Morgan Stanley Settles Charges Related to ETF Investments

The Securities and Exchange Commission today announced that Morgan Stanley Smith Barney has agreed to pay an $8 million penalty and admit wrongdoing to settle charges related to single inverse ETF investments it recommended to advisory clients.

The SEC’s order finds that Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs.  Among the order’s findings, Morgan Stanley failed to obtain from several hundred clients a signed client disclosure notice, which stated that single inverse ETFs were typically unsuitable for investors planning to hold them longer than one trading session unless used as part of a trading or hedging strategy.  Morgan Stanley solicited clients to purchase single inverse ETFs in retirement and other accounts, the securities were held long-term, and many of the clients experienced losses.

The SEC’s order further finds that Morgan Stanley failed to follow through on another key policy and procedure requiring a supervisor to conduct risk reviews to evaluate the suitability of inverse ETFs for each advisory client.  Among other compliance failures, Morgan Stanley did not monitor the single-inverse ETF positions on an ongoing basis and did not ensure that certain financial advisers completed single inverse ETF training.

“Morgan Stanley recommended securities with unique risks and failed to follow its policies and procedures to ensure they were suitable for all clients,” said Antonia Chion, Associate Director of the SEC Enforcement Division.

The SEC’s investigation was conducted by Breanne Atzert, Helaine Schwartz, and Stephan Schlegelmilch, and the case was supervised by Lisa Deitch and Antonia Chion. 

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Investors can learn more about the risks involved with leveraged and inverse ETFs by reading an investor alert issued by the SEC and FINRA.

Brokerage Firm Paying Penalty for Compliance and Trading Surveillance Failures

The Securities and Exchange Commission today announced that a New York-based brokerage firm has agreed to pay a $100,000 penalty to settle charges of compliance and trading surveillance failures.

Federal securities laws require firms to enforce policies and procedures to prevent the misuse of material, nonpublic information to which their employees routinely have access.  The SEC’s order finds that Sidoti & Company LLC had no written policies or procedures in place from November 2014 to July 2015 as it pertained to those making investment decisions for an affiliated hedge fund that invested in issuers covered by Sidoti’s research department and some other issuers for which Sidoti provided investment banking services.  For example, Sidoti maintained a “daily restricted list” of securities restricting personal trading because Sidoti was involved in investment banking or marketing activities or the firm was publishing research on the security.  There were 126 instances from Nov. 3, 2014 to May 5, 2015 when the hedge fund traded in a stock that appeared on the daily restricted list. 

“Sidoti did not devote sufficient resources to set up the requisite trade surveillance and compliance systems and failed to meet its obligation to prevent the misuse of material nonpublic information,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Without admitting or denying the findings, Sidoti consented to the SEC’s order finding that the firm violated Section 15(g) of the Securities Exchange Act of 1934. 

The SEC’s investigation was conducted in the New York office by Pamela Sawhney, Jason W. Sunshine, and Sandeep Satwalekar, and the case was supervised by Sanjay Wadhwa.  The SEC examination that led to the investigation was conducted by Jennifer Grumbrecht, Lourdes Caballes, Evett Evelyn, and Sabrina Rubin.

Brokerage Firm Paying Penalty for Compliance and Trading Surveillance Failures

The Securities and Exchange Commission today announced that a New York-based brokerage firm has agreed to pay a $100,000 penalty to settle charges of compliance and trading surveillance failures.

Federal securities laws require firms to enforce policies and procedures to prevent the misuse of material, nonpublic information to which their employees routinely have access.  The SEC’s order finds that Sidoti & Company LLC had no written policies or procedures in place from November 2014 to July 2015 as it pertained to those making investment decisions for an affiliated hedge fund that invested in issuers covered by Sidoti’s research department and some other issuers for which Sidoti provided investment banking services.  For example, Sidoti maintained a “daily restricted list” of securities restricting personal trading because Sidoti was involved in investment banking or marketing activities or the firm was publishing research on the security.  There were 126 instances from Nov. 3, 2014 to May 5, 2015 when the hedge fund traded in a stock that appeared on the daily restricted list. 

“Sidoti did not devote sufficient resources to set up the requisite trade surveillance and compliance systems and failed to meet its obligation to prevent the misuse of material nonpublic information,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Without admitting or denying the findings, Sidoti consented to the SEC’s order finding that the firm violated Section 15(g) of the Securities Exchange Act of 1934. 

