A NJ-based investment advisory firm and its owner have been charged by the SEC for “misleading investors in a collateralized debt obligation (CDO) and breaching their fiduciary duties in order to accommodate trades requested by a third-party hedge fund firm whose interests were not necessarily aligned with the debt investors,” the SEC reports.
The SEC alleges that Harding Advisory LLC and Wing F. Chau compromised their independent judgment as collateral manager to a CDO named Octans I CDO Ltd. Harding agreed to give the hedge fund firm rights in the process of selecting and acquiring a portfolio of subprime mortgage-backed assets to serve as collateral for debt instruments issued to investors in the CDO. These rights, which were not disclosed to investors, included the right to veto Harding’s proposed selections during the “warehouse” phase that preceded issuance of the CDO’s debt instruments. The influence of the hedge fund firm led Harding to select assets that its own credit analysts disfavored.
“A collateral manager’s independent selection of assets is an important selling point to potential CDO investors,” said George S. Canellos, co-director of the SEC’s Division of Enforcement. “Investors had a right to know that Harding and Chau had chosen to accommodate the interests of others and abandon their own obligations to act in the best interests of the CDO they advised.”
According to the SEC’s order instituting proceedings, the hedge fund firm was Magnetar Capital LLC, which had invested in the equity of the CDO. Merrill Lynch, Pierce, Fenner & Smith Inc. structured and marketed the CDO, which closed on Sept. 26, 2006. Merrill Lynch, Magnetar, and Harding agreed in the spring of 2006 that Harding would serve as collateral manager for the CDO. Chau understood that Magnetar was interested in investing as the equity buyer in CDO transactions, and that Magnetar’s strategy included “hedging” its equity positions in CDOs by betting against the debt issued by the CDOs. Because Magnetar stood to profit if the CDOs failed to perform, Chau knew that Magnetar’s interests were not necessarily aligned with investors in the debt tranches of Octans I, whose investment depended solely on the CDO performing well.
The SEC’s Enforcement Division alleges that while assembling the collateral for Octans I, Chau and Harding allowed Magnetar an undisclosed influence over the selection process. Harding’s own credit analysis of many of the selected assets was disregarded, and Magnetar’s influence over the portfolio was omitted from materials used to solicit investors for the CDO. Chau and Harding misrepresented the standard of care that Harding would use in acquiring collateral for Octans I.
The SEC’s Enforcement Division further alleges that Harding and Chau breached their advisory obligations to several other CDOs for which they served as investment managers. As a favor to Merrill Lynch and Magnetar, Harding and Chau purchased bonds for those CDOs that Chau and Harding disfavored. In accepting the bonds, Chau wrote in an e-mail to the head of CDO syndication at Merrill Lynch, “I never forget my true friends.”
The insider-trading lawsuit against Rengan Rajaratnam has been delayed due to the ongoing federal government shutdown. Rengan is the younger brother of the now imprisoned hedge fund billionaire Raj Rajaratnam.
Bloomberg reports that the case has been delayed because “Prosecutors in the Rajaratnam case have been unable to access certain evidence held electronically at U.S. Department of Justice facilities in Virginia.”
Rengan Rajaratnam has pleaded not guilty in NY court to charges of conspiring in an insider trading scheme to illegally earn nearly 1.2 million. He has been charged with conspiring with his older brother Raj, to cheat on Wall Street and earn nearly $1.2 million illegally.
Rengan voluntarily surrendered, his lawyer said, flying in from Brazil the day before the hearing. He was released on $1 million bail after Monday’s court appearance.
Rengan was also a portfolio manager at the hedge fund Galleon Group, and the trades for which he was charged resulted in nearly 1.2 million dollars of illegal profit, according to prosecutors. The defendant was charged with six counts of securities fraud and one count of conspiracy, and faces up to 20 years in prison on each of the fraud counts.
Miami Finance Forum and Bilzin Sumberg will be hosting and presenting a panel discussion of certain implications and anticipated market developments resulting from the SEC’s recent rule amendments allowing general solicitation of investors in private placement offerings.
Since Obama’s Jumpstart Our Business Startups Act (JOBs Act), the ban on hedge fund advertising has been lifted. The JOBS Act became law in March 2012 and made the initial recommendation to allow “general solicitation” for private issuers, the law was approved with bipartisan support in both houses of Congress.
