Category: Famous Cases


In what appears as the biggest insider trading case since 2014, an Indian origin hedge fund manager along with his ally and source – a former government official has been charged by the Security and Exchange Commission with criminal cases.

According to SEC, Sanjay Valvani, and another hedge fund manager working in the same firm were arrested after both were found doing insider trading with the help of a former Food and Drug Administration official, who helped them in obtaining nonpublic information from the FDA.

SEC also added that another fund manager; third from the same investment advisory firm was charged with falsely inflating assets in portfolios he managed.

According to SEC, Sanjay Valvani amassed unlawful profit worth $32 million for hedge funds investing in health care securities with the help of Gordon Johnson, a former FDA employee who has over 12 years of experience in the government agency and remained in close touch with his former colleagues.

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Johnson worked as a double agent for a trade association representing generic drug manufacturers and distributors while he was a hedge consultant. This gave him access to confidential information about companies that are deemed to get approvals from the FDI to produce enoxaparin, a generic drug that helps prevent the formation of blood clots.

Johnson allegedly leaked confidential information to Valvani including the details of the conversation that he had with FDI officials, which also includes a very close friend of his during his time in the agency.

Valvani who had information about the companies that will get approval from FDI, traded in advance, before the public announcements and amassed profit. Some of the companies that Valvani traded prior to the public announcement include Momenta Pharmaceuticals, Watson Pharmaceuticals, and Amphastar Pharmaceuticals.

“We allege that Valvani’s formula for trading success was tapping Johnston to abuse his position of trust as a generic industry representative to the FDA and underhandedly obtain confidential information from his friends and former colleagues at the FDA,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market.”

Adding to this, the SEC also indicated another hedge fund manager Christopher Plaford, who was tipped by Valvani on nonpublic information as well as confidential information from a former Centers for Medicare and Medicaid Services official about an impending cut to Medicare reimbursement rates for certain health services.

According to SEC, Plaford who is cooperating with the investigation allegedly made a whopping profit of $300,00 by trading based on the insider information in hedge funds he managed.

In another case filed against Stefan Lumiere, the SEC alleges that he along with Plaford engaged in a fraudulent scheme to falsely inflate the value of securities held by a hedge fund advised by their firm.

“Lumiere allegedly used fake prices to value assets while investors were led to believe the fund was using real prices from independent sources that reflected the market value for those assets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Financial professionals who cheat investors and game the system should not expect to get away with it.”

 

Source:

Indian-origin hedge fund manager charged with insider trading in US

Along the way Newman has become an unlikely hero to those on Wall Street who believe Bharara has been overzealous and overreached.

Here, for the first time, Newman shares with Fortune exclusively his story about what it was like to be the target of a driven federal prosecutor determined to add another insider-trading conviction to his growing pile of Wall Street pelts. Through it all, Newman never backed down from his belief that he did nothing wrong. (Bharara still maintains that Newman was rightfully convicted, but he did not respond to Fortune’s requests to comment for this article.)

As he reflects on the events that reshaped his life, Newman, 51, shows traces of bitterness but mostly exudes calm and a degree of satisfaction. That perspective has come only with time, though. The day the feds came calling, his feelings ran more toward fear, panic, and confusion.

Newman was no neophyte by the time he answered the call from Makol. He had already been working in finance for more than two decades. An accounting major at Skidmore College, he decided early on that a career as an accountant was not for him. He’d gotten an MBA from Babson College, passed his chartered financial analyst exam, and landed a job, in Boston, at a division of John Hancock’s asset management business. Newman next spent a few years as a tech analyst at Merrill Lynch in New York and another seven years running money at a couple of hedge funds in Boston. In March 2006 he was recruited to Diamondback as a portfolio manager. Over his nearly three years there actively managing money, Newman made investors over $75 million in profit. In return, Diamondback paid him more than $9 million.

Bharara and his team treated Newman like a high-value target from the beginning. In fact, they broke new ground in building the case against him. The day before Makol placed his call, a Sunday, the FBI had obtained a search warrant from a federal judge in Bridgeport, Conn., authorizing the raid on Diamondback. This was a new twist in the investigation of insider trading, just as the authorized use of wiretaps had been in the Rajaratnam case. The FBI had never before raided a hedge fund’s office looking for evidence of insider trading. Instead, agents had previously gathered information they wanted through subpoenas.

The warrant authorized the FBI to search Newman’s office, his files, and his computer, among other things, to look for evidence related to alleged insider trading by him in the stock of Dell Computer, based on information he supposedly received from Primary Global Research. The FBI was also looking for any email correspondence between Newman and his former research analyst, Jesse Tortora, as well as with Sam Adondakis, an analyst who worked for Anthony Chiasson, a portfolio manager at hedge fund Level Global Investors. (The FBI also raided the offices of Level Global and another hedge fund, Loch Capital.)

To establish probable cause for the warrant, an FBI agent named Michael Howard swore out an affidavit, in which he described how the FBI had approached an independent consultant—later revealed to be Karl Motey—who admitted to obtaining information from insiders at public companies and then providing it to clients at hedge funds in exchange for fees. Motey became a cooperating witness for the government. (Motey later pleaded guilty to providing nonpublic information to hedge funds.) Howard asserted in his affidavit that Diamondback, and specifically Newman, was one of Motey’s clients between 2007 and March 2009 and had paid for “inside information” from him about two semiconductor companies: Marvell Technology Group and UMC. (Newman says he never traded on any information Motey provided to him about Marvell or UMC. Reached by email, Motey declined to comment for this article.)

After the raid, Newman was put on paid leave until the end of 2010. That was the end of his career at Diamondback. In January 2011, according to Newman, Diamondback’s attorney informed Pavlis that there was nothing Newman could do to get his job back, so he decided to resign.

Meanwhile, Brodsky kept calling Pavlis to try to get his client to speak with him. “If Newman doesn’t want to come in and talk to us, we have other guys wearing wires at Diamondback,” Brodsky told Pavlis, says Newman. But after the raid on Diamondback Newman decided that he was not going to cooperate with the prosecutors. The raid offended Newman, he says, because it was needlessly disruptive to people’s lives. And besides, he believed he had done nothing wrong.

