December 11, 2017

Systematic SEC Coverup Alleged

Matt Taibbi, venerable financial reporter for the Rolling Stone, is out with a scathing expose on an alleged systematic coverup by the SEC of Wall Street financial crimes. All the major newspapers have extensive coverage of the subject, and the entire financial blogosphere is weighing in on it.


Read Matt Taibbi’s Article Here:  Is the SEC Covering Up Wall Street Crimes?

Legislative Inquiry

Lawmakers are seeking answers from the Securities and Exchange Commission, after revelations that it is routine policy to destroy documents pertaining to MUIs, or “Matters Under Inquiry”.

9,000 Files Destroyed

Darcy Flynn, who has worked for the SEC for 13 years, claims that the agency destroyed documents and files from any preliminary inquiries that were not deemed serious enough to warrant a formal investigation. This practice has been common-place since 1993. From the SEC’s internal website:

“After you have closed a MUI that has not become an investigation you should dispose of any documents obtained in connection with the MUI.”

That directive seemingly goes against federal law, which requires the National Archives and Records Administration be responsible for the destruction of any records. In addition, 10 years prior, the SEC and NARA reached an agreement that all investigative records would be kept for 25 years, after which the NARA would be responsible for destroying them.

Among the more than 9,000 files destroyed, were inquiries regarding financial fraud and insider trading at Lehman Brothers, Deutsche Bank AG and SAC Capital Advisors LP, possible financial fraud at Bank of America and Wells Fargo in 2007 and 2008, Goldman Sachs’ trades of AIG credit-default swaps in 2009 and Bernard Madoff Investment Securities LLC.

MNY-08415 – Insider Trading at AIG Alleged

One such file was case MNY-08145: allegations of insider trading at AIG at the height of its financial woes in September 2008. When trading irregularities were reported by an employee of AIG to her superiors, she was fired. The SEC, rather than investigate the allegations itself, left it to AIG or outside counsel to conduct an internal investigation. On October 1st, 2009, the SEC closed the case. Talking to Matt Taibbi of Rolling Stone, certified fraud examiner Harry Markopolos summed up the SEC’s practice of allowing companies to handle their own investigations: “The last person you want to trust is the person being accused or their lawyer.”

“Lawyers Behaving Badly”

Strangely enough, Flynn’s involvement in what is now shaping up to be a long and drawn out investigation into the SEC’s practices, started with a seemingly routine e-mail. Sent to all SEC staff by SEC enforcement director Robert Khuzumi, the e-mail asked for any reports of experiences regarding “the behavior of counsel representing clients in…investigations has been questionable.” With a subject line reading “Lawyers Behaving Badly”, this message was referring to counsel outside of the SEC, but Flynn mistook it for the behavior of lawyers anywhere – ‘within’ the SEC included.

Flynn responded to Khuzumi’s email, recounting a story about an investigation into Deutsche Bank. Following comments by CEO Rolf Brewer, denying that the German bank was about to take over rival US firm Bankers Trust, stock prices in the US company dropped significantly. This in turn lowered the potential price for Deutsche Bank to merge with Bankers Trust. Flynn and other SEC investigators opened an MUI, and with increasing evidence of wrongdoing, began the move towards a full blown investigation. Needing only the seal of approval from the SEC director of enforcement, Richard Walker, the investigation was expected to continue. Things suddenly ground to a halt when Walker removed himself from the case, and two weeks later the investigation was terminated, with no explanation. The following October, Richard Walker was hired as general counsel of Deutsche Bank. (Interestingly enough, Khuzami had joined the SEC from Deutsche, where he had worked for Walker.)

Flynn stayed with the SEC for four more years after the Deutsche Bank investigation, before leaving briefly, and then returning, taking a job that involved managing the disposition of records. It was here that he discovered the SEC’s policy regarding MUIs, and started to think that he was in fact overseeing illegal activity.

Becoming increasingly concerned, Flynn contacted the NARA, who in turn contacted Barry Walters, in charge of document requests for the SEC, and Adam Storch, managing executive of the SEC’s enforcement division. In a letter, Paul Wester, director of modern records at the NARA, wrote: “If you confirm that federal records have been destroyed improperly, please ensure that no further such disposals take place and provide us with a written report with 30 days.”

