2 HOUSTON-BASED INVESTMENT ADVISORY FIRMS CHARGED BY SEC FOR MAKING TRANSACTIONS WITHOUT NOTIFYING CLIENTS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Announces Charges Against Two Houston-Based Firms for Engaging in Thousands of Undisclosed Principal Transactions

The Securities and Exchange Commission today announced charges against two Houston-based investment advisory firms and three executives for engineering thousands of principal transactions through their affiliated brokerage firm without informing their clients.

One of the firms — along with its chief compliance officer — also is charged with violations of the “custody rule” that requires firms to meet certain standards when maintaining custody of client funds or securities.

In a principal transaction, an investment adviser acting for its own account or through an affiliated broker-dealer buys a security from a client account or sells a security to it.  Principal transactions can pose potential conflicts between the interests of the adviser and the client, and therefore advisers are required to disclose in writing any financial interest or conflicted role when advising a client on the other side of the trade.  They must also obtain the client’s consent.

The SEC’s Enforcement Division alleges that investment advisers Parallax Investments LLC and Tri-Star Advisors engaged in thousands of securities transactions with their clients on a principal basis through their affiliated brokerage firm without making the required disclosures to clients or obtaining their consent beforehand.  Parallax’s owner John P. Bott II and Tri-Star Advisors CEO William T. Payne and president Jon C. Vaughan were collectively paid more than $2 million in connection with these trades.

“By failing to disclose principal transactions and obtain consent, Parallax and Tri-Star Advisors deprived their clients of knowing in advance that their advisers stood to benefit substantially by running the trades through an affiliated account,” said Marshall S. Sprung, co-chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s orders instituting administrative proceedings, Bott initiated and executed at least 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Parallax clients.  In each transaction, Parallax’s affiliated brokerage firm Tri-Star Financial used its inventory account to purchase mortgage-backed bonds for Parallax clients and then transferred the bonds to the applicable client accounts.  Bott received nearly half of the $1.9 million in sales credits collected by Tri-Star Financial on these transactions.

According to the SEC’s orders, Payne and Vaughan initiated and executed more than 2,000 undisclosed principal transactions from 2009 to 2011 without the consent of Tri-Star Advisor clients.  Tri-Star Financial similarly used its inventory account to purchase mortgage-backed bonds for Tri-Star Advisor clients and then transferred the bonds to the applicable client accounts.  Payne and Vaughan together received nearly half of the $1.9 million in gross sales credits collected by the brokerage firm on these transactions.

The SEC’s Enforcement Division further alleges that Parallax failed to comply with the custody rule that requires firms to undergo certain procedures to safeguard and account for client assets.  Parallax served as an adviser to a private fund Parallax Capital Partners LP.  The custody rule required Parallax to either undergo an annual surprise exam to verify the existence of the fund’s assets, or obtain fund audits by a PCAOB-registered auditor and deliver the financial statements to investors within 120 days after the fiscal year ends.  Although Parallax obtained an audit of PCP in 2010, it failed to retain a PCAOB-registered auditor and failed to deliver the financial statements on time.

According to the SEC’s orders, Parallax chief compliance officer F. Robert Falkenberg was aware of the 120-day deadline, but failed to take any steps to ensure that Parallax complied.  Even after Falkenberg and Bott learned that the fund’s auditor was not registered with the PCAOB, they retained him to perform the 2010 audit and issue financial statements to investors.

According to the SEC’s orders, Parallax allegedly violated the principal transaction, custody, and compliance provisions of the Investment Advisers Act of 1940, and Bott allegedly aided, abetted, and caused the violations.  Falkenberg allegedly aided, abetted, and caused Parallax’s custody and compliance violations.  Tri-Star Advisors allegedly violated the principal transaction and compliance provisions of the Advisers Act, and Payne and Vaughan allegedly caused the violations.