The SEC’s investigation was conducted in the New York office by Pamela Sawhney, Jason W. Sunshine, and Sandeep Satwalekar, and the case was supervised by Sanjay Wadhwa.  The SEC examination that led to the investigation was conducted by Jennifer Grumbrecht, Lourdes Caballes, Evett Evelyn, and Sabrina Rubin.

SEC Charges Chinese Citizens Who Reaped Massive Profits From Insider Trading on Comcast-Dreamworks Acquisition

The Securities and Exchange Commission today announced that it obtained an emergency court order freezing brokerage accounts holding more than $29 million in illegal profits from insider trading in advance of the April 2016 acquisition of DreamWorks Animation SKG, Inc. by Comcast Corp.

The SEC alleges that in the weeks leading up to the news of the acquisition, Shaohua (Michael) Yin amassed more than $56 million of DreamWorks stock in the U.S. brokerage accounts of five Chinese nationals, including his elderly parents.  DreamWorks stock price rose 47.3% once the acquisition was announced.  

In a complaint filed in U.S. District Court in the Southern District of New York, the SEC alleged the five accounts reaped $29 million from the DreamWorks trades.  The complaint also alleges the accounts profited from other suspicious trading in another U.S.-based company and three China-based companies ahead of market-moving news.

Yin, a partner at Summitview Capital Management Ltd., a Hong Kong-based private equity firm, allegedly did not trade in DreamWorks stock through his own account but instead traded through five accounts from addresses in Beijing and Palo Alto and on a computer that also accessed Yin’s email accounts.

“Despite the defendant’s alleged attempts to hide his control over these accounts, the SEC’s data analytic investigative tools enabled us to determine who was behind the suspicious trading,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “Our action today shows that the SEC will not hesitate to freeze the assets of foreign traders when they use our markets to conduct illegal activity.”

On February 10, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York granted the SEC’s request for an asset freeze of the five brokerage accounts and issued an order to show cause why an injunction and other relief should not be issued. A hearing has been scheduled for February 17.

The SEC’s complaint charges Michael Yin with securities fraud and names the holders of the five brokerage accounts – Lizhao Su, Zhiqing Yin, Jun Qin, Yan Zhou and Bei Xie – as relief defendants.  The SEC is seeking a permanent injunction, return of allegedly ill-gotten profits, civil money penalties, and other relief.

The SEC’s investigation has been conducted by Jasmine Starr, Sarah Mitchell, and Finola H. Manvelian of the Los Angeles Regional Office, with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit.  The SEC’s litigation will be led by Gary Leung and Amy Longo.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC Charges Chinese Citizens Who Reaped Massive Profits From Insider Trading on Comcast-Dreamworks Acquisition

The Securities and Exchange Commission today announced that it obtained an emergency court order freezing brokerage accounts holding more than $29 million in illegal profits from insider trading in advance of the April 2016 acquisition of DreamWorks Animation SKG, Inc. by Comcast Corp.

The SEC alleges that in the weeks leading up to the news of the acquisition, Shaohua (Michael) Yin amassed more than $56 million of DreamWorks stock in the U.S. brokerage accounts of five Chinese nationals, including his elderly parents.  DreamWorks stock price rose 47.3% once the acquisition was announced.  

In a complaint filed in U.S. District Court in the Southern District of New York, the SEC alleged the five accounts reaped $29 million from the DreamWorks trades.  The complaint also alleges the accounts profited from other suspicious trading in another U.S.-based company and three China-based companies ahead of market-moving news.

Yin, a partner at Summitview Capital Management Ltd., a Hong Kong-based private equity firm, allegedly did not trade in DreamWorks stock through his own account but instead traded through five accounts from addresses in Beijing and Palo Alto and on a computer that also accessed Yin’s email accounts.

“Despite the defendant’s alleged attempts to hide his control over these accounts, the SEC’s data analytic investigative tools enabled us to determine who was behind the suspicious trading,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.  “Our action today shows that the SEC will not hesitate to freeze the assets of foreign traders when they use our markets to conduct illegal activity.”

