SEC CHARGES BROADBAND RESEARCH CORPORATION WITH INSIDER TRADING

The following excerpt is from the SEC website:

“Washington, D.C., Feb. 17, 2012 — The Securities and Exchange Commission today charged John Kinnucan and his Portland, Oregon-based expert consulting firm Broadband Research Corporation with insider trading. The charges stem from the SEC’s ongoing investigation of insider trading involving expert networks.

The SEC alleges that Kinnucan and Broadband claimed to be in the business of providing clients with legitimate research about publicly-traded technology companies, but instead typically tipped clients with material nonpublic information that Kinnucan obtained from prohibited sources inside the companies. Clients then traded on the inside information. Portfolio managers and analysts at prominent hedge funds and investment advisers paid Kinnucan and Broadband significant consulting fees for the information they provided. Kinnucan in turn compensated his sources with cash, meals, ski trips and other vacations, and even befriended some sources to gain access to confidential information.

In a parallel criminal case, Kinnucan has been arrested and charged with one count of conspiracy to commit securities fraud, one count of conspiracy to commit wire fraud, and two counts of securities fraud.

“Obtaining important and unreported financial results from company insiders and selling that information to hedge funds is not legitimate expert networking services — it’s old-fashioned insider trading,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

The SEC has charged 22 defendants in enforcement actions arising out of its expert networks investigation, which has uncovered widespread insider trading at several hedge funds and other investment advisory firms. The insider trading has occurred in the securities of 12 technology companies — including Apple, Dell, Fairchild Semiconductor, Marvell Technology, and Western Digital — for illicit gains totaling nearly $110 million. Related SEC insider trading cases stemming from the Galleon investigation involved illicit gains in excess of $91 million.

According to the SEC’s complaint filed in federal court in Manhattan, Kinnucan’s misconduct occurred from at least 2009 to 2010, a period during which he generated hundreds of thousands of dollars in annual revenues for Broadband. Kinnucan obtained material nonpublic information from well-placed employees at a variety of publicly-traded technology companies.

The SEC’s complaint specifically alleges that in July 2010, Kinnucan obtained material nonpublic information from a source at F5 Networks Inc., a Seattle-based provider of networking technology. On the morning of July 2, Kinnucan learned that F5 had generated better-than-expected financial results for the third quarter of its 2010 fiscal year, with the public announcement scheduled for July 21. Within hours of learning the confidential details, Kinnucan had phone conversations or left messages with several clients to convey that F5’s revenues would exceed market expectations. At least three clients — an analyst and two portfolio managers — caused trades at their respective investment advisory firms on the basis of Kinnucan’s inside information. The insider trading resulted in profits or avoided losses of nearly $1.6 million.
The SEC’s complaint, which charges Kinnucan and Broadband with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, requiring them to pay financial penalties, and permanently enjoining them from future violations.
The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone and Daniel Marcus — members of the SEC’s Market Abuse Unit in New York — and Matthew Watkins, Neil Hendelman, Diego Brucculeri and James D’Avino of the New York Regional Office. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation for their assistance in the matter.”

TEXAS MAN TO PAY $31 MILLION FOR PART IN FOREIGN CURRENCY TRADING SCHEME

The following excerpt is from the CFTC website:

“Federal Court Orders Texas Resident Robert D. Watson to Pay $31 Million for Defrauding Customers, Misappropriating Millions of Dollars, and Providing Fictitious Records in Forex Scheme
Watson’s business entities ordered to pay disgorgement of $21 million, and Texas resident Daniel J. Petroski ordered to pay more than $550,000 for his role in the scheme

In a related criminal matter, Watson was sentenced to 20 years in prison on February 10, 2012
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained federal court consent orders resolving its remaining claims against defendants Robert D. Watson and Daniel J. Petroski, both of Houston, Texas, PrivateFX Global One Ltd., SA, and 36 Holdings Ltd. Global One, a corporation formed in Panama, and 36 Holdings are under the control of a court-appointed receiver, Thomas L. Taylor III.

The consent orders, both entered on February 2, 2012, by the U.S. District Court for the Southern District of Texas, stem from a CFTC complaint filed in the same court on May 21, 2009, charging the defendants with operating a multi-million dollar fraudulent off-exchange foreign currency (forex) scheme (see CFTC Press Release 5661-09, May 26, 2009).

One consent order requires Watson, Global One, and 36 Holdings jointly and severally to pay $21 million in disgorgement and orders Watson to pay a $10 million civil monetary penalty. The other consent order requires Petroski to pay $414,723 in disgorgement and a $140,000 civil monetary penalty. The consent orders also require the defendants to give up their rights to funds and other assets held by the receiver.