The rule went into affect on September 23rd 2013 and so far only 8 hedge funds have filed for the *506c exception:
- Zeus Alpha LP
- Steben Select Multi-Strategy Partners, L.P.
- Force Select LTD
- Big Tree Capital Opportunity Fund I, L.P.
- Big Tree Capital Emerging Markets Fund, L.P.
- Ogee Group LLC
- Steben Select Multi-Strategy Partners, L.P., and,
- Israel Investment Fund LP.
“While hedge funds are finally allowed to advertise, we believe that funds will be cautious in adopting general solicitation.” Evan Rapoport, founder of industry portal HedgeCo.net, said. ”No one wants to be first and sign up to be the regulators’ guinea pig, but I do think that if you work with advertisers that have familiarity with securities regulations, the early adopters have a large opportunity to launch successful campaigns.”
He went on to say: “We believe the first funds to take advantage of the JOBS act will more than likely be some of the largest funds in existence. It is the larger investment companies that can afford the upfront costs associated with rolling out a successful advertising and branding campaign.”
*Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:
- The company cannot use general solicitation or advertising to market the securities;
- The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
- The company must be available to answer questions by prospective purchasers;
- Financial statement requirements are the same as for Rule 505; and
- Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.
If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. . If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws.
In a bid to finally end litigation going back to 2009, General Motors will pay out $50 million to hedge funds that believe they were wronged in a 2009 deal with regards to the company’s bankruptcy filing.
In 2012, a trust representing unsecured creditors of ”old” GM filed a lawsuit against GM over payments made to hedge funds in 2009 in exchange for waiving of claims against GM’s Canadian subsidiary. The deal, despite its disclosure in an SEC filing on the day GM sought Chapter 11 protection, could have prompted a reopening of the 2009 case.
Reuters reports: “The agreement ends complex litigation in which hedge funds affiliated with John Paulson and Paul Singer’s Elliott Management agreed to reduce the amount they said they were owed in the bankruptcy of “Old GM.” GM had warned the litigation could put it on the hook for $918 million. That threat was removed by the settlement.”
In the news recently General Motors has been plagued by controversy for its labor practices abroad, its steady outsourcing of production from the United States, and its demands for concessions from its workers.
In a recent and ongoing scandal, the General Motors plant in Colombia reportedly fired roughly 200 workers after they were injured on the assembly line, and in August 2012 negotiations refused to cover even the workers’ medical costs or pension benefits. In protest, a group of the workers has been living in tents outside the U.S. Embassy in Colombia since August 2011, and the president of the workers’ association, ASOTRECOL, went on a 72-day hunger strike from late 2012 to early 2013. General Motors has refused to enter new negotiations with the workers, with GM spokeperson Katie McBride saying that the company’s stance had been “very generous.”
The SEC has awarded more than $14 million to a whistleblower whose information led to enforcement action that recovered substantial investor funds. The award is the largest made by the SEC’s whistleblower program to date.
Payments to whistleblowers are made from a separate fund previously established by the Dodd-Frank Act and do not come from the agency’s annual appropriations or reduce amounts paid to harmed investors. The whistleblower program rewards high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million, and awards can range from 10 percent to 30 percent of the money collected in a case.
“Our whistleblower program already has had a big impact on our investigations by providing us with high quality, meaningful tips,” said SEC Chair Mary Jo White. “We hope an award like this encourages more individuals with information to come forward.”
The whistleblower, who does not wish to be identified, provided original information and assistance that allowed the SEC to investigate an enforcement matter more quickly than otherwise would have been possible. Less than six months after receiving the whistleblower’s tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor funds.
“While it is certainly gratifying to make this significant award payout, the even better news for investors is that whistleblowers are coming forward to assist us in stopping potential fraud in its tracks so that no future investors are harmed,” said Sean McKessy, chief of the SEC’s Office of the Whistleblower. “That ultimately is what the whistleblower program is all about.”
The U.S. Federal Government has been shut down for the first time in 17 years. Reuters reports that: “A shutdown would not mean a financial free-for-all.” It does however, mean that there are less people in place to review applications to register shares with regulators, including initial public offerings, or offer new financial products, Reuters says. This includes new regulation under the JOBS Act.
“If the budget stalemate in the U.S. Congress leads to an extended federal government shutdown, investors can expect potential interruptions to financial product approvals and new rules, though market oversight would not grind to a halt.” Reuters says.