On February 10, Judge J. Paul Oetken of the U.S. District Court for the Southern District of New York granted the SEC’s request for an asset freeze of the five brokerage accounts and issued an order to show cause why an injunction and other relief should not be issued. A hearing has been scheduled for February 17.

The SEC’s complaint charges Michael Yin with securities fraud and names the holders of the five brokerage accounts – Lizhao Su, Zhiqing Yin, Jun Qin, Yan Zhou and Bei Xie – as relief defendants.  The SEC is seeking a permanent injunction, return of allegedly ill-gotten profits, civil money penalties, and other relief.

The SEC’s investigation has been conducted by Jasmine Starr, Sarah Mitchell, and Finola H. Manvelian of the Los Angeles Regional Office, with assistance from John Rymas of the Enforcement Division’s Market Abuse Unit.  The SEC’s litigation will be led by Gary Leung and Amy Longo.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

SEC Announces Agenda for February 15 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the February 15 meeting of its Advisory Committee on Small and Emerging Companies.  The committee will discuss secondary market liquidity for Regulation A companies and reporting companies not listed on an exchange, and explore why more companies may be choosing to stay private.  It also will consider recommendations on corporate board diversity and on the treatment of so-called “finders” that assist companies in capital raising activities.

The February 15 meeting will begin at 9:30 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

AGENDA

SEC Announces Agenda for February 15 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the February 15 meeting of its Advisory Committee on Small and Emerging Companies.  The committee will discuss secondary market liquidity for Regulation A companies and reporting companies not listed on an exchange, and explore why more companies may be choosing to stay private.  It also will consider recommendations on corporate board diversity and on the treatment of so-called “finders” that assist companies in capital raising activities.

The February 15 meeting will begin at 9:30 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

AGENDA

SEC Announces Agenda for February 15 Meeting of the Advisory Committee on Small and Emerging Companies

The Securities and Exchange Commission today announced the agenda for the February 15 meeting of its Advisory Committee on Small and Emerging Companies.  The committee will discuss secondary market liquidity for Regulation A companies and reporting companies not listed on an exchange, and explore why more companies may be choosing to stay private.  It also will consider recommendations on corporate board diversity and on the treatment of so-called “finders” that assist companies in capital raising activities.

The February 15 meeting will begin at 9:30 a.m. in the multipurpose room at the SEC’s headquarters at 100 F Street, N.E., Washington, D.C., and is open to the public.  It will be webcast live on the SEC’s website and archived on the website for later viewing. 

The committee provides a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

Members of the public who wish to provide their views on the matters to be considered by the committee may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the meeting.

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Send paper submissions to Brent Fields, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

AGENDA

Private Equity Adviser Barred From Industry for Improper Withdrawal From Funds

The Securities and Exchange Commission today announced that a private equity adviser has been permanently barred from the securities industry and must pay a $1.25 million penalty to settle charges that he withdrew improper fees from two private equity funds he managed.

The SEC’s order finds that Scott M. Landress formed the funds to invest in real estate trusts with underlying investments in properties throughout the UK.  His investment advisory firm SLRA Inc. earned management fees based on the net asset value of the underlying investments.  SLRA’s fees shrank and its management costs increased as real estate property values fell during the financial crisis, and the funds’ limited partners declined several requests by Landress for additional compensation to cover the shortfalls.

According to the SEC’s order, Landress directed SLRA to withdraw 16.25 million pounds from the funds in early 2014, purportedly as payment for several years of services provided by an affiliate.  He subsequently transferred the money to his personal account.  SLRA and Landress did not disclose the related-party transaction and the resulting conflicts of interest until after the money had been withdrawn.

According to the SEC’s order, Landress and SLRA returned the withdrawn service fees to the funds after the SEC began its investigation.

“Private equity fund advisers have a duty to act in the best interest of their clients, but Landress and SLRA helped themselves to millions of dollars’ worth of fees to which they had no legitimate claim,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. 

Landress and SLRA agreed to the SEC’s cease-and-desist order without admitting or denying the findings.

The SEC’s investigation was conducted by David Becker, Gregory Padgett, Robert Dodge, and Brian Fitzpatrick, and the case was supervised by Amy Friedman and Jeffrey Finnell.

SEC Charges Financial Adviser With Stealing From Client Accounts

The Securities and Exchange Commission today charged an investment adviser representative with stealing approximately $5 million from client accounts by initiating unauthorized wire transfers and issuing checks to third parties to cover personal expenses.