After resigning from Diamondback, Newman moved back to the house in Needham, Mass., that he shared with his wife, Jill, and their daughter, who was 9 at the time. By then he says his marriage was on the rocks—over, really—and had been for some time, though he remained a devoted father. Before the raid, Newman’s routine had been to stay with his mother in Wilton, Conn., during the week and return home on the weekends. Now he wanted as much time as possible with his daughter.

Newman spent months in judicial purgatory. Every day, he woke up in abject fear that he might be arrested. Once, after a news story about insider trading appeared, a group of reporters from ­Reuters came to his house. (He wasn’t there.) Another time he got a call from a Bloomberg reporter wanting to talk to him. He didn’t answer the phone and then had his landline disconnected. He couldn’t sleep well because he was worried that his daughter would wake up and see him being arrested. He couldn’t work. He couldn’t trade. “All you do is spend your days kind of in panic mode, like, What’s going to come?” he recalls.

In September 2011, Pavlis heard from Diamondback’s lawyers that Diamondback was pushing hard to negotiate a settlement with the government in an attempt to stem a flood of investor redemptions. (On Jan. 23, 2012, the Justice Department entered into a deferred prosecution agreement with the firm in exchange for a total of $9 million in fines paid to the Securities and Exchange Commission and the DOJ. The firm announced it would close in December 2012 as a result of the redemptions. After Newman’s conviction was overturned, the government repaid the $9 million.)

Every day, Newman woke up in abject fear that he might be arrested. “All you do is spend your days kind of in panic mode, like, what’s going to come?” he recalls.

A month later, on a Friday afternoon, a furious Brodsky called Pavlis again. “It’s 10 months since the raid, and your client has to come tell us what the hell happened!” Brodsky screamed over the phone, according to Newman. “He’s got to tell us what went on there. This is a high-profile case!” (Brodsky did not respond to requests to comment for this article.)

Brodsky told Pavlis that Newman had two weeks to meet with him. “If you’re going to give him two weeks, if you’re going to arrest him in two weeks, why don’t you tell us what you have?” Pavlis replied.

“I never said I was going to arrest him,” Brodsky said. “What are you talking about?” When Pavlis relayed the conversation with Brodsky to Newman, Newman says he was both happy and nervous. Something didn’t feel right.

The following Monday, Newman met with Pavlis and they resolved that Newman would not go see Brodsky. “They have nothing,” Newman told Pavlis. Still, the more he thought about what Brodsky said, the more concerned the trader became. He thought, “They’re going to make something up, and I’m going to get arrested at some point.”

That point finally came at around 6 a.m. on Jan. 8, 2012, some 14 months after the FBI had first called him. Newman was at home in Needham. Just as he always imagined, he heard a knock at his door. He looked out the window and saw eight FBI agents. The local Needham police were there too. There were about 12 cars total in and around his driveway. But no sirens. “They wanted to surprise me,” he says. “They take great joy in that.” Newman was relieved that his daughter was still asleep.

Newman put on a T-shirt and pants and opened the door. “What’s up?” he said nonchalantly. He was surprised, he recalls, when the agents hesitated for a moment. “We’re arresting you for insider trading,” they finally told him, “and you’ve got to come with us.” He told them he needed to get his glasses. They said no. “You can’t leave our sight,” they told him. They searched him and handcuffed him. Newman claims that he was not read his Miranda rights.

He stayed cool as the agents put him in the backseat of a small Chevy. “You can’t let them see you panic because you can tell this is their sole desire,” he says. Needham is 20 miles from Boston, and at that time of day it should have been a quick trip to the courthouse. But the “two meathead FBI guys,” he says, decided to take him a very long, slow way through small towns and back roads. What should have been a 20-minute trip took 90 minutes.

Finally, Newman was checked in at the courthouse at around 8 a.m. and deposited in a jail cell. In the cell with Newman was a guy accused of robbing banks. He asked Newman what he was in for. Newman replied that he was being charged with insider trading. “Oh, the same thing as me,” the guy said. Newman fell asleep with his head on a roll of toilet paper. After a couple of hours a federal marshal took Newman to be fingerprinted and have his mug shot taken. There were about seven other marshals in the room watchingThe Departed, the Martin Scorsese film about Boston cops. Newman couldn’t believe it. “They’re saying to each other, ‘Oh, this part is awesome,’ and they’re all sitting there entranced,” he recalls. He says the marshal initially messed up the fingerprinting because he was distracted by the movie. Newman was released later in the day after posting bail of $1 million.

Back at home, Newman went through the indictment against him carefully. He was charged along with Anthony Chiasson of Level Global, even though the two hedgies barely knew each other, according to Newman. The gist of the government’s case against them was that a ring composed of their research ­analysts—Tortora for Newman, and Adondakis for Chiasson, both of whom had pleaded guilty and were cooperating with prosecutors—and others had exchanged with each other “material nonpublic information obtained directly and indirectly from employees of certain publicly traded technology companies.” The “fight club,” as Tortora often referred to the circle of analysts, then allegedly gave this inside information to Newman and Chiasson, who traded on it.

Specifically, the government alleged, Tortora had obtained “inside information” about Dell from Sandy Goyal, an unindicted “co-conspirator” who obtained the information about Dell from a company insider who worked in the investor relations department. In other words, whatever inside information that Newman allegedly received and traded on came to him fourth-hand. For instance, before Dell’s May 29, 2008, earnings call, the Dell ­insider—later identified as Rob Ray, a Dell investor relations employee who was never charged with wrongdoing by prosecutors—allegedly shared with Goyal the information that Dell’s gross margins would be higher than expected. The government alleged that Goyal passed the information to Tortora, who passed it to Newman, who allegedly traded on the information and made about a $1 million profit for Diamondback’s investors. (The same information went to Adondakis, who supposedly passed it on to Chiasson, who allegedly traded on it and made a profit of $4 million.)