Storch, accompanied by two SEC lawyers, met with Flynn to discuss his concerns. During the meeting, Flynn alleges that they discussed criminal liability, wondering if admitting the truth to the NARA would be a mistake. According to Flynn’s notes at the time, SEC assistant counsel Ken Hall said: “We could say that we do not believe there has been disposal inconsistent with the schedule.” When discussing the number of files destroyed, Storch allegedly said: “18,000 MUIs destroyed, including Madoff.”

Initially, Flynn and his lawyer Gary J. Aguirre didn’t intend to take the MUI accusations outside the Agency, assuring SEC chairman Mary Schapiro that this could be resolved internally if Flynn was protected against reprisal. After receiving no such assurance, Flynn contacted the SEC’s inspector general and wrote to three congressional agencies, one of them being the Senate Judiciary Committee, detailing his concerns.

In a July 15th letter to Sen. Grassley, ranking Republican on the Senate Judiciary Committee, Aguirre laid out the allegations against the SEC: “The SEC has been destroying MUI files containing federal records since at least 1993, if not earlier, through July 2010.” The letter stated that Mr. Flynn was “concerned that the SEC was in the process of engaging in a reprisal against him.” Aguirre is no stranger to the SEC’s handling of ‘whistle-blowers’, as he himself once worked for the Agency. In 2005, while investigating possible insider trading at Pequot Capital involving John Mack (current Chairman of Morgan Stanley), he was suddenly dismissed. A senate committee referred to his improper firing as part of a “process of reprisal.” In that particular case, Pequot founder Arthur Samberg paid out nearly $28 million in civil charges related to insider trading, bit never admitted or denied any wrongdoing.

This came at a time when Grassley was already investigating the SEC with respect their polices regarding following up on complaints. In a letter to securities regulator FINRA, Grassley specifically wanted to know how many complaints they had forwarded to the SEC regarding hedge fund SAC Capital. SAC has a history of accusations against it, including insider trading. FINRA had forwarded 19 complaints about SAC Capital to the SEC. Armed with this information, Grassley wrote to the SEC, inquiring as to how many of these referrals had been investigated, and asking for evidence to support this. Khuzami responded, saying that the SEC didn’t comment on investigations, and would not provide any further information. SAC Capital has previously commented on Grassley’s findings, saying the referrals “are neither findings nor allegations of insider trading.”

After being contacted by Flynn, Grassley sent a further letter to the SEC, wanting to know if the allegations that they routinely destroyed MUI records were true – and if so, was this the reason for their failure to provide him with information about SAC Capital.

Grassley commented: “From what I’ve seen, it looks as if the SEC might have sanctioned some level of case-related document destruction. It doesn’t make sense that an agency responsible for investigations would want to get rid of potential evidence. If these charges are true, the agency needs to explain why it destroyed documents, how many documents it destroyed over what time frame and to what extent its actions were consistent with the law.”

In a letter to Mary Schapiro, Grassley questioned the Agency’s policies, asking if Flynn’s allegations were true, and if so, was there any way the destroyed documents could be retrieved. An SEC spokesman said that the agency has a computerized record of every MUI process, and if necessary, certain items such as brokerage trading records, emails and newspaper clippings can be retrieved.

Spokespeople for Goldman Sachs, Bank of America, Wells Fargo and Citigroup declined to comment, and there has been no response from Lehman. As for Deutsche Bank, a spokesman said: “as a matter of bank policy we cannot comment on regulatory matters, particularly those that have been closed for nearly a decade.

A number of inquires are currently under way: the Senate Judiciary Committee, the National Archives and Records Administration, and the inspector general of the SEC.

Read More:

Matt Taibbi’s Article in Rolling Stone

Sen. Grassley letter to SEC Chairman Mary Schapiro (PDF)

Bloomberg Article

NY Times Article

Financial Blogosphere Reacts:

Dealbreaker

Zero Hedge

Felix Salmon

Yves Smith at Naked Capitalism

SEC Charges Diageo with FCPA Violations

On the 27th of July the US Securities and Exchange Commission charged the UK based liquor distributor Diageo plc with violations of the Foreign Corrupt Practices Act (the FCPA). The investigation into the company revealed that in order to boost the sale of brands such as, Johnnie Walker and Windsor Scotch wiskies, Diageo, through its subsidiaries, repeatedly engaged in unlawful activities in India, Thailand, and South Korea.


