Category Archives: Fraud

Raj Rajaratnam Convicted of 14 Counts Related to Insider Trading

Posted on by
Reply

Earlier this morning Sri Lanka-born Raj Rajaratnam, co-founder of the Galleon Group, was convicted of 5 conspiracy charges and 9 securities fraud charges related to insider trading.  Rajaratnam was accused of using the inside information to make trades that made the Galleon Group’s hedge funds approximately $68 million in profits and avoided losses.  His defense claimed that all the information he traded on was publicly available.

The verdict came from the U.S. District Court in Manhattan after more than two weeks of deliberation and more than two months after the trial began.  During the trial prosecutors presented extensive evidence against Rajaratnam, including text messages, trading records and wiretapped phone conversations.  There were approximately 45 tapes used in the case, which represented one of the most extensive uses of wiretaps in a white-collar case.

The Galleon probe has resulted in more than two dozen arrests and 21 guilty pleas.  It has also led to a second investigation aimed at consultants in the securities industry who pass off inside information as the product of legitimate research.  Rajaratnam will remain free on bail, with electronic monitoring, until his July 29 sentencing.  He faces up to 25 years in prison.

Primary Global Research Consultant Arrested Today in Continuing Insider Trading Probe

Posted on by
Reply

Today federal authorities arrested Winifred Jiau, a technology expert who was employed as a consultant at Primary Global Research LLC, on charges related to her alleged involvement in an insider trading scheme.  Jiau is the seventh individual associated with Primary Global Research to be charged of insider trading beginning last month.  Primary Global Research, an expert-network firm based in Mountain View, California, specialized in providing investors with information from public company employees.  Jiau, who was hired as a consultant at Primary Global Research, allegedly sold inside information to portfolio managers at hedge funds that paid her over $200,000 between 2006 and 2008.

Jiau has been charged with both conspiring to commit securities fraud and engaging in securities fraud by selling material nonpublic information about publicly traded companies.  The latter charge could potentially involve up to 20 years in prison and a $5,000,000 fine.

Civil, Criminal Insider Trading Investigations Target Hedge Funds, Others

Posted on by
Reply

According to a Wall Street Journal  report, federal authorities are conducting civil and criminal investigations of insider trading that could involve hedge funds, mutual funds, research consultants, investment bankers, and analysts.  The scope of the investigations appears to be exceptionally broad and has several areas of focus, including whether:

(1) independent analysts and consultants working with expert networks provided material non-public information to hedge funds and mutual funds;

(2) investment bankers selectively leaked material non-public information about transactions;

(3) independent analysts and research boutiques provided non-public information to clients; and

(4) traders at hedge funds and trading firms improperly gained material non-public information about merger deals.

Continue reading →

The SEC Proposes Two New Rules Under the Dodd Frank Act

Posted on by
Reply

Whistleblower Program

The SEC proposed a new whistleblower program under the Dodd Frank Act. The SEC’s proposed rule provides a simple, straightforward procedure for potential whistleblowers to provide critical information to the agency.  To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million. The SEC is asking for comments on or before December 17, 2010.  To see the proposed rule please go to: http://www.sec.gov/rules/proposed/2010/34-63237.pdf

Rule to Prevent Fraud in Connection with Security-Based Swaps:

The rule is proposed under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which generally authorizes the SEC to regulate security-based swaps. The proposed rule would add a definition of “security-based swap” to the U.S. Exchange Act of 1934 (the “Exchange Act”). “Security-based swaps” will be subject to the general antifraud provisions of the federal securities laws (for e.g., section 10(b) of the Exchange Act.