The same information flow allegedly occurred before Dell’s August 2008 earnings call. And the indictment also alleged that Newman and Chiasson had traded on inside information about Nvidia’s earnings in 2009. Newman and Chiasson were each accused of multiple counts of securities fraud and of one count of conspiracy to commit securities fraud. The government alleged that Newman had made a total of $4 million in illegal gains.

Right away, Newman knew something was amiss. He looked back at Dell’s quarterly earnings for May 2008 and discovered that the gross margins had been lower than anticipated, not higher. The Wall Street estimate for Dell’s margin that quarter had been 18.5%, but the actual gross margin for the quarter was 18.1%. “They’re charging me for something that didn’t even happen!” he thought. He called Pavlis. “Not only do I not remember getting any information,” Newman told his lawyer, “but the information they put in is wrong.” Pavlis said it was something to examine.

“They’re ­charging me for ­something that didn’t even happen!” thought Newman as he read the details of the indictment.

Newman, though, decided it was time to hire new, high-powered lawyers. (Diamondback’s insurance paid about 95% of Newman’s $10.2 million in legal fees; he paid the rest.) He hired Stephen Fishbein and John Nathanson, at Shearman & Sterling, in New York City. They immediately reached the same conclusion as Newman about the Dell gross margins. “They charged you for something you shouldn’t have been charged for,” he says his new lawyers told him.

However, the government’s factual snafu didn’t seem to help Newman in the trial, presided over by federal judge Richard Sullivan. Antonia Apps, who prosecuted the case for the government, argued that it didn’t matter whether the Dell information was right or wrong. All that mattered was that the information should not have been shared in the first place. Once it was, regardless of whether Newman knew where it had come from or whether it was material and nonpublic, he should not have traded on it.

For Newman, one of the more disturbing aspects of the trial, which occurred over six weeks in late 2012 at the federal courthouse in Manhattan, was learning what Tortora, his former analyst, said about him. By that time the two men did not get along. “He didn’t like me,” Newman says. “We didn’t leave on good terms.” At the end of 2009, after a little more than two years of working together, says Newman, he fired Tortora for poor performance. Newman says he still paid him $700,000 for the year. The year before Tortora had made more than $2 million. “He flipped out,” Newman says. Newman gave him a few months to look for a new job, then cut him loose. Tortora was furious.

Tortora pleaded guilty and agreed to help the prosecution make its case against Newman. Newman says Tortora “burned through all his money, and he didn’t have a choice” but to cooperate with the government. At trial, Tortora testified that he had lost hundreds of thousands of dollars day-trading and gambling. When asked during the trial about his relationship with Newman, Tortora said, “I hate him. I hate him to this day.” (Tortora did not respond to requests for comment made through his lawyer.)

After two days of deliberation, on Dec. 17, 2012, the jury convicted Newman and Chiasson of four counts of securities fraud and one count of conspiracy to commit securities fraud. Newman had steeled himself against the verdict, and he intentionally showed no emotion as the verdict was being read.

The jury agreed with the prosecution’s argument that confidential information should not be traded on regardless of where it came from, even if the trader did not know it had been obtained illegally. Newman’s lawyers argued that this was new law, though: Prior to Newman’s conviction, it was illegal to trade on inside information only if the insider sharing the confidential, nonpublic information breached a fiduciary duty to shareholders and if the person who received the information, and then traded on it, knew that the information was obtained improperly.

Newman says there’s “close to no chance” that he could land another hedge fund job. Today he’s focused on rebuilding his life.Photograph by Spencer Heyfron

Apps argued that Newman should have known that the information he had received about Dell and Nvidia was “bad information.” But, Newman says, “there was no tipper ever charged. The Dell and Nvidia guys were never charged criminally or civilly. You can’t have insider trading if you don’t charge the tipper.”

On May 2, 2013, Judge Sullivan sentenced Newman to 54 months in federal prison. “Fifty-four months for something I didn’t do,” Newman says now. “Nuts.” He was also ordered to pay a $1 million fine and forfeit $737,724 in ill-gotten compensation, or about half of Newman’s liquid assets at the time.

Bharara piled on in a public statement. “With today’s sentence, Todd Newman becomes the first member of this corrupt circle of friends to be punished for his conduct,” he said after the sentencing. “Efforts to cheat the market by gaining an illegal edge ultimately lead to a loss of one’s liberty, as it did for Todd Newman today.”

Three months later Newman appealed his conviction to the Second Circuit Court of Appeals. The gist of his appeal was that what the jury convicted Newman of was not a crime—at least based on the insider-trading laws as they have been applied for decades. Newman’s lawyers faulted the judge for failing to properly instruct the jury about the law. “When all was said and done, Mr. Newman was not convicted of trading on information he knew to be obtained improperly,” the Shearman & Sterling lawyers wrote. “The jury was not instructed that such knowledge needed to be proved and the government offered no evidence to prove it. Instead, Mr. Newman was convicted simply of profiting from information that ordinary investors did not have. That is not a crime.”

On Dec. 10, 2014, a three-judge panel on the Second Circuit agreed with Newman and threw out his conviction as well as that of Chiasson. The panel ruled that the prosecution’s argument was flawed and that Sullivan had erred in advising the jury. The appeals court ruled, importantly, that the prosecutors presented “no evidence” at trial that Newman and Chiasson “knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.”

Bharara didn’t give up right away. First, he asked for an “en banc” ruling from the Second Circuit—one in which all the judges on the court, not just a three-judge subset, reconsider the decision. In April 2015 the Second Circuit denied Bharara’s request. Then, last October, the Supreme Court declined to review the Second Circuit’s ruling, freeing Newman once and for all. On Oct. 22, Bharara dropped the charges against the six “cooperating witnesses” in Newman’s case, all of whom had pleaded guilty, including Tortora. Maintaining their guilty pleas, he said, would not be “in the interests of justice.” Tortora’s attorney issued a statement: “After five long years, my client is thrilled to be vindicated. Justice was served in the end.”