The court previously entered a consent order of permanent injunction on February 24, 2010, that resolved liability against all defendants and permanently barred the defendants from engaging in any commodity-related activity and from registering with the CFTC. This earlier order found that on or about July 1, 2006, defendants began soliciting investors to purchase shares of Global One, whose purported objective was to speculate in the forex markets. Global One’s offering raised approximately $21 million from at least 80 investors by touting Global One’s purportedly successful forex trading performance, according to the order. From April 2006 through April 2009, the defendants reported monthly returns, purportedly generated through forex trading, to Global One investors of approximately 1.5 percent to nearly 3 percent and claimed to never have had a losing month trading forex, the court found. However, also according to the order, the defendants’ representations to Global One investors regarding Global One’s extraordinary forex trading profits and related returns to investors were false.
The earlier consent order also found that, prior to the filing of the CFTC’s complaint, the defendants provided the CFTC with fictitious third-party bank and forex trading records prepared by Watson to conceal the fraud.

In a related criminal matter, filed in the U.S. District Court for the Southern District of Texas as part of President Barack Obama’s Financial Fraud Enforcement Task Force, Watson pleaded guilty to one count of securities fraud. On February 10, 2012, the court sentenced Watson to the statutory maximum of 20 years in prison.
The CFTC thanks the Fort Worth Regional Office of the Securities and Exchange Commission for its assistance.

CFTC Division of Enforcement staff members responsible for this case are Christopher Reed, Charles Marvine, Rick Glaser, and Richard Wagner“.

TWO COMPANIES CHARGED WITH SELLING UNREGISTERED PROMISSORY NOTES

The following excerpt is from the SEC website:

February 15, 2012

SEC Charges Venulum with Registration Violations in Connection with Offerings of Wine Contracts and Promissory Notes

"The Securities and Exchange Commission today charged two non-U.S. companies — Venulum Ltd. (a British Virgin Islands company) and Venulum Inc. (a Canadian company) — and their owner and chairman Giles Cadman (a resident of the United Kingdom), with registration violations in connection with unregistered offers and sales of promissory notes and interests in fine wines. The Commission’s suit, filed in Dallas federal court, alleges that, beginning in 2002, Venulum made unsolicited calls to American investors, primarily dentists, to solicit investments in interests in trading in fine wines to be managed by Venulum. Venulum’s solicitation highlighted its purported expertise in selecting, sourcing, storing and marketing fine wines for the benefit of investors. Then, starting in 2010, Venulum solicited 94 of its wine investors to purchase high-interest promissory notes. Neither of the offerings was registered with the Commission.

Without admitting or denying the Commission’s allegations, the defendants consented to permanent injunctions against violating Sections 5(a) and 5(c) of the Securities Act of 1933. The injunction is subject to court approval.

The Commission acknowledges the assistance of the Texas State Securities Board.

JUDGE FINDS COMPANY AND CEO DEFRAUDED MUTUAL FUNDS

The following excerpt is from the SEC website:

“On Tuesday, February 14, 2012, United States District Judge Robert W. Sweet of the Southern District of New York issued an Opinion in favor of the U.S. Securities and Exchange Commission finding that United Kingdom-based hedge fund adviser Pentagon Capital Management PLC (PCM) and Lewis Chester, PCM’s Chief Executive Officer, engaged in securities fraud in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, Judge Sweet found that Defendants PCM and Chester orchestrated a scheme to defraud mutual funds in the United States through late trading from February 2001 through September 2003. Late trading refers to the practice of placing orders to buy, redeem, or exchange U.S. mutual fund shares after the time as of which the funds calculate their net asset value (usually as of the close of trading at 4:00 p.m. ET), but receiving the price based on the net asset value already determined as of 4:00 p.m. ET. Judge Sweet found that the Defendants “intentionally, and egregiously violated the federal securities laws through a scheme of late trading” through broker-dealer Trautman Wasserman & Company, Inc. (TW&Co.), and found that the scheme was “broad ranging over the course of several years and in no sense isolated.”

As a result of Defendants’ conduct, the Court found that PCM and Chester violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and granted the Commission’s request to enjoin PCM and Chester from future violations of those provisions. Judge Sweet further found PCM and Chester, together with Relief Defendant Pentagon Special Purpose Fund, Ltd., PCM’s advisory client, jointly and severally liable for disgorgement of $38,416,500 of profits from the U.S. mutual fund trades executed through TW&Co. plus prejudgment interest. Finally, Judge Sweet imposed civil penalties against Defendants in the amount of $38,416,500, equal to Defendants’ pecuniary gain for late trades through TW&Co.

The Court found in Defendants’ favor regarding charges of deceptive market timing of U.S. mutual funds.

Chester, age 43, is a resident of London, England. PCM is an investment adviser and investment manager based in London, England, and it is registered with the United Kingdom Financial Services Authority. Pentagon Special Purpose Fund, Ltd. is an international business company incorporated in the British Virgin Islands.”