According to the SEC report, Diageo India Ltd., an indirect subsidiary of Diageo, allegedly spent 1.7 million dollars in payments to Indian government officials who were responsible for the sale and distribution of alcoholic beverages. In Thailand, the subsidiary Diageo Moet Hennessy Thailand, allegedly paid over half a million dollars to retain the council of a Thai government official, who persuaded other officials to favor Diageo in numerous tax and sales issues that threatened to undermine the companies sales. Likewise, in 2003, Diageo Korea Ltd. was facing an uphill battle with the South Korean government due to intense custom and tax regulations.

These issues were resolved in 2004, however, with the S. Korean government giving Diageo Korea a 50 million dollar tax rebate. Several months later the company allegedly gifted a South Korean official 86 thousand dollars for consulting services.

According to their report, the SEC’s investigation uncovered widespread creative accounting, in which the financial managers of the various Diageo subsidiaries allegedly covered up the bribes by labeling them as “special rebates” or “trade incentives”, giving the illusion that the money was being spent on legitimate business expenses.

This illegal activity was allegedly carried out over a period of six years and as a result Diageo’s sales were boosted in the aforementioned countries by 11.3 million dollars. In failing to properly record and maintain their financial records Diageo violated the FCPA.

During the investigation Diageo cooperated fully and upon the final report agreed to settle the case for a total of 16 million dollars. The settlement did not include an admission of guilt but the company agreed to comply with the anti-bribery laws in the future and pay 13 million dollars in restitution, as well as a 3 million dollar fine.

Read more:
SEC.gov
SEC slaps Diageo $16 mn fine for bribery in India, Thailand
Bribery: USA penalties for UK company Diageo
Foreign Corrupt Practices Act (FCPA)

Immunosyn Corporation and Execs Charged by SEC

Immunosyn Corporation, three shareholder companies and four of their senior executives, have been charged by the Securities and Exchange Commission with fraudulently misleading investors.


It is alleged that in various public filings between 2006-2010, the California-based biopharmaceutical company stated that Argyll Biotechnologies LLC, its controlling shareholder, either planned to or had commenced the US regulatory approval process for human clinical trials for SF-1019.

SF-1019 is a drug derived from goat blood that is intended to treat various ailments. What Immunosyn did not disclose was that the FDA had put a hold on the drug applications for SF-1019, preventing clinical trials from happening. In addition, it is alleged that Immunosyn stated that approval for human clinical trials was imminent or underway in Europe, when in fact an application had never been submitted.

The SEC’s complaint, which was filed on 1st August in federal court in Chicago, alleges that Douglas McClain Jr., Immunosyn’s CFO, Douglas McClain Sr., Argyll’s Chief Scientific Officer, and James Micelli, Argyll’s CEO, raised approximately $20 million through insider trading, by selling Immunosyn shares while knowing that they were misrepresenting the status of SF-1019. The majority of shares were sold through Argyll Equities, owned jointly by McClain Jr. and Micelli, and Padmore Holdings Ltd, an offshore company owned by McClain Sr., McClain Jr., and Micelli. Also charged with securities fraud is the CEO of Immunosyn, Stephen D. Ferrone.

The SEC alleges that a video on Immunosyn’s website showed McClain Sr. making misstatements about the regulatory approval status of SF-1019. In addition, he sold Immunosyn stock to patients at a Texas holistic clinic, some of them terminally ill. Allegedly, he raised about $300,000 from the patients, but they never received their shares.

The SEC is seeking a final judgement that forbids the defendants from future violations of the anti-fraud provisions of the federal securities laws, with each defendant returning any money they have made, and paying financial penalties. They also seek to bar McClain Sr., McClain Jr., Micelli and Ferrone from serving as a director or officer of a public company.

The investigation was led by Tracy Lo, John Kusutusch and Eric Phillips from the SEC’s Chicago Office, with the assistance of the Food and Drug Administration. Ms. Lo and Mr. Phillips will handle the litigation.

