SEC ALLEGES INVESTMENT ADVISER KEPT CUSTODIAL FUNDS WITH BROKER-DEALER COUNTERPARTIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission  charged an investment adviser to several alternative mutual funds for maintaining millions of dollars of the funds’ cash collateral at broker-dealer counterparties instead of the funds’ custodial bank.  The violations were uncovered during an SEC examination of the firm and the funds it manages.

Water Island Capital LLC agreed to pay a $50,000 penalty to settle the SEC’s charges.

According to the SEC’s order instituting a settled administrative proceeding, an investment company that maintains its securities and similar investments in the custody of a qualified bank must likewise keep in the bank’s custody other cash assets of the investment company.  The SEC’s order finds that Water Island Capital did not ensure that roughly $247 million in cash collateral held by broker-dealer counterparties was maintained with the funds’ custodial bank.  The cash collateral related to the funds’ investments in certain total return and portfolio return swaps.  

“Mutual funds must ensure that all fund assets are properly protected,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Water Island Capital failed to implement the required policies and procedures to ensure all cash collateral was held in the custody of the funds’ bank.”

The SEC’s order finds that in addition to causing violations of the custody requirements of Section 17(f)(5) of the Investment Company Act, Water Island Capital caused violations of Section 12 and Rule 12b-1(h) due to its failure to implement the funds’ directed brokerage policies and procedures, which required the firm to create and maintain an approved list of executing brokers for the funds as well as to monitor with documentation the funds’ compliance with the directed brokerage requirements.  Water Island Capital failed to create the list and failed to maintain documentation reflecting monitoring of the funds’ compliance pursuant to the funds’ policies and procedures.  The SEC’s order further finds that Water Island Capital caused the funds’ violations of Rule 38a-1 under the Investment Company Act.        

Water Island Capital consented to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC’s investigation was conducted by Celeste Chase and Osman Nawaz of the New York office, and the case was supervised by Amelia A. Cottrell.  The examination that led to the investigation was conducted by Joy Best, Melissa Dahle, William Maldonado, Edward Moy, and Dawn Blankenship of the New York office’s investment adviser/investment company examination program.

SEC.gov | Aligning the Interests of Company Executives and Directors with Shareholders

SEC.gov | Aligning the Interests of Company Executives and Directors with Shareholders

Joint Dissenting Statement Concerning Modifications to Previously-Adopted Regulation SBSR

Joint Dissenting Statement Concerning Modifications to Previously-Adopted Regulation SBSR

SEC CHARGES 4 WITH HAVING ROLES IN INSIDER TRADING RING SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

02/05/2015 12:45 PM EST

The Securities and Exchange Commission today charged a stock research analyst, a corporate insider, and two others involved in a California-based insider trading ring that generated nearly $750,000 in illegal profits by trading in advance of four corporate news announcements.

The SEC alleges that John Gray, then an analyst at Barclays Capital, and his friend Christian Keller traded on confidential merger information that Keller learned while working in finance at two Silicon Valley-based public companies.  Gray and Keller attempted to conceal the trades by placing them in a brokerage account held in the name of Gray’s friend Kyle Martin.  Gray also tipped a fourth participant, Aaron Shepard, with nonpublic information so he could trade in advance of some of the corporate announcements.
Gray, Keller, Martin, and Shepard have agreed to settle the SEC’s charges by paying more than $1.6 million combined.

“Gray and Keller tried to evade detection by trading in another person’s name, using prepaid disposable phones, and making structured cash withdrawals to share profits,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Despite their careful planning, we were able to detect the suspicious trading and effectively use our cooperation program to expose their nefarious scheme.”

According to the SEC’s complaint filed in federal court in the Northern District of California, Gray was primarily responsible for placing the trades in Martin’s account.  Gray and Martin also placed additional trades in other accounts based on Keller’s confidential information that Gray shared with Martin.  Gray provided Keller kickbacks in cash from the trading profits.

The SEC alleges that Gray and Keller first traded on confidential merger information that Keller learned while employed as a financial analyst at Applied Materials Inc.  They illegally traded ahead of the company’s acquisitions of Semitool Inc. in 2009 and Varian Semiconductor Equipment Associates in 2011.  Keller left Applied Materials and joined Rovi Corporation in 2012 as a vice president for investor relations and finance.  The scheme continued as they used confidential information that Keller learned as an insider to profitably trade Rovi securities ahead of negative news announcements by the company about its 2012 first and second quarter financial results.

Gray, Keller, Martin, and Shepard agreed to make the following payments to settle the case, without admitting or denying the allegations.  The settlements are subject to court approval.

• Gray agreed to pay disgorgement of $287,487.55, prejudgment interest of $21,836.88, and a penalty of $448,876.03.  Gray also agreed to be barred from the securities industry and from participating in penny stock offerings.
• Keller agreed to pay disgorgement of $52,000, prejudgment interest of $4,002.03, and a penalty of $417,468.73, which represents the total profits from the secret trades placed in Martin’s brokerage account.  Keller also agreed to be barred from serving as an officer or director of a public company for 10 years.
• Martin agreed to pay disgorgement of $243,276.10 plus prejudgment interest of $21,404.28, and Shepard agreed to pay disgorgement of $161,388.36 plus prejudgment interest of $9,633.07.  They are not being assessed additional penalties due to their significant cooperation during the SEC’s investigation.

The SEC’s investigation was conducted by Jennifer J. Lee and supervised by Steven Buchholz of the San Francisco Regional Office with assistance from John Rymas of the Market Abuse Unit of the Philadelphia Regional Office.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

Rule 14a-8: Conflicting Proposals, Conflicting Views

Rule 14a-8: Conflicting Proposals, Conflicting Views

Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures

Joint Statement on the Commission’s Proposed Rule on Hedging Disclosures