Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider.  Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock.  Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.”  Dennis responded “you da man!!! I owe you.”

The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company.  Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.

The SEC’s complaint charges Dennis 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.  Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty.  Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.  He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.

The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office.  The case has been supervised by Sanjay Wadhwa.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

SEC-HEDGE FUND SETTLES FRAUDULENT OFFER TO BUY WINNEBAGO INDUSTRIES COMMON STOCK

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Settled Securities Fraud Charges Against Alexander H.G. Mascioli and His Purported Hedge Fund, North Street Capital, LP

The Securities and Exchange Commission today filed settled fraud charges in the United States District Court for the District of Connecticut against Alexander H.G. Mascioli and his alter-ego, purported hedge fund, North Street Capital, LP ("NSC"), alleging that Mascioli and NSC made a fraudulent May 2012 offer to acquire all outstanding shares of Winnebago Industries, Inc.'s ("WGO") common stock.

The Commission alleges that, on May 9, 2012, Mascioli authored on NSC letterhead, signed, and sent to WGO an offer to acquire all outstanding common stock of WGO for approximately $321 million in cash. The May 9 letter represented that NSC's offer was not conditioned on any financing, that NSC was prepared to move forward immediately, and that it could complete the process in approximately two weeks. In truth, Mascioli and NSC had virtually no assets, significant liabilities, and no reasonable prospects of securing any financing to fund the acquisition. Furthermore, at the time they made their offer, Mascioli and NSC had not retained any financial or legal advisers to represent them in the transaction. On May 17, having not received a response to the May 9 offer, Mascioli sent a copy of the May 9 letter that he had modified to look like an NSC press release to Bloomberg, which subsequently posted the offer on its website. After NSC's fraudulent offer was made public on May 17, WGO's stock price and trading volume increased significantly. In pre-market trading on May 18, almost 700,000 WGO shares were traded. By contrast, in the four trading days prior to May 18, WGO had little to no volume in pre-market trading. Moreover, on May 17, WGO's stock closed at $8.51 per share; when trading opened on May 18, however, WGO stock opened at $9.81 per share, an almost 15% increase. In pre-market trading on May 18, after learning of NSC's offer for WGO and viewing a public website Mascioli created for NSC that contained various misrepresentations about NSC's business, a New York hedge fund made the decision to cover the majority of a large short position it held in WGO and incurred losses in doing so.

Without admitting or denying the allegations in the complaint, Mascioli and NSC have consented to entry of a final judgment permanently enjoining each of them from violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and ordering them to pay, jointly and severally, a $100,000 civil penalty. Mascioli has also consented to a final judgment that permanently bars him from serving as an officer and/or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. The proposed settlement is subject to court approval.

The SEC's investigation was conducted by George Bagnall and George Parizek with assistance from trial attorney Cheryl Crumpton. The Commission acknowledges the assistance of the Financial Industry Regulatory Authority in this matter.

SEC ANNOUNCES ACTIONS AGAINST BROKERS, FIRM AND OTHERS INVOLVED IN VARIABLE ANNUITIES SCHEME

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced enforcement actions against a pair of brokers, an investment advisory firm, and several others involved in a variable annuities scheme to profit from the imminent deaths of terminally ill patients in nursing homes and hospice care.

Variable annuities are designed to serve as long-term investment vehicles, typically to provide income at retirement.  Common features are a death benefit paid to the annuity’s beneficiary (typically a spouse or child) if the annuitant dies, and a bonus credit that the annuity issuer adds to the contract value based on a specified percentage of purchase payments.  The SEC Enforcement Division alleges that Michael A. Horowitz, a broker who lives in Los Angeles, developed an illicit strategy to exploit these benefits.  He recruited others to help him obtain personal health and identifying information of terminally ill patients in southern California and Chicago.  Anticipating they would soon die, Horowitz sold variable annuities contracts with death benefit and bonus credit features to wealthy investors, and he designated the patients as annuitants whose death would trigger a benefit payout.  Horowitz marketed these annuities as opportunities for investors to reap short-term investment gains.  When the annuitants died, the investors collected death benefit payouts.

The SEC Enforcement Division alleges that Horowitz enlisted another broker Moshe Marc Cohen of Brooklyn, N.Y., and they each deceived their own brokerage firms to obtain the approvals they needed to sell the annuities.  They falsified various broker-dealer forms used by firms to conduct investment suitability reviews.  As a result of the fraudulent practices used in the scheme, some insurance companies unwittingly issued variable annuities that they would not otherwise have sold.  Horowitz and Cohen, meanwhile, generated more than $1 million in sales commissions.