Read more:
SEC.gov
Goat Blood HIV Cure said to be $20 Million Scam
Charges of Fraud Hit Pharma Company, Execs
SEC lays out “Tall tales” in $20M biotech securities scam
SF-1019 Immunosyn

SEC Moves Quickly To Freeze Assets in Alleged Insider Trading

“Three Swiss entities have had their assets frozen by the Securities and Exchange Commission, amidst allegations of insider trading.

The charge came ahead of a public announcement that Lonza Group Ltd, based in Switzerland, would be acquiring Arch Chemicals Inc., a Connecticut company, for $1.2 billion dollars. An SEC complaint was filed on July 15th, alleging that Compania International Financiera S.A., Chartwell Asset Management Services and Coudree Capital Gestion S.A., purchased over one million common shares of Arch between the dates of July 5th and 8th, at prices of $34.39 to $42.89, primarily in UK based accounts. On July 11th, Lonza announced it would pay $47.20 a share for Arch. Immediately following Lonza’s announcement of the Arch acquisition, the Swiss entities began to sell the stock shares for millions of dollars of profit.

According to the complaint filed by the SEC, the three entities were in possession of private information about the proposed Arch acquisition at the time of the share purchases. In the complaint filed in U.S. District Court for the Southern District of New York, the SEC requested emergency relief, due to the fact that since the defendants are foreign entities, proceeds of the trades in question could be transferred into overseas accounts upon clearance at U.S. brokerage firms.

The SEC’s emergency request was granted by the Honorable P. Kevin Castel on July 15th. Certain assets of the defendants were frozen, and all assets obtained from the trading described in the complaint were ordered to be repatriated. A preliminary injunction hearing has been scheduled for July 25th.

“”The SEC’s swift action to secure a judicial freeze order only four days after the observation of suspicious trading prevented millions of dollars from moving offshore,”" said the Director of the SEC’s Division of Enforcement, Robert Khuzami.

In charge of the SEC investigation were Assistant Regional Director Silvestre A. Fontes, Assistant Regional Director Sandra Bailey, and Senior Counsel Thomas J. Rappaport. They were assisted by the Division of Enforcement’s Market Abuse Unit, led by Daniel M. Hawke. Litigation will be conducted by Michael D. Foster. The SEC were assisted by the FINRA Office of Fraud Detection during the investigation.”

SEC Press Release

SEC Freezes Assets of 3 Firms Accused of Insider Trading

US Securities and Commission Website

SEC Sues 3 Firms, Alleges Insider Trading

Insider Trading – Wikipedia

Rajat Gupta May Sue SEC

“Former Goldman Sachs director Rajat Gupta is considering a lawsuit against the SEC for denying him the right to a jury trial. The SEC is accusing Gupta of passing insider trading tips, including information about a $5 billion investment in Goldman Sachs from Berkshire Hathaway, to recently convicted Galleon Group hedge fund founder Raj Rajaratnam.

Rajat Gupta May Sue SEC

The SEC initiated administrative proceedings against Gupta and despite there being no apparent difference between him and 28 other alleged co-conspirators of Rajaratnam, Gupta is the only co-defendant the SEC is pursuing on these charges from the Galleon case. The SEC attempted to dismiss Gupta’s case but the U.S. District Court judge rejected the motion to dismiss and said in his ruling that the case had merit on equal protection grounds since the SEC has established a history of singling out Gupta for prosecution over identical co-defendants.”

Reuters

Hedge Fund Billionaire Convicted of Fraud

Charlie Sheen Files a Lawsuit Against Warner Bros.

“Charlie Sheen has filed a case against the giants of filmmaking Warner Bros. and this has all come because of Sheen’s exclusion from the famous TV series Two and a Half Men.

charlie sheen

The lawsuit is against $100 Million and the way Charlie Sheen has reacted to the whole incidence, Warner Bros. is definitely going to have a tough time ahead with the famous sitcom.

Although Warner Bros. have files an 8-k but its late filing has made this issue even more serious and grave.

The lawsuit states that this is a direct case of contract violation and irrespective of the outcome of this lawsuit, Charlie Sheen wins or not, Two and a Half Men will not remain the same anymore and that is what going to cause real trouble for the Warner bros.”