The SEC alleges that Barry Connell, who worked in the New Jersey office of a major financial institution, conducted more than 100 unauthorized transactions by using falsified authorization forms misrepresenting that he received verbal requests from the clients.  Connell allegedly used money from client accounts to rent a home in suburban Las Vegas and pay for a country club membership and private jet service.

“As alleged in our complaint, Connell stole funds from clients who entrusted him their finances, choosing to fund his own lavish lifestyle rather than fulfill the fiduciary duty he owed them,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

The SEC’s complaint charges Connell with violations of Sections 206(1) and (2) of the Investment Advisers Act of 1940.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today filed criminal charges against Connell.

The SEC’s investigation, which is continuing, is being conducted by Jonathan Grant, George O’Kane, and Wendy Tepperman.  The litigation will be led by Dugan Bliss and the case is being supervised by 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 Investment Adviser With Stealing Investor Funds

The Securities and Exchange Commission today charged a Connecticut-based investment advisory business and its owner with stealing money from investors to settle a private lawsuit among other misuses.

The SEC alleges that Sentinel Growth Fund Management and its founder Mark J. Varacchi misrepresented to investors that money they deposited with the firm would be allocated to up-and-coming hedge fund managers for investment purposes.  According to the SEC’s complaint, Varacchi and Sentinel Growth Fund Management did not transfer all the money as promised, instead commingling investor assets and manipulating account activity, account balances, and investment returns as part of a scheme to siphon away investor funds.  Varacchi and his firm allegedly stole at least $3.95 million from investors, including more than $1 million to settle litigation brought by Varacchi’s prior employer.

“As alleged in our complaint, Varacchi promised investors that their money would be routed to up-and-coming hedge fund managers when in reality he was diverting significant portions for personal use and unauthorized business expenses,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

The SEC’s complaint seeks disgorgement and penalties against Varacchi and Sentinel Growth Fund Management.  The complaint also names two hedge funds as relief defendants for the purposes of recovering investor assets in their possession.

The SEC’s investigation, which is continuing, is being conducted by the Asset Management Unit and the Boston Regional Office, including Robert Baker, Cynthia Baran, Trevor Donelan, Michael Moran, and Naomi Sevilla.  The SEC’s litigation will be led by Martin Healey, Mr. Baker, and Mr. Moran.    

Sentinel Growth Fund Management was not registered with the SEC or any state to do business as an investment adviser.  Investors can quickly and easily check the SEC’s investor.gov website before they invest to determine whether people selling them investments are properly registered.

SEC Charges Investment Adviser With Stealing Investor Funds

The Securities and Exchange Commission today charged a Connecticut-based investment advisory business and its owner with stealing money from investors to settle a private lawsuit among other misuses.

The SEC alleges that Sentinel Growth Fund Management and its founder Mark J. Varacchi misrepresented to investors that money they deposited with the firm would be allocated to up-and-coming hedge fund managers for investment purposes.  According to the SEC’s complaint, Varacchi and Sentinel Growth Fund Management did not transfer all the money as promised, instead commingling investor assets and manipulating account activity, account balances, and investment returns as part of a scheme to siphon away investor funds.  Varacchi and his firm allegedly stole at least $3.95 million from investors, including more than $1 million to settle litigation brought by Varacchi’s prior employer.

“As alleged in our complaint, Varacchi promised investors that their money would be routed to up-and-coming hedge fund managers when in reality he was diverting significant portions for personal use and unauthorized business expenses,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit.

The SEC’s complaint seeks disgorgement and penalties against Varacchi and Sentinel Growth Fund Management.  The complaint also names two hedge funds as relief defendants for the purposes of recovering investor assets in their possession.

The SEC’s investigation, which is continuing, is being conducted by the Asset Management Unit and the Boston Regional Office, including Robert Baker, Cynthia Baran, Trevor Donelan, Michael Moran, and Naomi Sevilla.  The SEC’s litigation will be led by Martin Healey, Mr. Baker, and Mr. Moran.    

Sentinel Growth Fund Management was not registered with the SEC or any state to do business as an investment adviser.  Investors can quickly and easily check the SEC’s investor.gov website before they invest to determine whether people selling them investments are properly registered.