Needless to say, Newman believes that Bharara came after him wrongly and recklessly. “He blames everybody else on Wall Street for stepping over the line, and he’s the one that stepped over the line in my case,” Newman says.

He was offended at first to read that Bharara had cooperated with the producers of Showtime’s hit show Billions, about a ruthless federal prosecutor in New York who’s determined to take down a billionaire hedge fund manager for insider trading. He didn’t like the idea of a show making light of such situations. But after seeing the show, he’s amused by it. “They’ve actually made the hedge fund guy look better than the U.S. Attorney in the Southern District,” says Newman with a smile.

These days, Newman is mostly focused on putting his life back together. He does some trading. But he says there’s no chance “or close to no chance” of getting hired at a hedge fund again, so he hasn’t bothered trying. He plans to start a business to help others make it through experiences similar to his own.

He has plenty of hard-won lessons to share. The trial itself was especially painful. “You sit there for five weeks being ripped apart,” he says. For Newman it was humiliating, and he started losing hope that he would prevail. But then he picked himself up and continued the fight. In the process, he may have helped change the way we regulate Wall Street forever.

A version of this article appears in the September 1, 2016 issue of Fortune.

Source:http://fortune.com/todd-newman-diamondback-insider-trading/

Is First International Group, a company that has offered to buy Electrosteel Steels Ltd from a group of banks, a front for Dharmesh Doshi, a shadowy figure from the second big stock exchange scandal to roil Indian markets?

Indeed, experts have already red-flagged this as one of the factors that banks have to watch out for when they acquire control of companies that are unable to repay their loans.

The story begins earlier this year when a consortium of lenders to Electrosteel Steels set out to identify a buyer for the 50% equity they received in the company in return for Rs.2,500 crore in unpaid debt through a conversion under the strategic debt restructuring scheme.

An unlikely candidate emerged as a possible buyer.

Its name was First International Group Plc. (which quaintly abbreviates as FIG). The only other contender was Tata Steel Ltd. Since FIG was offering Electrosteel creditors a better deal, they were leaning towards a sale to it.

FIG approached SBI Capital Markets, which was working on behalf of lenders, with an expression of interest in Electrosteel Steels, said a banker familiar with the negotiations who spoke on condition of anonymity

As news of the likely deal spread, the question on everyone’s mind was—what is FIG? A glance at the company’s website shows that it is a London-based entity which deals in securities.

Next question—why is a securities company interested in buying an Indian steel company?

To this the bankers had no answer.

Bankers asked the local arm of audit firm Deloitte India to conduct forensic due diligence exercise on the company. The deal is currently in cold storage pending the results of this audit.

Meanwhile, documents accessed by Mint suggest close links between FIG and Doshi, an associate of stock broker Ketan Parekh, who was banned from the Indian markets in 2001. They also show that FIG had extensive dealings with both Doshi and his company, Jermyn Capital Partners, which, in turn, had some dealings with Electrosteel.

Doshi, along with Ketan Parekh, was one of the key accused in the stock market scam of 2001 and had been barred from the Indian markets for life. That was the second major scam to roil Indian markets; the first took place in the early 1990s and was masterminded by Harshad Mehta, Parekh’s mentor.

The Securities and Exchange Board of India (Sebi) found links between Jermyn Capital Llc., London-based Jermyn Capital Partners Plc. and Doshi. In a 13 January 2006 order, Sebi noted that “Jermyn Capital Partners Plc was formerly known as Triumph Securities UK Plc which was a 100% subsidiary of Triumph International Finance (India) Ltd (TIFIL) through its Mauritius based subsidiary International Holdings (Triumph) Ltd”.

“SEBI had earlier conducted investigations in the wake of the ‘Stock Market Scam of 2001’ and initiated various punitive actions against TIFIL and its directors including Mr. Ketan V. Parekh, Mr. Kartik K. Parekh, Mr. Dharmesh Doshi, Mr. Jatin R. Sarvaiya and Mr. A.R Kapadia. While Mr. Ketan Parekh and three other Directors of TIFIL were arrested in May 2002, Mr. Dharmesh Doshi evaded arrest and is still absconding,” said the 13 January 2006 order.

While Jermyn Capital Partners Plc. was barred from the Indian Securities market, it continued to remain active in the UK. In 2010, the company changed its names to Orbit Investment Securities Services Plc. It continues to function under that name.

Arundhati Bhattacharya, chairperson of State Bank of India, which heads the consortium of lenders to Electrosteel Steels, did not respond to an e-mail seeking comment.

Bankers must exercise due caution while working with potential buyers of stressed assets, said an expert.

“In its most recent guidelines on SDR, the regulator has stated very clearly that banks are required to do additional due diligence on the new buyers and establish that they are not related or are associates of the current promoter group. The onus of finding out all possible details about the buyer remains with the banks. They must consider any red flags which are raised in respect of a potential buyer and should be cautious in who they are dealing with,” said Dinkar V., partner, transaction advisory services, at global consulting firm EY.

Dinkar, who also heads the restructuring and stressed asset turnaround unit of EY, was not commenting on the Electrosteel case in particular.

 

 

Source:

http://www.livemint.com/Money/OvK6BEVABPdtfCUlNFMNsM/Is-First-International-Group-a-front-for-Dharmesh-Doshi.html

 

Securities and Exchange Board of India (hereinafter referred to as ‘SEBI’) conducted an investigation into the scrip of Palred Technologies Limited (hereinafter referred to as ‘PTL’ or ‘the Company’) for the period of September 18, 2012 to November 30, 2013 (hereinafter referred to as ‘the investigation period’), to ascertain the possible violation of the provisions of the SEBI Act, 1992 (hereinafter referred to as ‘SEBI Act’) and SEBI (Prohibition of Insider Trading) Regulations, 1992 (hereinafter referred to as ‘PIT Regulations’).