SENATOR LEVIN PROPOSES GOING AFTER "UNJUSTIFIED" TAX LOOPHOLES

The following excerpt is from the Senator Carl Levin website:

February 7, 2012
“WASHINGTON – Two Senate committee chairmen introduced legislation today to help reduce the budget deficit and pay for important priorities by closing tax loopholes.
Sens. Carl Levin, D-Mich., chairman of the Senate Armed Services Committee and the Senate Permanent Subcommittee on Investigations, and Kent Conrad, D-N.D., chairman of the Senate Budget Committee, introduced the Cut Unjustified Tax Loopholes Act, or CUT Loopholes Act. The bill, S.2075, would crack down on offshore tax abuses, close tax loopholes that encourage corporations to move jobs offshore and end a corporate tax loophole that allows corporations to claim a stock option tax deduction that is greater than the stock option expense shown on their books.

Based on estimates from the Joint Committee on Taxation and the Office of Management & Budget, the CUT Loopholes Act would yield at least $155 billion in deficit reduction over 10 years. That is more than enough to cover the $100 billion cost of a full-year extension of the payroll tax cut, and could contribute to the kind of balanced deficit reduction agreement that the nation needs.

“With federal tax revenue at its lowest level in decades and economists warning that more draconian budget cuts could damage the recovery, it is clear that we can’t achieve significant deficit reduction and meet important priorities by focusing on spending cuts alone,” Levin said. “Many in Congress have refused to consider revenue measures to meet our budget challenges, but there should be bipartisan support for closing these indefensible tax loopholes.”

“The CUT Loopholes Act is a win-win as it promotes tax fairness and it will help reduce the budget deficit,” said Conrad.  “This legislation identifies a series of steps we can take now to end egregious tax loopholes and offshore tax abuses.  The revenue raised by cutting these tax loopholes will reduce the deficit and help pay for pressing domestic needs, such as an extension of the payroll tax cut.  I commend Senator Levin and his Permanent Subcommittee on Investigations for their excellent work identifying and seeking to change unjust tax policies.”

The bill would take steps to close offshore tax havens identified by the Permanent Subcommittee on Investigations. This portion of the bill is based primarily on the Stop Tax Haven Abuse Act, S. 1346, authored by Levin and cosponsored by Conrad and six others. President Obama, as a senator, supported a similar measure. Among other measures, the bill would:

Give Treasury authority to take tough new actions to combat tax haven banks and tax haven jurisdictions that help U.S. clients hide assets and dodge U.S. taxes.
Stop offshore corporations that are managed from the United States from claiming foreign status and thereby dodging taxes on their non-U.S. income.
Eliminate tax incentives for moving U.S. jobs offshore and transferring intellectual property offshore.

Establish in law the presumption that, unless a taxpayer proves otherwise, an offshore corporation that is formed by, receives assets from or benefits a U.S. taxpayer is considered under the control of that taxpayer for U.S. tax purposes.
Based on estimates from the Joint Committee on Taxation and the Office of Management and Budget, the offshore tax provisions of the bill would reduce the deficit by at least $130 billion over 10 years.

The second major focus of the bill is closing a corporate tax loophole that provides a tax subsidy to corporations that compensate executives using stock options. Under current law, corporations are allowed to take a larger income tax deduction for stock option expenses than is recorded on their financial books. Between 2005 and 2009, this loophole allowed U.S. corporations to take between $12 billion and $61 billion annually in excess tax deductions.

The bill would:
Prohibit corporations from taking a larger income tax deduction for stock-option grants than the expense shown on their books.
Preserve current tax treatment for individuals who receive stock options and for incentive stock options commonly used by start-up companies.
Apply to stock options the same $1 million overall limit on corporate tax deductions for executive pay that applies to other forms of compensation.

This portion of the bill is based primarily on the Ending Excessive Corporate Deductions for Stock Options Act, S. 1375, authored by Levin and cosponsored by Sens. Sherrod Brown, Claire McCaskill and Sheldon Whitehouse. The Joint Committee on Taxation has estimated that these provisions would reduce the deficit by $25 billion over 10 years.

“We can’t afford to use taxpayer dollars to subsidize offshore schemes and loopholes,” said Levin.  “Closing down offshore tax havens that tax dodgers use to get out of paying their fair share is not only the right thing to do, it can help us pay our bills while boosting the economy and reducing the deficit. The CUT Loopholes Act offers a way to provide additional revenue that should get bipartisan support.”

SEC TIGHTENS RULE ON INVESTMENT ADVISER PERFORMANCE FEES

The following excerpt is from the SEC website:

“Washington, D.C., Feb. 15, 2012 — The Securities and Exchange Commission today announced it is tightening its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.

Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011. The Commission-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.
The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then.”