Below are updates on notable SEC enforcement activity from the week of November 26-30, 2012:
“White-Out” Firm Found Guilty
Jeffrey Liskov and his firm, EagleEye Asset Management, LLC were found guilty of securities fraud by a jury in Boston. The Plymouth, MA firm was found guilty of misleading investors by misrepresenting the risks associated with investments in the foreign currency exchange (“forex”) market.
The Commission alleged that Liskov and EagleEye persuaded “older” clients to shift investments from low-risk securities into high-risk forex positions based on misleading information. Despite racking up huge losses for the clients, Liskov earned over $300,000 in performance fees. Among the allegations were that Liskov used “white-out” to change names and dates on forms in order to, among other things, fraudulently transfer client assets into forex trading accounts.
After four hours of deliberation, the jury found Liskov and EagleEye liable for violations of Section 10(b) of the Exchange Act, Rule 10b-5, and the Advisers Act.
For more, read the SEC Release.
Insider Trading: Oil Company CEO Charged
Former CEO of Denver-based oil company Delta Petroleum Corporation was charged with insider trading. In the run-up to California-based investment firm Tracinda taking a 35% stake in Delta, former CEO Roger Parker tipped a close friend, who in turn tipped friends and family, according to the SEC complaint. Delta’s stock rose 20% in value once the Tracinda investment was announced. The complaint also alleges Parker provided early insights into a positive earnings report. The SEC obtained emails and phone records in connection with the alleged tipping.…
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Earlier this week, Columbus retailer Big Lots Inc. filed suit in Florida against a stock research company that Big Lots claims obtained nonpublic information about inventory, payroll, and margins. Big Lots claims that research firm Retail Intelligence Group stole trade secrets and aided employees’ breach of fiduciary duties by inducing 72 Big Lots managers to disclose the confidential information. Retail Intelligence Group allegedly sold the information to investors in the form of a research report, which correctly predicted decreased performance for the third quarter.
The lawsuit touches on the difficulty of defining what types of behavior should be considered illegal insider trading. Federal securities laws (and case law) generally prohibit trading securities in breach of a duty to the issuer (or otherwise) while in the possession of material, nonpublic information. Research firms are known to estimate inventory, converse with suppliers and customers, and engage experts on specific companies or industries, among other things, in order to predict performance. There is a serious question as to when simply having detailed insight into the health of a corporation morphs into obtaining nonpublic information. Federal courts have historically interpreted the term “nonpublic” to mean information that companies have not widely disseminated.
Of further concern are the implications for Regulation FD raised by this lawsuit. Regulation FD prohibits selective disclosure to market professionals and securityholders of material, nonpublic information unless the information is simultaneously disclosed to the public. Employees certainly cannot tip others with confidential corporate information. But it is possible to conceive of …
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On Friday the Cleveland Plain Dealer reported that members of the U.S. House Financial Services Committee bought and sold financial stocks last fall, at the same time that the Committee was approving the bailout, and in the same companies that the Committee would later criticize for incompetence and greed. The article points out two potential problems:
1. The potential for conflicts of interest; and
2. The potential for trading on material, non-public information.
Some of the trades resulted in avoiding significant losses; while perhaps more troubling, some trades resulted in increased losses, which may at least be proof there was no impropriety.
In any event, such trades do not appear to violate Congressional ethics rules (although, arguably they could violate broad rules against using one’s office for “improper advantage”); however, the securities rules are more troublesome. If a member of Congress trades in securities based on material, non-public information provided by a corporate insider, the representative faces possible liability under a tipper/tippee theory assuming other elements of the offense are met. But, if the representative trades based on material, non-public information that results from the representative knowing about a new regulation or government program that will affect a company, liability depends on whether the representative has breached a duty to the source of the information, presumably Congress or some other source to which no duty is owed.
Congressional staffers are not so lucky, as they potentially owe a duty to their representative, the source of the information.
This is not …
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