2. PTL was incorporated in the year 1999. The Company had changed its name from Four Soft Limited to PTL w.e.f. December 09, 2013. The scrip of Palred is listed on National Stock Exchange Limited (hereinafter referred to as ‘NSE’) and Bombay Stock Exchange (hereinafter referred to as ‘BSE’).

The investigation alleged that Mr. Palem Srikanth Reddy, who is also the Chairman and Managing Director (CMD) of PTL, Ms. P. Soujanya Reddy, Mr. Ameen Khwaja, Ms. Noorjahan Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja, Mr. Shahid Khwaja, Ms. Kukati Parvathi, Mr. Pirani Amyn Abdul Aziz, Mr. Karna Ramanjula Reddy, Mr. Umashankar S, Ms. Raja Lakshmi Srivaiguntam, Mr. Prakash Lohia and Mr. Mohan Krishna Reddy Aryabumi had traded in the scrip of PTL during the investigation period, while in possession of ‘price sensitive information’ (hereinafter also referred to as ‘PSI’).

The Company, in its e-mail dated June 20, 2014 had informed SEBI that Mr. Palem Srikanth Reddy (the Chairman and Managing Director of PTL), Mohan Krishna Reddy and P. Soujanya Reddy were the persons privy to the ‘slump sale of software solutions business to Kewill group’. Mr. Palem Srikanth Reddy was also privy to the information about the declaration of dividend. Mr. Palem Srikanth Reddy being the connected person within the meaning of Regulation 2(c)(i) of the PIT Regulations and having access to the UPSI, as detailed above, is alleged to be an ‘insider’ in terms of the Regulation 2(e) read with Regulation 2(c) of the PIT Regulations.

The investigations have revealed that Mr. Palem S. Reddy had communicated/ counselled, directly or indirectly the UPSI to one Mr. Ameen Khwaja, his relative Ms. Kukati Parvathy and others (hereinafter collectively referred to as the ‘suspected entities’). The details of the connections of suspected connected entities with Mr. Palem S. Reddy are as under:

Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja were the common directors of one Pal Premium Online Media Pvt. Limited (hereinafter referred to as ‘Pal’). The names of both Mr. Palem Srikanth Reddy and Mr. Ameen Khwaja appear in the promoter category of Pal. It was found that Pal had provided services relating to ‘search engine’ to PTL during the period September 2011 to May 2013 (i.e. during the period of UPSI). Further, after the ‘slump sale of business’ by PTL to Kewill group, discussions pertaining to the merger of Palred Media and Entertainment Pvt. Limited and Pal with PTL had begun on December 19, 2013, which later got approved by the Board of Directors of the Company. In view of the same, Mr. Ameen Khwaja is also alleged to be an ‘insider’ and ‘connected person’ in terms of the Regulations 2(e) and (c) of the PIT Regulations.

Mr. Ameen Khwaja appears to have not traded in the scrip of PTL during the period of investigation. However, his immediate family members namely Ms. Noorjahan A. Khwaja, Mr. Ashik Ali Khwaja, Ms. Rozina Hirani Khwaja, Ms. Shefali Ameen Khwaja and Mr. Shahid Khwaja (hereinafter collectively referred to as ‘Khwaja group’) were found to be trading in the scrip of PTL during the UPSI period.

The trading pattern of Khwaja group entities was found to be in clear deviation from their established trading pattern. Except Ms. Noorjahan Khwaja, no other Khwaja group entity had traded in the market since April 01, 2011 to September 17, 2012. Even the maximum purchase value of Ms. Noorjahan Khwaja at BSE/ NSE was only 2.13 lakh in seven scrips, the same is in sharp contrast to the amount of 16.62 lakh, she had invested in the scrip of PTL (a not-so-frequently traded scrip during the relevant period). Further, it has also been revealed that the trading accounts of four members of Khwaja group were opened only on June 26, 2013, June 27, 2013, July 10, 2013 and July 12, 2013 i.e. during the UPSI period.

Mr. Pirani Amyn Abdul Aziz is also found to be connected to Mr. Ameen Khwaja through mutual friends on ‘Facebook’. He was employed with Deloitte Tax Services India Pvt. Limited (a group company of Deloitte Touche Tohmatsu India Pvt. Limited, which had conducted the due diligence of PTL during the slump sale). During the course of investigation, Mr. Pirani Amyn Abdul Aziz failed to reply to the specific details, as sought by SEBI.

His trading pattern was found in deviation from the established trading pattern. It was found that he had transacted only in the scrip of ‘Cummins India Limited’ for a quantity of only three shares for a consideration of 1,330,which he had purchased and sold during July 2013. Further, he was not found trading in any other scrip since April 2011 except that of investing about 5 lakh in PTL shares from June 2013 onwards, i.e., during the UPSI of ‘slump sale’. The proportion of his investment in PTL shares when considered in relation to his income and that too in a scrip which was not frequently traded (during the relevant period), is not commensurate with the usual investment behavior

It was found that he had opened his trading account with HDFC Securities Limited on June 25, 2013, i.e. just one day prior to his trading (i.e. June 26, 2015), in the scrip of PTL. Further an analysis of his bank account details revealed that he had received a series of cash deposits, prior to each payment to his broker for transacting in the shares of PTL. Mr. Pirani Amyn Abdul Aziz has not furnished any detail of the source of such cash deposits. The same raises serious suspicion on his transactions.

TABLE – 5

Trades during the UPSI of ‘slump sale’

(i.e. between September 18, 2012 –August 10, 2013) S.No.

Name

During 18/09/2012 to 10/08/2013

During 18/08/2013 to 20/08/2013

Total

Buy

Sell

Buy

Sell

Buy

Sell

1

Srikanth Palem Reddy

2,09,968

5,399

0

0

2,09,968

5,399

2

Noorjahan A Khwaja

1,20,972

2,456

0

0

1,20,972

2,456

3

Ashik Ali Khwaja

64,193

0

0

0

64,193

0

4

Rozina Hirani

43,014

0

0

0

43,014

0

5

Shefali Ameen Khwaja

45,000

0

0

0

45,000

0

6

Shahid Khwaja

50,822

0

0

0

50,822

0

7

Pirani Amyn Abdul Aziz

32,305

0

0

0

32,305

0

8

Karna Ramanjula Reddy

13,954

0

0

0

13,954

0

9

Umashankar S.