For more information, visit http://www.footnoted.com/on-the-lighter-side/charlie-sheen-and-the-sec-filing/

Possible Insider Trading within the Tech World

“It has been discovered that there may be a problem with insider trading going on in Silicon Valley – with many of the new technology companies out there.

insider trading

Often, what happens is that the employees of these companies work together with other technology companies and they hear about potential breakthroughs, product announcements, or acquisitions before they are communicated the public.

They then take this information and use it in making a decision whether or not to invest in that company – essentially, trading on material, non-public information.

Under the Securities Exchange Act of 1934 it is illegal to use “”any deceptive device”" when making purchases and this would include information that has not been brought out to the public.

The only catch with this is that it is clearly defined when it comes to public companies, but leaves a lot of grey area when it comes to private ones like these technology companies.

This has been brought to the Securities and Exchange Commission’s attention and some of this trading is being looking at.”

For more information, visit http://www.cnbc.com/id/42377452

New SEC Enforcement Units Created to Focus on Hedge Funds

“The Madoff scandal has made Securities and Exchange Commission tighten its screw and have started to closely monitor any financial instrument that has been giving more returns than the market index rate, putting an extra measure of scrutiny on hedge funds in particular.

sec enforcement

The SEC has started to closely monitor the hedge funds that have been generating returns for their clients that are 3% higher than the market index rate.

Recently the SEC had set up a number of new SEC enforcement and monitoring units such as the Asset Management Unit, Market Abuses Unit and the Structured Product Unit to investigate any abnormal activity with respect to the hedge fund returns.

These actions taken by the SEC is a result information they’ve learned while investigating the Madoff scandal, as well as other recent financial scandals.

These SEC Enforcement and monitoring units have been provided the necessary rights and authorizations to get in touch with the Hedge fund owners and ask them to provide their investment profile, if their returns are found to be abnormal.

These new SEC enforcement units, as well as other new regulation that is sure to follow, will increase the cost of compliance and add a new layer of rules and complexity to small and large firms alike.”

For more information, visit http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/e6c28337-842e-4477-b83c-a3284fb35021.cfm

David Sokol Resigns From Berkshire Hathaway; Is SEC Insider Trading Probe Coming?

David Sokol has resigned from his position as CEO of Netjets and Chairman of MidAmerican Energy Holdings Company according to a Berkshire Hathaway press release dated March 30, 2011, where was on the short list for possible successors to Warren Buffet at Berkshire Hathaway (Stock quote: BRK.A and BRK.B), believed by many to be the smartest investor in the world.

David Sokol resigns from Netjets, a Berkshire Hathaway subsidiary, over Lubrizol stock purchases, which many are wondering might become part of a SEC insider trading investigation.

David Sokol resigns from Netjets, a Berkshire Hathaway subsidiary, over Lubrizol stock purchases, which many are wondering might become part of a SEC insider trading investigation.

Berkshire Hathaway has a 100% ownership stake in Netjets and a 89.8% stake in MidAmerican Energy Holdings Company.

Sokol gave personal career reasons for tendering his resignation, but also disclosed his stock purchases in Lubrizol (Stock ticker: LZ), a specialty chemical company that Berkshire Hathaway has recently announced a $9 billion agreement to purchase the company.  Mr. Sokol purchased shares in Lubrizol ahead of the Berskshire Hathaway announcement of the purchase.

While both David Sokol and Warren Buffet state that they believe that Mr. Sokol’s Lubrizol stock purchases were legal, many financial news reporters and commentators are wondering if Mr. Sokol’s trades would be considered as front-running, or insider trading – and also are asking whether a SEC investigation may be forthcoming.  In his appearance on CNBC’s Squawk Box on March 31, Mr. Sokol said that he had not been contacted by the SEC.

The Wall Street Journal has published a detailed timeline of events surrounding Sokol’s Lubrizol stock purchase in the context of Berkshire Hathaway’s announcement of purchasing the company.

Here is the SEC Schedule 14a Preliminary Proxy Statement filed by Berkshire Hathaway regarding the Lubrizol announcement.

David Sokol has tried to resign from his positions at the Berkshire Hathaway owned companies in the past, but his resignation was not accepted by Berkshire Hathaway.

