The SEC announced the largest-ever settlement in an insider trading case with CR Intrinsic's agreement to pay more than $600 million. In another case, a financier claimed to investors that he had an inside track on pre-IPO stock for, among other popular social media firms, Facebook, but instead took the money and used it for personal purposes. The agency also charged a group of "pump-and-dumpers" with market manipulation and went after a Massachusetts-based advisor who was stealing money from his clients. Last but not least was a $1.8 million settlement related to the Galleon insider trading case.
CR Intrinsic to Pay More Than $600 Million for Insider Trading
CR Intrinsic Investors, a hedge fund advisory firm based in Stamford, Conn., has agreed to a record settlement of over $600 million in an insider trading case that was originally filed in November, when the SEC charged the firm with participation in an insider trading scheme that netted it more than $200 million.
Matthew Martoma, one of the fund's former portfolio managers, was alleged to have gotten insider information from Dr. Sidney Gilman about an Alzheimer's drug being jointly developed by two pharmaceutical companies. Gilman had been selected by the firms, Elan Corp. and Wyeth, to present final drug trial results to the public; instead he shared data on the clinical trials with Martoma.
News of negative results from Gilman, leaked about two weeks before they were to be made public, allowed the firm to cause several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week. An amended complaint filed last week included SAC Capital Advisors, an affiliate of CR Intrinsic, and four hedge funds managed by CR Intrinsic and SAC Capital as relief defendants; each of those firms received ill-gotten gains from the scheme that consisted of profits and avoided losses, as well as fees received by SAC Capital.
The record settlement requires CR Intrinsic to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest and a $274,972,541 penalty. It is subject to court approval, and while it would resolve the charges against CR Intrinsic and the relief defendants, none of whom admit or deny the charges, it does not include a resolution of the case against Martoma. Gilman's case has already been resolved via a consent judgment.
Financier Charged in Ponzi-type Scheme, Misappropriation of Client Funds
Craig Berkman, a financier masquerading as a sophisticated fund manager, was charged by the SEC with defrauding investors hoping to buy shares of Facebook and other social media companies from before their initial public offerings. The U.S. Attorney's Office for the Southern District of New York has also announced criminal charges against him.
Berkman, a former Oregon gubernatorial candidate who now lives in Florida, claimed he could get pre-IPO stock in Facebook, LinkedIn, Groupon and Zynga. But when he had investors' money, he made Ponzi-type payments to earlier investors, paid off bankruptcy claims and covered personal expenses.
John Kern of Charleston, S.C., was also charged. He served as legal counsel to some of Berkman's companies, and assured worried investors after the Facebook IPO that their money had indeed been used to buy pre-IPO Facebook stock being held for them by unnamed counterparties. According to the SEC, Berkman raised at least $13.2 million from 120 investors by selling membership interests in limited liability companies he controlled. The fraud happened in three separate offerings. In the first, he told investors their money would acquire pre-IPO shares of several social media companies. In the second, he got investors to believe their money would be used to buy pre-IPO shares of Facebook or acquire a company that held pre-IPO Facebook shares. In the third, he claimed investors' money would fund various new large-scale technology ventures.
Of course, none of those things happened, although he did use $600,000 to buy a small interest in an unrelated fund that had acquired pre-IPO Facebook stock. Then one of his companies used a forged letter about it to claim it owned almost half a million shares of Facebook. When the fund found out about the forgery, it terminated and liquidated Berkman's company's interest, so there was no longer even an indirect interest in Facebook shares.
In 2001, the Oregon Division of Finance and Securities issued a cease-and-desist order against Berkman and fined him $50,000 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. Then, in June 2008, an Oregon jury found him liable in a private action for breach of fiduciary duty, conversion of investor funds and misrepresentation to investors arising from his involvement with a series of purported venture capital funds known as Synectic Ventures. That resulted in a $28 million judgment against him. In March of 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against him in Florida for his unpaid debts arising from the 2008 court judgment, and the parties to the bankruptcy proceeding reached a settlement with him.But Berkman didn't use his own money to satisfy the judgments; instead, he used investor money. More than $5.4 million went to the bankruptcy settlement; $4.8 million went to Ponzi-type payments to earlier investors in the pre-IPO debacle, with him claiming that it was money made on their investments; and about $1.6 million went to his personal expenses—travel and dining, as well as big cash withdrawals. Kern also got $300,000.
The investigation is continuing. Promoters, Lawyers, Broker-Dealer, Others Charged in Market Manipulation
A group of Canadian stock promoters, two San Diego attorneys, a Bahamas-based broker-dealer, and other participants were charged by the SEC in an international "pump-and-dump" scheme involving two public U.S. companies, Pacific Blue Energy Corp. and Tradeshow Marketing Co.
According to the SEC, Canadians John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton and their associates misled investors by email, sent by two websites they controlled—Skymark Research and Emerging Stock Report—and by a telephone boiler room scheme to drive up the share prices of the two companies, both microcaps. They made millions when they sold their own shares secretly.
The attorneys, Luis Carrillo and Wade Huettel, were accused of helping the promoters hide their ownership of the stocks; drafting false public filings; and providing misleading legal opinions. Their law firm, Carrillo Huettel, was rewarded with sales proceeds disguised as a loan.
