SEC ENCOURAGES ISSUERS, UNDERWRITERS OF MUNICIPAL SECURITIES TO SELF-REPORT VIOLATIONS OF SECURITIES LAWS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative.  Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”

Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.

“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”

The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement.  For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.

EMERGENCY ASSET FREEZE ACTION FILED AGAINST MICROCAP STOCK SCALPING PROMOTER

FROM:  SECURITIES AND EXCHANGE COMMISSION 
SEC Files Emergency Action Against Promoter Behind Microcap Stock Scalping Scheme, Obtains Asset Freeze

The Securities and Exchange Commission yesterday filed an emergency action ex parte against John Babikian, a promoter behind a platform of affiliated microcap stock promotion websites. The Complaint alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively "APS," to commit a brand of securities fraud known as "scalping." The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West's share price and trading volume, which Babikian exploited by unloading shares of America West's stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.

According to documents filed simultaneously with the SEC's complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC's emergency request to preserve these assets by issuing an asset freeze order.

According to the Commission's complaint, America West's stock was both low-priced and thinly traded prior to Babikian's mass dissemination of the APS e-mails promoting it. America West's trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian's e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West's share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.

The court's order, among other things, freezes Babikian's assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the Commission has taken immediate action to freeze Babikian's U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.

The Commission acknowledges the assistance of the Quebec Autorité des Marchés Financiers, the Financial Industry Regulatory Authority, and OTC Markets Group Inc.

The Commission's investigation of this matter is continuing.

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.