UPDATE:

Further analysis from around the blogosphere on whether Sokol’s trade in Lubrizol constitutes insider trading:

Kid Dynamite’s World

David Merkel

NY Times Dealbook

SEC Charges FDA Chemist With Insider Trading

The Securities and Exchange Commission (SEC) has charged a chemist that works for the U.S. Food and Drug Administration with insider trading, netting over $3.6 Million in illegal trading profits and proceeds by trading on privileged information ahead of important FDA drug announcements.

SEC Charges FDA Chemist with Insider Trading

SEC charges FDA chemist, Cheng Yi Liang, with insider trading.

The full text of the SEC press release can be read here:  SEC Insider Trading Press Release

The SEC charges allege that Cheng Yi Liang traded illegally ahead of at least 27 public announcements concerning FDA drug approval decisions about 19 publicly traded companies. The charges state that some announcements were about the FDA’s approval of new drugs and other announcements were negative FDA decisions.

Here is a rundown of the illegal trades alleged in the SEC charges:

Stock (Ticker Symbol), Trade Dates, FDA Results Announced Date, Profits (Or Losses Avoided)

Encysive (ENCY) July 3 – 24, 2006 July 24, 2006, 4:22 pm $75,361

Connetics (CNCT) Sept. 8 – 19, 2006 Sept. 19, 2006, 6:41 pm $15,700

Cornerstone (CRTX) Apr. 19 – May 14, 2007 May 14, 2007, 6:30 am $42,698

Cornerstone (CRTX) May 15 – 30, 2007 May 31, 2007, 7:00 am $50,750

Encysive (ENCY) June 1 – 14, 2007 June 15, 2007, 6:46 pm $150,324

Pozen (POZN) Aug. 1, 2007 Aug. 2, 2007, 8:31 am ($174,409)

Anesiva (ANSV) Aug. 2 – 16, 2007 Aug. 17, 2007, 6:30 am $1,324

Momenta (MNTA) Nov. 5, 2007 Nov. 6, 2007, 7:33 am $130,675

Pharmacyclics(PCYC) Dec. 20 – 21, 2007 Dec. 21, 2007, 7:00 pm $20,058

Progenics (PGNX) Jan. 9, 2008 Jan. 10, 2008, 8:00 am $5,500

Middlebrook (MBRK) Jan. 10 – 23, 2008 Jan. 24, 2008, 3:04 pm $267,047

Spectrum (SPPI) Feb. 27 – Mar. 7, 2008 Mar. 7, 2008, 5:44 pm $88,470

CV Therapeutics (CVTX) Mar. 14 – 27, 2008 Apr. 10, 2008, 7:18 pm $103,607

Pozen (POZN) Apr. 15, 2008 Apr. 15, 2008, 8:58 pm $75,007

Progenics (PGNX) Apr. 8 – 23, 2008 Apr. 24, 2008, 8:58 pm $463,761

Adolor (ADLR) May 2 – 20, 2008 May 20, 2008, 5:03 pm $46,485

Vanda (VNDA) June 24 – July 25, 2008 July 28, 2008, 6:30 am $88,828

Novadel (NVDL) Nov. 28 – Dec. 19, 2008 Dec. 22, 2008, 8:03 am $22,910

EPIX (EPIX) Nov. 24 – Dec. 18, 2008 Dec. 22, 2008, 3:02 pm $81,994

Vanda (VNDA) Mar. 30 – Apr. 29, 2009 May 6, 2009, 5:30 pm $1,040,809

Santarus (SNTS) Nov. 18 – 19, 2009 Dec. 1, 2009, 5:20 pm $26,820

Santarus (SNTS) Dec. 3 – 4, 2009 Dec. 4, 2009, 7:08 pm $9,287

Somaxon (SOMX) Mar. 18, 2010 Mar. 18, 2010, 11:30 am $119,643

Pozen (POZN) Apr. 26 – 30, 2010 Apr. 30, 2010, 4:59 pm $18,868

Momenta (MNTA) July 20, 2010 July 23, 2010, 10:48 am $85,428

Mannkind (MNKD) Jan. 4, 2011 Jan. 19, 2011, 3:34 pm ($60,047)

Clinical Data (CLDA) Jan. 6 – 21, 2011 Jan. 21, 2011, 5:52 pm $379,602

Alleged Illegal Profits or Losses Avoided TOTAL: $3,645,412