HedgeOp would like to take the opportunity to highlight recent enforcement actions brought by the SEC Enforcement Division’s Asset Management Unit and remind all about the importance of implementing a thorough compliance program and of maintaining a robust culture of compliance.
The SEC appears to be focusing on markets and products not previously investigated in the insider trading context. According to Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Market Abuse Unit, the SEC is “aggressively working to identify and prosecute illegal insider trading across multiple markets and derivatives products regardless of the complexity of the trading pattern that we have to unravel in our investigations.”
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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.
The Wall Street Journal Online reports that the Senate voted 82-14 this morning to end debate on a continuing resolution for $250 billion to fund the government through March 4, 2011. It is expected that, after a final vote in the Senate, the resolution will be sent to the House of Representatives for a vote prior to the expiration of the current stop-gap measure at midnight tonight.
According to a Senate Appropriations Committee summary produced late Sunday, the resolution provides a small increase of $1.16 billion over 2010 spending, but it appears that there will be no new funds to help the SEC or CFTC with regulatory reform under Dodd-Frank. According to the Wall Street Journal Online, the proposed spending plan would give the SEC authority to set up five offices mandated by Dodd-Frank, including a whistleblower office.
A $1.1 trillion omnibus bill, supported by the Democrats and hailed by the SEC and CFTC, would have included an 18% increase in the SEC’s budget ($200 million in new funding), and a 69% increase in the CFTC’s budget ($100 million of additional money). That bill failed to garner sufficient support and, last Thursday night, the Dow Jones Newswire reported that Senate Majority Leader Harry Reid (D-Nev.) had announced that the Senate would focus instead on a short-term funding measure. At that time, it was reported that the Senate Republicans were considering only a resolution proposed by Minority Leader Mitch McConnell (R-Ky.), which would have simply maintained funding at the 2010 budget levels until February 18, 2011. The House’s version of a new measure, released in early December, would have shifted more funds to the SEC and the CFTC while maintaining the 2010 budget.
The SEC and CFTC had expected to use the new funding under the omnibus bill to allow the agencies to more effectively carry out their new responsibilities and implement the many new rules under the Dodd-Frank Act. These include both agencies’ supervision of the over-the-counter derivatives markets and the SEC’s new power to regulate and examine certain private fund advisers and municipal advisers. Now, it appears that, despite these new duties, which both SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler have said require hiring hundreds of new staff members and significant upgrades in technology, the SEC and CFTC will be forced to operate within their 2010 budgets.
Although the Obama administration could shift money around to help the SEC and CFTC, it is likely that the Republicans, who did not support Dodd-Frank and will take control of the House of Representatives in January 2011, will attempt to block any such shifts through legislation.
The Wall Street Journal Online reports that Senate Finance Committee Chairman Max Baucus (D., Mont.) remains confident that the Democrats could still win funding battles for financial regulation. Sen. Richard Shelby (R., Ala.), however, is quoted as saying, “It’s going to be a big political fight. I think the odds shift toward Republicans.”
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.
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
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.
Last week, on April 28, 2010, SEC Chairman Mary Schapiro testified before the Senate’s Subcommittee on Financial Services and General Government in support of the President’s FY 2011 budget request of $1.258 billion for the Securities and Exchange Commission.
During her testimony, Chairman Schapiro discussed the SEC’s progress on various initiatives undertaken during the past year as well as the agency’s continuing work to further improve investor protections.
The Securities and Exchange Commission announced that Richard A. Levine has been named an Associate General Counsel for Legal Policy in the agency’s Office of the General Counsel.
According to the SEC, Mr. Levine will provide legal and policy advice to the Commission on a wide range of matters, with a particular emphasis on enforcement, corporate disclosure, and accounting.
Said SEC General Counsel David Becker:
Rich is known to the public and across the Commission as a splendid lawyer. He has extensive knowledge of the securities laws and superb judgment. Rich has been a valued advisor to me and to the Commission for many years. I am delighted that he has agreed to serve in this new capacity.
Mr. Levine has held numerous positions in the SEC’s Office of General Counsel, most recently as the SEC’s Assistant General Counsel for Enforcement. Before joining the SEC, Mr. Levine was a litigation associate at Cahill Gordon & Reindel in New York City. He earned his JD in 1980 from Michigan Law School and his BA, summa cum laude, from the State University of New York at Albany in 1977.
Said Mr. Levine:
I have been fortunate in my career to have worked with and learned from so many talented and dedicated SEC staff. I know how vital the SEC’s work is for America’s investors, and I am honored to have this opportunity to continue to advance the SEC’s mission.
Mr. Levine will begin his new role immediately.
As reported in the Financial Times, the US Securities and Exchange Commission is touting a new brain trust in response to an oft-cited criticism that its staffers do not have the necessary level of industry knowledge and experience to effectively regulate the business.
The SEC’s new asset management unit is part of a broader reorganisation at the agency designed to make it a more efficient and effective regulator. The unit will focus on investment advisers, investment companies, hedge funds and private equity funds. Continue reading