The SEC would still have an eye on exchange activity, potential insider trading and money market funds. ”The SEC will remain open and operational in the event the federal government undergoes a lapse in appropriations on October 1. Any changes to the SEC’s operational status after October 1 will be announced.” The SEC said.
In U.S. politics, a government shutdown is a situation in which the government stops providing all but “essential” services. Typically, federal services that continue despite a shutdown include the National Weather Service and its parent agencies, medical services at federal facilities, the postal service, armed forces, air traffic management, and corrections (the penal system). A government shutdown is similar to a lockout in the private sector.
President Barack Obama will deliver a statement from the Rose Garden at 12:25 p.m., where he was expected to both address the shutdown and the opening of enrollment for health insurance exchanges under his signature health care law.
In this year’s Forbes 400, the magazine’s annual list of the richest people in the US, are twenty eight hedge fund managers, Forbes magazine reports. To even show up on the 2013 list, one must have over $1.3 billion in net worth, that is up $200 million from 2012′s list. In the first Forbes 400 (1982), there were only 13 billionaires and a net worth as low as $75 million could secure you a spot.
At the top of the list is George Soros whose net worth stands at $20 billion, the firm: Soros Fund Management. In 2010, it was reported to be one of the most profitable firms in hedge fund history, averaging a 20% annual rate of return over four decades.
“Twenty-eight members of the 2013 Forbes 400 built their fortunes through the management of hedge funds.” Forbes reports, “Now making up 7% of America’s wealthiest individuals, their number decreased over the past twelve months from the 31 managers that made the list in 2012, as several legendary investors failed to keep pace with the rising tide of the world’s most exclusive club. Twenty-four of the hedge fund managers that did make the 2013 list got richer over the past year.”
The full list can be accessed here.
Forbes Trivia: Over the first 25 years of the Forbes 400 list, 1,302 different people made the list. 97 immigrants and 202 women (15.5%) made the list in that time. Four of the top five richest people in the United States in 2006 were college dropouts: Bill Gates, Sheldon Adelson, Larry Ellison, and Paul Allen.
One of the founders of New York hedge fund firm Vicis Capital is under fire by the SEC for engineering an undisclosed transaction in which he had a financial conflict of interest. Without admitting or denying the charges, Stastney agreed to pay more than $2.9 million to settle the SEC’s charges.
The SEC alleges that Stastney traded as a principal when he authorized the client hedge fund to pay approximately $7.5m to purchase a basket of illiquid securities from a personal friend and outside business partner hired by the firm as a managing director.
“Fund advisers cannot sit on both sides of a transaction as buyer and seller without the consent of the clients who rely on them for unbiased investment advice,” said Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Stastney failed to live up to his fiduciary duty when he unilaterally set the terms of the transaction and authorized it without disclosing that he would personally profit from it.”
On top of the $2.9 million fine, the SEC’s order bars the Marlboro, NJ hedge fund adviser from association with any investment company, investment adviser, broker, dealer, municipal securities dealer, or transfer agent for at least 18 months. Stastney will be permitted to finish winding down the fund under the oversight of an independent monitor payable at his own expense.
Hedge fund manager and alternative investor specialist Morgan Creek Capital Management is launching its first open end alternative mutual fund, the Morgan Creek Tactical Allocation Fund.
“Investors in the Tactical Allocation Fund may benefit from a flexible investment approach designed with the goal of capitalizing on uncorrelated investment strategies that seek to dampen portfolio volatility and reduce risks,” said Mark W. Yusko, Chief Investment Officer of Morgan Creek. “The fund features a broadly diversified global portfolio, actively managed utilizing a multi-asset class investment strategy with daily liquidity.”
The investment objective of the Fund is to provide long-term total returns while utilizing a strategy that seeks lower volatility than a traditional portfolio of equities and fixed income securities, Morgan Creek said in a statement. The Fund’s multi-strategy, multi-asset class structure allows it to dynamically shift capital to pursue and attempt to take advantage of potential investment opportunities identified by Morgan Creek’s investment team, seeking to appropriately hedge risks in the market in an effort to minimize losses in times of stress.
In one of the largest crackdowns in the industry, the SEC has taken legal action against 23 firms and hedge fund managers for short selling violations. The funds agreed to pay $14.4 million to settle the market manipulation charges, the Wall Street Journal reports.