The proposed rule would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities.  The rule also would explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap. The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps.  Further, the rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries.  For further details please see http://www.sec.gov/rules/proposed/2010/34-63236.pdf

Hedge Fund Charged with Multiple Violations of Rule 105 of Regulation M; Insufficient Policies and Procedures; $2.6 Million Settlement

Posted on by
Reply

The SEC has fired a warning shot to hedge funds and other market participants that it will target Rule 105 violations in its enforcement efforts and that hedge funds are expected to have robust policies and procedures for preventing and detecting Rule 105 violations.  On Thursday, the SEC charged Dallas-based hedge fund manager Carlson Capital, L.P. with four violations of Rule 105 of Regulation M.  The regulation prohibits purchases of an equity security made available through a public offering from an underwriter or broker or dealer participating in the offering after having sold short the same security during a restricted period (which is generally five business days before the pricing of the offering).  Rule 105 is designed to prevent market participants from selling short a security just before a company prices a public offering, thereby artificially depressing the market price of the security and allowing the short seller to purchase the security at a lower price.  Rule 105 applies irrespective of a trader’s intent.  Carlson agreed to settle the charges for more than $2.6 million dollars and was also censured and ordered to cease and desist from further violations. Continue reading →

Insider Trading Case Against Mark Cuban Gets New Life; Implications for Hedge Funds

Posted on by
Reply

In a case that should be watched closely by hedge fund managers, a federal appellate court has revived the SEC’s insider trading case against billionaire Dallas Mavericks owner Mark Cuban.  The appellate court found that there was “more than a plausible” basis to find in the SEC’s favor.  The case will now go back to the lower court for further litigation or settlement discussions.

Continue reading →

SEC Charges Man for Posing as Portfolio Manager

Posted on by
Reply

Stephen C. Bond of Walnut Creek , California was charged by the Securities and Exchange Commission (“SEC”) for  fraudulently holding himself out to be a portfolio manager of  the “Asenqua” and “Fireside” hedge funds.  This elaborate hedge fund scheme was carried out alongside  Silicon Valley hedge fund manager Albert K. Hu from 2001 through 2008 .

The SEC compliant filed in federal district court for the Northern District of California alleges,

Bond attended investor meetings along with Hu to solicit investments  in the “Asenqua” and “Fireside” hedge funds. According to the SEC, Bond was portrayed at these meetings and in written materials as the funds’  portfolio manager.

While it does not appear Mr. Bond actually carried out any trades or implemented any of the trading strategies he and Mr. Hu discussed with investors, they believed him to be a legitimate professional with apparent insight into the securities market.

Mr. Bond made almost a million dollars for his part in defrauding investors.   The SEC has charged him with violations of the anti-fraud provisions of the federal securities laws and seek to have him pay financial penalties and repay any gains illegally obtained.

With regards to Mr. Albert K Hu, he too was sued by the SEC in March 2009 for his involvement in the scheme.  This case currently remains pending.   In the meantime, he  remains in custody following the filing of a related criminal action.

Ex-HedgeFund Manager Pleaded Guilty to Fraud

Posted on by
Reply

This past Friday the sole managing member of Westgate Capital Management LLC (the “Fund”), James Nicholson, pleaded guilty to securities fraud, investment adviser fraud and mail fraud  which are subject to the following maximum penalties:

The fraud allegedly began back in 2004 with Nicholson falsely representing to investors that Westgate’s funds had assets under management ranging from $600 million to $900 million, when in fact only about $50 million to $60 million were actually invested.   These misrepresentations came to light last December when checks totaling around $5 million for nearly two dozen investors bounced during their attempt to redeem.  Prosecutors and Nicholson himself  admitted that:
  • financial records were falsified,
  • no legitimate and independent accounting firm auditing the Fund existed,
  • there was no actual office verifiable for the supposed auditor

Had a thorough due diligence check on the Fund and Mr. Nicholson been conducted earlier on, perhaps investors may have been spared the $133 million loss that occured as a result of Mr. Nicholson’s fraudulent activities.

1 Year Later…

Posted on by
Reply

One year ago today, Bernard Madoff was arrested and charged with securities fraud in a $50 billion Ponzi scheme that affected thousands of investors.   It was an investment scandal that rocked Wall Street and raised concerns and awareness on all levels.  As a result, stricter regulations and much needed reforms and due diligence on how the Securities and Exchange Commission intends to respond to and review allegations of fraud have been implemented.

Briefly stated those reforms include:

Continue reading →