6,000

5,000

0

0

6,000

5,000

10

Raja Lakshmi Srivaiguntam

16,955

200

0

0

16,955

200

11

Rajpal Suresh Chandra

15,000

5,260

0

0

15,000

5,260

12

K. Parvathi

34,900

0

0

0

34,900

0

13

Prakash Lohia

25,972

2,000

3,500

0

29,472

2,000

14

Soujanya Reddy

17,500

0

0

0

17,500

0

TABLE – 7 Profit/losses incurred by suspected entities during their trading in PTL

Buy Vol.

Buy value in

Sell Vol.

Sell value in

Remaining shares unsold till UPSI 14.10.2013

Closing price on day of PSI

Notional sell value of shares

Gain (₹)

A

B

C

D

E=A-C

F

G=E*F

H=G+D-B

Srikanth Palem Reddy

209968

2799682

5399

91651

204569

39.2

8019105

5311074

Noorjahan A Khwaja

120972

1661672

2456

52634

118516

39.2

4645827.2

3036789

Khwaja Ashik Ali

64193

1010859

0

0

64193

39.2

2516365.6

1505507

Rozina Hirani

43014

636791

0

0

43014

39.2

1686148.8

1049358

Shefali Ameen Khwaja

45000

701666

0

0

45000

39.2

1764000

1062334

Shahid Khwaja

50822

914136

0

0

50822

39.2

1992222.4

1078086

Pirani Amyn Abdul Aziz

32305

499986

0

0

32305

39.2

1266356

766370

Mohankrishna Reddy Aryabumi

9300

273005

0

0

9300

39.2

364560

91555

Karna Ramanjula Reddy

16250

296240

0

0

16250

39.2

637000

340760

Umashankar S.

10450

230004

5000

71746

5450

39.2

213640

55382

Raja Lakshmi Srivaiguntam

16955

282090

200

3360

16755

39.2

656796

378066

K. Parvathi

35800

593167

0

0

35800

39.2

1403360

810193

Prakash Lohia

25972

374023

2000

37900

23972

39.2

939702.4

603579

Soujanya Reddy

17500

215924

0

0

17500

39.2

686000

470076

Total

698501

15055

683446

16559129

TABLE – 8 S.No.

Entity Name

PAN

Profit (₹)

Interest 12% p.a.**

Total (₹)

1.

Mr. Palem Srikanth Reddy

AAMPP9497N

53,11,074

20,63,898

73,74,972

2.

Ms. Noorjahan A. Khwaja

ACAPK3460G

30,36,789

9,53,469

39,90,258

3.

Mr. Ashik Ali Khwaja

ADMPA1271E

15,05,507

4,67,243

19,72,750

4.

Ms. Rozina Hirani Khwaja

ABQPH3900B

10,49,358

3,25,675

13,75,032

5.

Ms. Shefali Ameen Khwaja

ADTPV2598L

10,62,334

3,29,003

13,91,337

6.

Mr. Shahid Khwaja

ATXPK3630J

10,78,086

3,29,629

14,07,715

7.

Mr. Pirani Amyn Abdul Aziz

AONPP0697R

7,66,370

2,39,107

10,05,477

8.

Mr. Mohan Krishna Reddy Aryabumi

ABLPA2405R

91,555

26,097

1,17,652

9.

Mr. Karna Ramanjula Reddy

APAPK7847J

3,40,760

1,12,031

4,52,791

10.

Mr. Umashankar S.

ANUPS2006D

55,382

17,498

72,880

11.

Ms. Raja Lakshmi Srivaiguntam

BOPPS3150H

3,78,066

1,16,216

4,94,282

12.

Ms. Kukati Parvathi

ACIPP8586G

8,10,193

3,02,857

11,13,050

13.

Mr. Prakash Lohia

ABTPL5701F

6,03,759

1,91,095

7,94,674

14.

Ms. P. Soujanya Reddy

AAQPP2729R

4,70,076

1,81,436

6,51,512

TOTAL

1,65,59,129

56,55,254

2,22,14,383

* Interest calculated on illegal gains from the individual date of buy transaction till January 31, 2016

10. Considering the facts and circumstances of the case, the balance of convenience lies in favour of SEBI. With the initiation of investigation and quasi-judicial proceedings, it is possible that the noticees may divert the unlawful gains (subject to the adjudication of the allegation on the merits in the final order), which may result in defeating the effective implementation of the direction of disgorgement, if any to be passed after adjudication on merits. Non-interference by the Regulator at this stage would therefore result in irreparable injury to interests of the securities market and the investors.

In view of the foregoing, I, in exercise of the powers conferred upon me by virtue of Section 19 read with Sections 11(1), 11(4)(d) and 11(B) of the SEBI Act, 1992, hereby order to impound the alleged unlawful gains of a sum of 2,22,14,383 (alleged gain of 1,65,59,129 + interest of 56,55,254 from the date of buy transactions to January 31, 2016), jointly and severally from the persons tabulated in the paragraph above. If the funds are found to be insufficient to meet the figure of unlawful gains, as directed above, then the securities lying in the demat account of these persons shall be frozen to the extent of the remaining value.

Source:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1454682584239.pdf

US Second Circuit Court of Appeals yesterday dismissed Gupta’s appeal
Gupta, 67, had moved the court seeking a “certificate of appealability” but in the ruling the court “denied” the motion and “dismissed” his appeal.

“Appellant has not shown that ‘jurists of reason would find it debatable whether the district court was correct in its procedural ruling’ …as to whether Appellant’s claim was procedurally defaulted,” Circuit Judges Susan Carney and Christopher Droney said in their ruling.