The SEC’s investigation was conducted by R. Joann Harris and Asset Management Unit member Barbara L. Gunn of the Fort Worth Regional Office.  The SEC’s litigation will be led by Jennifer Brandt.

ELDERLY INVESTORS TARGETED WITH OFFERING FRAUD

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
SEC Charges Gary C. Snisky with Offering Fraud

The Securities and Exchange Commission (Commission) filed a civil injunctive action on November 21, 2013, in the United States District Court for the District of Colorado against Gary C. Snisky of Longmont, Colorado. The Commission alleges that Snisky recruited and trained a sales force that raised at least $3.8 million from more than 40 elderly investors in Colorado and seven other states by promising guaranteed returns and safety of principal through a purported investment in government secured bonds.

The Commission's complaint alleges that Snisky and his sales force targeted mostly elderly, annuity-holding investors to purchase interests in Arete, LLC, a purportedly safe alternative to an annuity that also allowed for withdrawal of principal. Additionally, the complaint alleges that Snisky and his salespeople represented to investors that Arete provided a guaranteed annual return of 6% to 7%, a 10% bonus to compensate for any annuity withdrawal penalties, and that investor funds would be placed in bonds backed by the "full faith and credit" of the United States Government. These representations, however, were false, as Snisky misappropriated approximately $2.8 million in investor funds, mostly in cash withdrawals, and used these funds to pay commissions to his salespeople and for his personal use.

The Commission's complaint alleges that Snisky violated the antifraud provisions of the securities laws, Section 17(a) of the Securities Act of 1933 Section 10(b) of the Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder, and Sections 206(1), (2), and (4) of the Advisers Act of 1940 and Rule 206(4)-8 thereunder; violated the unregistered broker-dealer provisions of the securities laws in Section 15(a) of the Exchange Act; violated the security registration provisions of the securities laws in Sections 5(a) and (c) of the Securities Act; and aided and abetted Arete's failure to register as an investment company under Section 7(a) of the Investment Company Act of 1940. The Commission's complaint seeks a permanent injunction, disgorgement plus prejudgment interest, a civil monetary penalty, and other relief against Snisky.

The Commission's investigation was conducted in the Denver Regional Office by John C. Martin, Kerry M. Matticks and James A. Scoggins. Polly A. Atkinson will lead the Commission's litigation. The SEC acknowledges the assistance of the U.S. Attorney's Office, the Internal Revenue Service and the Federal Bureau of Investigation for the District of Colorado. The SEC's investigation is continuing.

SEC ANNOUNCES AGENDA AND PANELISTS FOR DECEMBER 5 STAFF ROUNDTABLE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced the agenda and panelists for its December 5 staff roundtable on the use of proxy advisory firm services by institutional investors and investment advisers.

The roundtable, announced earlier this month, will begin at 9:30 a.m. and will be divided into two sessions.  In the first session, participants will discuss, among other topics, the current use of proxy advisory services, including the factors that may have contributed to their use, the purposes and effects of using the services, and competition in the marketplace for such services.  In the second session, participants will discuss, among other topics, issues identified in the Commission’s 2010 concept release on the U.S. proxy voting system, including potential conflicts of interest that may exist for proxy advisory firms and users of their services, and the transparency and accuracy of recommendations by proxy advisory firms.

The roundtable panelists are:

Karen Barr - General Counsel, Investment Adviser Association
Jeffrey Brown - Head of Legislative and Regulatory Affairs, Charles Schwab
Mark Chen - Associate Professor of Finance, Georgia State University
Michelle Edkins - Managing Director and Global Head Corporate Governance and Responsible Investment, BlackRock, Inc.
Yukako Kawata - Partner, Davis Polk & Wardwell LLP
Hoil Kim - Vice President, Chief Administrative Officer and General Counsel, GT Advanced Technologies, Inc.
Eric Komitee - General Counsel, Viking Global Investors LP
Jeff Mahoney - General Counsel, Council of Institutional Investors
Nell Minow - Co-Founder and Board Member, GMI Ratings
Trevor Norwitz - Partner, Wachtell, Lipton, Rosen & Katz
Harvey Pitt - CEO, Kalorama Partners
Katherine Rabin - CEO, Glass Lewis & Co. LLC
Gary Retelny - President, Institutional Shareholder Services, Inc.
Michael Ryan - Vice President, Business Roundtable, and former president and COO of Proxy Governance, Inc.
Anne Sheehan - Director of Corporate Governance, CalSTRS
Damon Silvers - Director of Policy and Special Counsel, AFL-CIO
Darla Stuckey - Senior Vice President of Policy and Advocacy, Society of Corporate Secretaries
Lynn Turner - Managing Director, LitiNomics, Inc.
The roundtable will be held at the SEC’s headquarters in Washington, D.C., and is open to the public on a first-come, first-served basis.  The event also will be webcast live on the SEC’s website and will be archived for later viewing.

Members of the public are welcome to submit comments on the topics to be addressed at the roundtable.  Comments may be submitted electronically or on paper; please use one method only.  Any comments submitted will become part of the public record of the roundtable and posted on the SEC’s website.

FINAL JUDGEMENT ENTERED FINAL JUDGEMENT AGAINST DEFENDANT FOR ALLEGEDLY MISLEADING INVESTORS

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Court Enters Final Judgment by Consent Against SEC Defendant Corey Ribotsky

The Securities and Exchange Commission announced that, on November 14, 2013 the Honorable Joseph F. Bianco, United States District Court Judge for the Eastern District of New York, entered a final judgment by consent against Defendant Corey Ribotsky. In addition, Judge Bianco also dismissed all claims against Defendant The NIR Group, LLC at the SEC's request because that entity is defunct and has no assets.

The SEC filed this enforcement action on September 28, 2011, alleging, among other things, that during the financial crisis Ribotsky and NIR made false statements to investors regarding the poor performance and trading strategy of the various AJW Funds he managed through NIR. The SEC also alleged that Ribotsky misappropriated client assets and mislead investors about the decision to form the AJW Master Fund.

Ribotsky consented to the final judgments without admitting or denying the allegations in the Commission's complaint. The final judgment against Ribotsky imposed permanent injunctions prohibiting Ribotsky from violating Section 17(a)(1), (2) and (3) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Ribotsky has also agreed to pay $12,500,000 in disgorgement, $1,000,000 in prejudgment interest, and a $1,000,000 civil penalty.

To settle the Commission's related administrative proceedings that the Commission will separately institute, Ribotsky has consented to be barred from any future association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, with the right to reapply after four years.

SEC CHARGES FORMER EMPLOYEE OF SEMICONDUCTOR COMPANY WITH TIPPING NONPUBLIC INFORMATION

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a former employee at a Silicon Valley-based semiconductor company for his role tipping nonpublic information used in connection with Raj Rajaratnam’s massive insider trading scheme.

The SEC alleges that Sam Miri, who worked in the communications division at Marvell Technology Group, tipped confidential information about the company’s financial performance to former Galleon Management portfolio manager Ali Far.  He used the nonpublic information provided by Miri to trade Marvell securities on behalf of hedge funds that he founded after leaving Galleon.  Far and Spherix Capital, who were among those earlier charged by the SEC in the Galleon matter, earned hundreds of thousands of dollars in illicit profits based on Miri’s tips.  In exchange for the illegal tips, Far arranged four quarterly payments to Miri totaling approximately $10,000.

Miri, who lives in Palo Alto, Calif., has agreed to settle the SEC’s charges by paying more than $60,000 and being barred from serving as an officer or director of a public company.

“Miri finds himself playing the role of defendant because he chose to violate his duty to protect his employer’s confidential information by selling it to a hedge fund manager in exchange for quarterly payments,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York Regional Office.  “A total of 35 firms and individuals have now been held accountable for their varying roles in the Galleon scheme.”