“The benchmark of an effective enforcement program is zero tolerance for any securities law violations, including violations that do not require manipulative intent,” said Andrew J. Ceresney, Co-Director of the SEC’s Division of Enforcement. “Through this new program of streamlined investigations and resolutions of Rule 105 violations, we are sending the clear message that firms must pay the price for violations while also conserving agency resources.”
The SEC charged the following firms in this series of settled enforcement actions:
Blackthorn Investment Group – Agreed to pay disgorgement of $244,378.24, prejudgment interest of $15,829.74, and a penalty of $260,000.00.
Claritas Investments Ltd. – Agreed to pay disgorgement of $73,883.00, prejudgment interest of $5,936.67, and a penalty of $65,000.00.
Credentia Group – Agreed to pay disgorgement of $4,091.00, prejudgment interest of $113.38, and a penalty of $65,000.00.
D.E. Shaw & Co. – Agreed to pay disgorgement of $447,794.00, prejudgment interest of $18,192.37, and a penalty of $201,506.00.
Deerfield Management Company – Agreed to pay disgorgement of $1,273,707.00, prejudgment interest of $19,035.00, and a penalty of $609,482.00.
Hudson Bay Capital Management – Agreed to pay disgorgement of $665,674.96, prejudgment interest of $11,661.31, and a penalty of $272,118.00.
JGP Global Gestão de Recursos – Agreed to pay disgorgement of $2,537,114.00, prejudgment interest of $129,310.00, and a penalty of $514,000.00.
M.S. Junior, Swiss Capital Holdings, and Michael A. Stango – Agreed to collectively pay disgorgement of $247,039.00, prejudgment interest of $15,565.77, and a penalty of $165,332.00.
Manikay Partners – Agreed to pay disgorgement of $1,657,000.00, prejudgment interest of $214,841.31, and a penalty of $679,950.00.
Meru Capital Group – Agreed to pay disgorgement of $262,616.00, prejudgment interest of $4,600.51, and a penalty of $131,296.98.00.
Merus Capital Partners – Agreed to pay disgorgement of $8,402.00, prejudgment interest of $63.65, and a penalty of $65,000.00.
Ontario Teachers’ Pension Plan Board – Agreed to pay disgorgement of $144,898.00, prejudgment interest of $11,642.90, and a penalty of $68,295.
Pan Capital AB – Agreed to pay disgorgement of $424,593.00, prejudgment interest of $17,249.80, and a penalty of $220,655.00.
PEAK6 Capital Management – Agreed to pay disgorgement of $58,321.00, prejudgment interest of $8,896.89, and a penalty of $65,000.00.
Philadelphia Financial Management of San Francisco – Agreed to pay disgorgement of $137,524.38, prejudgment interest of $16,919.26, and a penalty of $65,000.00.
Polo Capital International Gestão de Recursos a/k/a Polo Capital Management – Agreed to pay disgorgement of $191,833.00, prejudgment interest of $14,887.51, and a penalty of $76,000.00.
Soundpost Partners – Agreed to pay disgorgement of $45,135.00, prejudgment interest of $3,180.85, and a penalty of $65,000.00.
Southpoint Capital Advisors – Agreed to pay disgorgement of $346,568.00, prejudgment interest of $17,695.76, and a penalty of $170,494.00.
Talkot Capital – Agreed to pay disgorgement of $17,640.00, prejudgment interest of $1,897.68, and a penalty of $65,000.00.
Vollero Beach Capital Partners – Agreed to pay disgorgement of $594,292, prejudgment interest of $55.171, and a penalty of $214,964.
War Chest Capital Partners – Agreed to pay disgorgement of $187,036.17, prejudgment interest of $10,533.18, and a penalty of $130,000.00.
Western Standard – Agreed to pay disgorgement of $44,980.30, prejudgment interest of $1,827.40, and a penalty of $65,000.00.
“Twenty-two of the firms have agreed to settle the civil charges, though they did not admit or deny wrongdoing. G-2 Trading is fighting the charges.” The Wall Street Journal reported.
The SEC’s Rule 105 of Regulation M prohibits the short sale of an equity security during a restricted period – generally five business days before a public offering – and the purchase of that same security through the offering. The firms charged in these cases allegedly bought offered shares from an underwriter, broker, or dealer participating in a follow-on public offering after having sold short the same security during the restricted period.