Gupta’s two-year prison term ends in March next year and ever since his conviction in June 2012, he has filed several appeals, including to the US Supreme Court, to overturn his conviction and prison term but the courts have rejected his arguments and affirmed his sentence.

The former McKinsey chief is currently serving his prison term in a federal prison in Ayer, Massachusetts.

Gupta had last filed an appeal in August in the US Court of Appeals against the July ruling by Jed Rakoff who had rejected Gupta’s appeal saying his argument that the evidence of personal benefit presented at trial was insufficient to sustain his conviction is “both too late and too little”.

In his appeals, Gupta cited a recent landmark decision by the appeals court that had said that for an insider-trading conviction prosecutors must show that a defendant received a personal benefit for passing illegal tips.

Gupta sought to vacate his sentence and the judgment against him on the basis of an argument that the trial court’s instruction to the jury concerning the “personal benefit” element of an insider trading violation was “erroneous” and there was insufficient evidence of such benefit.

Rakoff had also denied Gupta’s bid to seek a “certificate of appealability” that would have given the IIT and Harvard alumnus another legal recourse to challenge his conviction.

Rakoff, who had presided over Gupta’s trial and sentenced him to the two years’ imprisonment, had said that even though Gupta is a “man of many laudable qualities,” the “hard fact remains” that he committed a serious crime.

Source:
http://www.business-standard.com/article/international/gupta-s-latest-bid-to-reverse-insider-trading-conviction-fails-115123000290_1.html

Deepwater Horizon Rig

According to the Securities and Exchange Commission, after the explosion on the Deepwater Horizon oil rig on April 20, 2010, Seilhan was designated to BP’s Incident Command Center in Houma, Louisiana, where he was responsible for overseeing the initial oil collection and clean-up operations.  In his position as Incident Commander, Seilhan learned of nonpublic information relating to the seriousness of the disaster, including initial oil flow estimates from the sunken rig that were significantly greater than the public estimate of  5,000 barrels per day.  Indeed, those private estimates were between 52,700 and 62,200 barrels per day – a 10x increase than that provided to the public.

After he learned of this information, Seilhan sold his and his family’s entire $1 million portfolio of BP securities, including common shares and options.  By doing so, Seilhan and his family were able to avoid over $100,000 in losses as BP’s share price eventually declined 48%.  Later, after BP announced it had successfully capped the well, Seilhan  repurchased shares of the BP Stock Fund (composed nearly entirely of BP shares) at a lower basis.

While the Commission acknowledged the assistance of the Department of Justice’s Deepwater Horizon Task Force, there is no indication that criminal charges will be filed.

Keith A. Seilhan, a senior responder for BP during the Deepwater Horizon oil spill, agreed to settle claims that he violated federal securities laws by selling his family’s entire $1 million portfolio of BP securities after he learned that the public estimations of the spill’s magnitude were grossly understated.  Without admitting or denying the allegations, Seilhan agreed to pay (i) $105,409 of ill-gotten gains; (ii) $13,300 in prejudgment interest; and (iii) a civil penalty of $105,409.

A copy of the SEC’s Complaint is here and embedded below:

Source:

http://www.forbes.com/sites/jordanmaglich/2014/04/17/sec-accuses-former-bp-employee-of-insider-trading-during-deepwater-horizon-spill/

Rakesh Agarwal vs. SEBI.

Rakesh Agarwal, was the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G regarding their intentions to takeover ABS. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. He was an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34, 00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000 in each exchange) to compensate any investor which may make any claim subsequently.” On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal, however, held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS) to help Bayer A. G acquire his company.

Securities and Exchange Board have set out in its order banning Arora — the former star Asia-Pacific fund manager of Alliance Capital Management — from trading in August are far from convincing.

There are three main charges. One, that Arora played a pivotal role in thwarting Alliance Capital’s efforts to sell its India operations by resorting to unethical means.

Two, he did not make disclosures or sometimes made wrongful disclosures when some of Alliance’s holdings in certain stocks breached limits that required informing the respective companies.

Third, he sold his entire holding in Digital GlobalSoft based on unpublished, price-sensitive information.

In this case, SEBI conducted investigations into the management, conduct and other affairs of the Alliance Capital Asset Management (I) Pvt. Ltd. (ACAML). Samir Arora was the fund manager of the company. Knowing that the company was inviting bids for takeover of the same, he made special arrangement with Henderson Global Investors. For helping this company takeover his present company, he purchased shares and when the price rose sold off the shares to get a considerable profit. The Authority found him guilty and directed him not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period of five years.

The conduct of Samir Arora is not in consonance with the high standards of integrity, fairness and professionalism expected from a fund manager. His conduct erodes the investors’ confidence and is detrimental to their interests as well as the safety and integrity of the securities market. His association in the securities market in any capacity is prejudicial to the interests of the investors and the safety and integrity of the securities market.

Hindustan Lever Limited (HLL) – Brooke Bond Lipton India Limited  (BBLIL)

The controversy involved HLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997, SEBI issued a show cause notice to the Chairman, all Executive Directors, the Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order charging HLL with insider trading.

SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL. Later HLL filed an appeal with the appellate authority, which ruled in its favour.

Background of the case:

The SEBIs charges were triggered off by HLLs purchase of 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from the Unit Trust of India (UTI, 1996-97 income: Rs 7,481 crore) at Rs 350.35 per share. This transaction took place on March 25, 1996, before the HLL-BBLIL merger was announced on April 19, 1996. A day after the announcement of the merger, the BBLIL scrip quoted at Rs 405, thereby leading to a notional gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.

HLL is an insider, according to Section 2 (e) of the SEBI (Insider Trading) Regulations. It states: An insider means any person who is, or was, connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information.

The SEBI has argued that both these conditions were met when HLL bought the BBLIL shares from the UTI. HLL and BBLIL had a common parentage–as subsidiaries of the London-based $33.52-billion Unilever–and were then under a common management. Thus, HLL and its directors had prior knowledge of the merger. Agrees Both HLL and BBLIL are deemed to be under the same management even under Section 370 (1)(b) of the Companies Act, 1956.

