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SEC, FINRA Enforcement: Ex-Barclays Analyst, 3 Others Fined for Insider Trading.

Byline: Marlene Y. Satter

Among recent enforcement actions, the Financial Industry Regulatory Authority went after short sale violations, anti-money laundering failures, and reporting failures related to short interest positions.

Also, the Securities and Exchage Commission busted an alleged insider trading ring and fined an alternative energy company for hiding bad financial news from investors.

SEC Charges Former Barclays Capital Analyst, 3 Others in Insider Trading Ring

The SEC charged a stock research analyst at Barclays Capital, a corporate insider and two others involved in a California-based insider trading ring that generated nearly $750,000 in illegal profits by trading in advance of four corporate news announcements.

The SEC alleges that John Gray, then an analyst at Barclays Capital, and his friend Christian Keller traded on confidential merger information that Keller learned while working in finance at two Silicon Valley-based public companies.

Gray and Keller attempted to conceal the trades by placing them in a brokerage account held in the name of Gray's friend Kyle Martin. Gray also tipped a fourth participant, Aaron Shepard, with nonpublic information so he could trade in advance of some of the corporate announcements.

Without admitting or denying the allegations, Gray, Keller, Martin and Shepard have agreed to settle the SEC's charges by paying more than $1.6 million combined. The settlements are subject to court approval.

"Gray and Keller tried to evade detection by trading in another person's name, using prepaid disposable phones, and making structured cash withdrawals to share profits," said Jina Choi, director of the SEC's San Francisco Regional Office, in a statement. "Despite their careful planning, we were able to detect the suspicious trading and effectively use our cooperation program to expose their nefarious scheme."

According to the SEC's complaint filed in federal court in the Northern District of California, Gray was primarily responsible for placing the trades in Martin's account. Gray and Martin also placed additional trades in other accounts based on Keller's confidential information that Gray shared with Martin. Gray provided Keller kickbacks in cash from the trading profits.

The SEC alleges that Gray and Keller first traded on confidential merger information that Keller learned while employed as a financial analyst at Applied Materials Inc. They illegally traded ahead of the company's acquisitions of Semitool Inc. in 2009 and Varian Semiconductor Equipment Associates in 2011. Keller left Applied Materials and joined Rovi Corporation in 2012 as a vice president for investor relations and finance.

The scheme continued as they used confidential information that Keller learned as an insider to profitably trade Rovi securities ahead of negative news announcements by the company about its 2012 first and second quarter financial results.

FINRA Fines Bloomberg Tradebook on Short Sale Violations

Bloomberg Tradebook LLC, Bloomberg's agency broker, was censured by FINRA and fined $140,000 on failures to report the execution of short sale and short sale exempt transactions to to the FINRA/NASDAQ Trade Reporting Facility (FNTRF) with a short sale or short sale exempt modifier, as appropriate.

The firm was also required to revise its written supervisory procedures (WSPs), which were inadequate to ensure the accurate reporting of short sales and short exempt sales to the FNTRF.

The firm neither admitted nor denied FINRA's findings, but consented to the sanctions.

FINRA Fines, Censures BMA Securities on AML Failures

FINRA censured BMA Securities, aka Burt Martin Arnold Securities Inc., and fined the firm $325,000 over anti-money laundering compliance and monitoring failures.

In addition, the agency required the firm to bring in an independent consultant to review its policies, systems and procedures and training related to anti-money laundering (AML) compliance and monitoring.

According to the agency, the firm, on behalf of certain clients, sold certain shares of an issuer whose securities were not registered and were not subject to an applicable exemption from registration. In spite of red flags, the firm approved the sale and concluded that the customers were not acting in concert. It did not revisit that decision despite the fact that, just six days later, six of the customers sold approximately 4 million shares in one day.

The firm ignored the obvious coordination of efforts and possible control relationship, continuing to accept for deposit and then sell out the issuer's shares for the group's accounts. No additional investigation was conducted. It also never checked to be sure that the stock could properly be sold.

FINRA also found that the firm had failed to put in place a supervisory system and WSPs adequate for compliance in these instances, and failed to put in place and use an adequate AML program. It also failed to establish an adequate customer identification program (CIP) and failed in some instances to gather and check appropriate documentation about the customers. That resulted in customers being permitted to participate in suspicious activity without appropriate documents in the file.

In addition, the firm failed to provide customers with disclosures of the profits to the firm and a former trader of the firm, in situations where the trader bought exchange-traded securities positions from customers into his trading account and then sold them out to the market at a profit.

The firm neither admitted nor denied FINRA's findings, but consented to the sanctions.

FINRA Censures, Fines BNP Paribas Prime Brokerage on Reporting Failures

BNP Paribas Prime Brokerage Inc. was censured by FINRA and fined $105,000 for failing to report its short interest positions and submitting an inaccurate short interest position report to FINRA.

According to the agency, the firm's supervisory system was inadequately designed to achieve compliance regarding short interest reporting.

The firm neither admitted nor denied FINRA's findings, but consented to its sanctions.SEC: Energy Co. Hid Bad Financial News From Investors

The SEC has announced charges against Broadwind Energy, a Chicago-area alternative energy company, its former CEO and its CFO for accounting and disclosure violations that kept investors from knowing that reduced business from two significant customers had cut the company's long-term financial prospects.

According to the agency, Broadwind anticipated the reduction and privately shared this information with the company's auditors, investment bankers, and lender. However, it didn't record a $58 million impairment charge in its financial statements or disclose it publicly to investors until months later.

In fact, Broadwind conducted a public offering of its stock without disclosing the impairment in its registration statement. When the information was disclosed in an annual report two months after the offering, Broadwind's stock price dropped 29%.

The SEC said that then-CEO J. Cameron Drecoll approved and certified public filings containing the misrepresentations and misleading omissions when he should have known that the intangible assets were impaired. Broadwind's CFO Stephanie Kushner, who had just been hired, did not make sure that the financial statements and disclosures were accurate.

The agency also said that Broadwind Energy committed other violations arising from accelerated revenue recognition practices and inadequate disclosures. The deterioration in customer relationships that produced the impairment charge also compromised the ability of one of the firm's subsidiaries to meet monthly debt covenants associated with its primary credit facility.

To avoid default and other problems, subsidiary personnel accelerated revenue until the firm could raise funds to retire the credit facility through the public stock offering. Broadwind failed to disclose this, or its effect on future revenue, in the offering's registration statement. In addition, as a result of the transactions, Broadwind reported $4 million of improperly recognized revenue.

Without admitting or denying the charges, Broadwind Energy, Drecoll, and Kushner agreed to settle. The company agreed to pay a $1 million penalty, Drecoll agreed to pay disgorgement and prejudgment interest of $543,358 and a penalty of $75,000 and Kushner agreed to pay disgorgement and prejudgment interest of $23,109 and a penalty of $50,000. The settlements are subject to court approval.

--- Check out SEC Commissioners Rail Against Oppenheimer & Co. Waiver on ThinkAdvisor.
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Publication:ThinkAdvisor
Date:Feb 6, 2015
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