Agreeing to settle the SEC’s charges are four non-brokers and a New York-based investment advisory firm recruited into the scheme.  Also agreeing to settlements are two other brokers who are charged with causing books-and-records violations related to annuities sold through the scheme.  A combined total of more than $4.5 million will be paid in the settlements.  The SEC’s litigation continues against Horowitz and Cohen.

“This was a calculated fraud exploiting terminally ill patients,” said Julie M. Riewe, co-chief of the SEC Enforcement Division’s Asset Management Unit.  “Michael Horowitz and others stole their most private information for personal monetary gain.”

According to the SEC’s orders instituting administrative proceedings, the scheme began in 2007 and continued into 2008.  Horowitz agreed to compensate Harold Ten of Los Angeles and Menachem “Mark” Berger of Chicago for identifying terminally ill patients to be used as annuitants.  Berger, in turn, recruited Debra Flowers of Chicago into the scheme and compensated her directly.  Through the use of a purported charity and other forms of deception, Ten, Berger, and Flowers obtained confidential health data about patients for Horowitz.

According to the SEC’s orders, after selling millions of dollars in variable annuities to individual investors, Horowitz still desired to generate greater capital into the scheme.  Searching for a large source of financing, he began pitching his scheme to institutional investors.  A pooled investment vehicle and its adviser BDL Manager LLC were created in late 2007 in order to facilitate institutional investment in variable annuities through the use of nominees.  Commodities trader Howard Feder, who lives in Woodmere, N.Y., became each firm’s sole principal.  Feder and BDL Manager fraudulently secured broker-dealer approvals of more than $56 million in annuities sold through Horowitz’s scheme.  Feder furnished the brokers with blank forms signed by the nominees enabling the brokers to complete the forms with false statements indicating that the nominees did not intend to access their investments for many years.  Feder understood that the purpose of Horowitz’s scheme was to designate terminally ill patients as annuitants in the expectation that their deaths would result in short-term lucrative payouts.  BDL Group received more than $1.5 million in proceeds from its investment in the annuities.

The order against Horowitz and Cohen alleges that they willfully violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 and they willfully aided and abetted and caused violations of the Exchange Act’s books-and-records provisions.  Horowitz also acted as an unregistered broker.

Ten, Berger, Flowers, Feder, and BDL Manager consented to SEC orders finding that they willfully violated Section 10(b) of the Exchange Act and Rule 10b-5.  They neither admitted nor denied the findings and agreed to cease and desist from future violations.  The individuals agreed to securities industry or penny stock bars as well as the following monetary sanctions:

Ten agreed to pay disgorgement of $181,147.64, prejudgment interest of $20,858.80, and a penalty of $90,000.
Berger agreed to pay disgorgement of $119,000, prejudgment interest of $11,579.61, and a penalty of $100,000.
Feder agreed to pay a penalty of $130,000.
BDL Manager agreed to pay disgorgement of $1,550,565.55, prejudgment interest of $196,608.97, and a penalty of $1,550,565.55.
The SEC’s order against Richard Horowitz and Marc Firestone finds that they negligently allowed point-of-sale forms for 12 annuities in the scheme to be submitted to their firm with inaccurately overstated answers to the form’s question asking how soon the customer intended to access his or her investment.  These inaccurate answers led to each annuity’s issuance, and Horowitz and Firestone were each paid commissions.

Richard Horowitz and Firestone consented to the order finding that they caused their firm to violate Section 17(a) of the Exchange Act and Rule 17a-3.  Without admitting or denying the findings, they agreed to cease and desist from committing or causing future violations of those provisions as well as the following monetary sanctions:

Horowitz agreed to pay disgorgement of $292,767.89, prejudgment interest of $36,512.20, and a penalty of $40,800.
Firestone agreed to pay disgorgement of $127,853.20, prejudgment interest of $17,140.89, and a penalty of $40,800.
The SEC’s investigation was conducted by Marilyn Ampolsk, Peter Haggerty, Jeremiah Williams, and Anthony Kelly of the Enforcement Division’s Asset Management Unit along with Christopher Mathews and J. Lee Buck II.  The SEC’s litigation will be led by Dean M. Conway.