No company can be an insider to itself. The transnational knowledge of the merger was because it was a primary party to the process, and not because BBLIL was an associate company. To buttress this point, HLL maintains that if it had purchased shares of Tata Oil Mills Co. (TOMCO) before the two merged in April, 1994, SEBI would not consider it a case of insider trading. Why? Because HLL was not associated with the Tata-owned TOMCO.

HLL contends that it purchased the BBLIL shares so that its parent company, Unilever, could maintain a 51 per cent stake in the merged entity. Before the merger, Unilever had a 51 per cent stake in HLL, but only 50.27 per cent in BBLIL. Thus, the HLL management feels that the SEBI should consider if it had any additional information which it should not, legitimately, have had as a transferee company in the merger.

According to the SEBI guidelines, HLL can be deemed to be an insider. But the SEBIs definition of an insider has to be fleshed out by it to provide a clearer picture.

HLL dealt in, or purchased, the BBLIL shares on the basis of unpublished price-sensitive information which is prohibited under Section 3 of the Regulations. Section 2 (k)(v) states that unpublished, price-sensitive information relates to the following matters (amalgamations, mergers, and takeovers), or is of concern to a company and is not generally known or published.

According to the SEBI, there can be no dispute that the information of the overall fact of the merger falls under this definition.

Only the information about the swap ratio is deemed to be price-sensitive. And this ratio was not known to HLL–or its directors–when the BBLIL shares were purchased in March, 1996. Moreover, HLL argues that the news of the merger was not price-sensitive as it had been announced by the media before the companies announcement, April 7, 1996). HLL also points out that it was a case of a merger between two companies in the group, which had a common pool of management and similar distribution systems. Therefore, the merger information in itself had little relevance; the only thing that was price-sensitive was the swap ratio.

Why did HLL not follow the route of issuing preferential shares to allow Unilevers stake to rise to 51 per cent in HLL? As per the SEBI chargesheet Such a step would have involved various compliances/ clearances, and required Unilever to bring in substantial funds in foreign exchange. The implication: HLL depleted its reserves to ensure that Unilever did not have to bring in additional funds

Issuing of preferential shares would have, indeed, been a cheaper option to ensure that Unilever had a 51 per cent stake in HLL. Had HLL followed this route, it would have had to pay Rs 282..35, instead of Rs 350.35, per share. In other words, it would have made a profit of Rs 5.41 crore by doing so. However, Unilever always enjoyed the option. Says a senior manager with HLL: The forex angle falls flat on that ground itself. HLL also states that while the preferential route would have been beneficial for itself, it would have been dilutory for other shareholders since it would have resulted in an expanded capital base, leading to a lower earnings per share in the future.

HLL was probably worried that the clearances for a preferential allotment from the SEBI and the Reserve Bank of India (RBI) would take their time in coming–or not be given at all. It had already faced a time-consuming and expensive run-in with the RBI during the HLL-TOMCO merger in 1994.

Levers cancelled the entire holding of HLL in BBLIL

HLL was upfront that its entire holding in BBLIL–1.60 per cent–including the lots purchased from the UTI would be cancelled after the merger in March, 1997. HLL maintains that this is perfectly legal. In addition, shareholders of both HLL and BBLIL approved of the cancellation of shares as part of the merger scheme. Says Iyer: By this process of cancellation, which normally happens in every amalgamation, the voting rights of Unilever have gone up. However, so have the voting rights of other shareholders. So, no exclusive benefit–profits or avoidance of loss–has accrued to HLL or Unilever.

By extinguishing the shares, HLL wanted to maintain Unilevers shareholding at 51 per cent and not realise any financial gains. However, Section 3 defines insider trading irrespective of whether profits are made or not.

By virtue of being in uncharted territory, the parallel hearing before the Union Ministry of Finance will be disposed of within four or five months from the date of filing. And if the verdict goes against Levers, the group will then go to court. If so, expect a long-drawn legal battle. For now, the SEBI verdict is a black spot on a company that excels in cleaning them up.

Prosecution Not Justifiable:

Round two of the battle between SEBI and HLL took place under the aegis of the Appellate Authority of the Finance Ministry.

In response to the SEBI’s charge, HLL appealed to the Appellate Authority pleading that it be absolved of the charges of insider trading. UTI later filed an appeal with the Appellate authority, claiming a higher compensation of Rs. 75.2 million (7.52 crore).

It pleaded that it had to incur a notional loss as it was not aware that a merger of the two Unilever group companies was on the cards

HLL Not Guilty-Proposal ‘Generally Known’:

In support of its ruling, the Appellate Authority cited press reports that indicated “prior market knowledge of the merger.” However, by its own admission, there were only a few reports “prior to the actual purchase (of shares from UTI).” The Authority had cited 21 news reports to support the contention that the prospect of a merger between HLL and BBLIL was widely known.

In its judgement, the Appellate Authority said that under Regulation 11B, SEBI was not capable of initiating investigations and then taking recourse to powers under the Act for awarding compensation without passing an order under the above mentioned regulation.

Although not high-ranking in terms of dollars, the case of Wall Street Journal columnist R. Foster Winans is a landmark case for its curious outcome.

Winans wrote the  “Heard on the Street” column profiling a certain stock. The stocks featured in the column often went up or down according to Winans’ opinion.

Winans leaked the contents of his column to a group of stockbrokers, who used the tip to take up positions in the stock before the column was published. The brokers made easy profits and allegedly gave some of their illicit gains to Winans.

Winans was caught by the SEC and put at the center of a very tricky court case. Because the column was the personal opinion of Winans rather than material insider information, the SEC was forced into a unique and dangerous strategy. The SEC charged that the info in the column belonged to the Wall Street Journal, not Winans. This meant that while Winans was convicted of a crime, the WSJ could theoretically engage in the same practice of trading on its content without any legal worries.

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lE4vsw1y

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