According to the SEC’s complaint filed in federal court in Manhattan, Miri tipped Far in May 2008 with inside information about Marvell’s plans to announce a permanent chief financial officer after a string of interim chief financial officers.  With an earnings announcement scheduled for later that month, Miri also revealed confidential information about Marvell’s sales revenue and profitability as well as projections of future earnings potential.  In the days leading up to the announcement, Spherix Capital hedge funds purchased approximately 300,000 shares of Marvell common stock.  When the stock climbed more than 20 percent after Marvell announced its quarterly financial results and new CFO on May 29, Far’s hedge funds reaped approximately $680,000 in ill-gotten gains.

The SEC’s complaint charges Miri with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Miri agreed to pay $10,000 in disgorgement, $1,842.90 in prejudgment interest, and a $50,000 penalty.  Miri also agreed to be barred from serving as an officer or director of a public company for five years.  Without admitting or denying the charges, Miri agreed to be permanently enjoined from future violations of these provisions of the federal securities laws.  The settlement is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by John Henderson, Diego Brucculeri, and James D’Avino of the New York Regional Office.  The case has been supervised by Joseph Sansone of the Market Abuse Unit and 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 CHARGES TRADER WITH DEFRAUDING OLDER INVESTORS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today charged a self-described institutional trader in Colorado with defrauding elderly investors into making purported investments in government-secured bonds as he used their money to pay his mortgage.

The SEC alleges that Gary C. Snisky of Longmont, Colo., primarily targeted retired annuity holders by using insurance agents to sell interests in his company Arete LLC, which posed as a safe and more profitable alternative to an annuity.  Investors were told their funds would be used to purchase government-backed agency bonds at a discount, and Snisky as an institutional trader would use the bonds to engage in overnight banking sweeps.  However, Snisky did not purchase bonds or conduct any such trading, and he misappropriated approximately $2.8 million of investor funds to pay commissions to his salespeople and make personal mortgage payments.

“With one hand Snisky ushered investors into a supposedly safe investment opportunity with guaranteed profits, and with the other hand he put investors’ money into his own pocket,” said Julie K. Lutz, director of the SEC’s Denver Regional Office.

In a parallel action, the U.S. Attorney’s Office for the District of Colorado today announced criminal charges against Snisky.

According to the SEC’s complaint filed in federal court in Denver, Snisky raised at least $3.8 million from more than 40 investors in Colorado and several other states. Beginning in August 2011, Snisky recruited veteran insurance salespeople who could sell the Arete investment to their established client bases that owned annuities. The majority of investors in Arete used funds from IRAs or other retirement accounts.

The SEC alleges that Snisky described Arete as an “annuity-plus” investment in which, unlike typical annuities, investors could withdraw principal and earned interest with no penalty after 10 years while still enjoying annuity-like guaranteed annual returns of 6 to 7 percent.  Snisky emphasized the safety of the investment, calling himself an institutional trader who could secure government-backed agency bonds at a discount and save middleman fees.  Snisky’s sales pitch was so convincing that even one of his salespeople personally invested retirement funds in Arete.

The SEC alleges that Snisky created and provided all of the written documents that the hired salespeople used as offering materials to solicit investors.  Snisky also showed salespeople fraudulent investor account statements purporting to show earnings from Arete’s investment activity.  Following an initial influx of investors, Snisky organized at least two seminars where he met with investors and salespeople.  He introduced himself as the institutional trader behind Arete’s success, and encouraged investors to spread the word.  Snisky hand-delivered fraudulent account statements to investors attending the seminars to mislead them into believing their investments were performing as promised.

The SEC’s complaint against Snisky seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, and a financial penalty.

The SEC’s investigation, which is continuing, has been conducted by John C. Martin, Kerry M. Matticks, and James A. Scoggins of the Denver office.  The SEC’s litigation will be led by Polly A. Atkinson.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Colorado, Internal Revenue Service, Federal Bureau of Investigation, and U.S. Postal Inspection Service.