Securities Industry Commentator by Bill Singer Esq

December 5, 2019

featured in today's Securities Industry Commentator:

SEC Charges Hedge Fund Adviser and Top Executives with Fraud (SEC Release)

[In]Securities Guest Blog: WeWork Works It Out by Aegis Frumento Esq ( Blog)

FINRA Fines and Suspends Former Morgan Stanley Rep Over Unsuitable Trades. In the Matter of  John A. Borsellino  Respondent (FINRA AWC)

Slam Dunk Insider Trading Case Rejected by 2nd Circuit. United States of America, Appellee, v. Sean Stewart, Defendant/Appellant (Opinion, United States Court of Appeals for the Second Circuit; 17-593) 


Former Managing Director Of Investment Bank Sentenced To 2 Years In Prison For Insider Trading Scheme (DOJ Release)

In an odd twist on the old Insider Trading theme, we have a son, Defendant Sean Stewart, who was a JP Morgan Chase analyst and subsequently worked for investment bank Perella Weinberg Partners. Defendant Stewart allegedly gave his father, Robert Stewart, inside information. In fact, Defendant Stewart admitted that "he was very close to his father, routinely confided in him, and even occasionally mentioned potential deals," and that his father and others then invested based upon that information. Notwithstanding the tips, Defendant Stewart argued that he did not know that his father would trade on the information. Sure, that explanation may arch an eyebrow or two as a response but consider this Q&A conducted by the Federal Bureau of Investigation during its investigation following Robert's arrest for alleged insider trading:

FBI: [H]ow do you explain a comment you made to Rick [Cunniffe], that Sean got angry with you when he gave you this information on a silver platter and you didn't invest. 

Robert: I think I was just saying to Rick because Sean said, "Uh y'know, all these deals-if you were trading-you could have made like millions of dollars[,]" and I said, "Sean nobody's going to trade and make millions of dollars on this stuff." That wasn't his intention. 

FBI: So why was Sean giving you this information? 

Robert: I think he was just proud of the fact that he was doing deals and y'know, almost like ["]hey, this deal is going to go way up[,"] not intending that somebody was going to trade on it.

Sean and Robert Stewart were both indicted in the United States District Court for the Southern District of New York ("SDNY"), and Robert pled guilty to one conspiracy count but Sean opted for trial. The government's case was largely dependent upon Robert's so-called "silver platter statement" implicating and incriminating Sean. Sean did his best to preclude the introduction of his father's damning testimony as hearsay and he attempted to impeach the credibility of the statement.  Moreover, when Sean attempted to subpoena his father's testimony, Robert asserted his Fifth Amendment and that was sustained by SDNY. I urge all serious Wall Street participants to read this thoughtful and intriguing 2Cir Opinion. As set forth in the Syllabus of the 2Cir's Opinion (Chief Judge Katzmann and Leval, J for the majority; Berman, J. dissenting):

Defendant‐appellant Sean Stewart appeals from a judgment of conviction entered on February 24, 2017, in the United States District Court for the Southern District of New York (Swain, J.). In connection with an insider trading scheme, the defendant‐appellant was found guilty after a jury trial of conspiracy to commit securities fraud and tender offer fraud, in violation of 18 U.S.C. § 371; conspiracy to commit wire fraud, in violation of 18 U.S.C. § 1349; six counts of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78f; and tender offer fraud, in violation of 15 U.S.C. §§ 78n(e) and 78ff. On appeal, the defendant‐appellant argues that he was deprived of an opportunity to examine a key witness in light of that witness's improper invocation of the Fifth Amendment privilege against self‐incrimination; that his due process rights were violated by the district court's decision not to immunize that witness in order to allow the witness to testify without fear of self‐incrimination; and that several evidentiary errors were made. Although we disagree with the defendant's constitutional arguments, we nevertheless find that certain impeachment material that might have influenced the jury's deliberations should not have been excluded. Accordingly, the judgment of the district court is VACATED and REMANDED. 

Following the 2Cir reversal of his conviction, Sean Stewart, 38, was convicted in SDNY after re-trial by a jury, and he was sentenced to 24 months in prison plus three years of supervised release. In 2015, Sean Stewart's father, Robert Stewart, and Richard Cunniffe pled guilty to one count each of conspiracy to commit securities fraud and tender offer fraud, and, additionally, Cunniffe pled guilty to one count of conspiracy to commit wire fraud, three counts of substantive securities fraud, and one count of substantive tender offer fraud. Robert Stewart was sentenced to four years probation with the first year to be served in home detention, and he was ordered to pay a $150,000 forfeiture. Cunniffe was sentenced to one year one year of probation, and ordered to pay a $900,000 forfeiture. As alleged in part in the DOJ Release:

In early 2011, SEAN STEWART, who at the time held the position of vice president in the Healthcare Investment Banking Group of a global bank headquartered in Manhattan ("Investment Bank A"), began tipping his father, Robert Stewart, with nonpublic information about upcoming mergers and acquisitions.  The first of these tips related to the acquisition of Kendle International Inc. by INC Research, LLC, which was announced publicly on May 4, 2011.  SEAN STEWART represented Kendle in the confidential negotiations that led to the deal announcement.  Based on inside information from SEAN STEWART, Robert Stewart purchased Kendle stock and passed the information to another individual to trade on his behalf, and earned several thousand dollars in profits after the acquisition of Kendle was publicly announced. 

The second deal about which SEAN STEWART tipped Robert Stewart was the acquisition of Kinetic Concepts, Inc. ("KCI"), by Apax Partners, announced on July 13, 2011.  Robert Stewart passed the inside information to another co-conspirator, Richard Cunniffe, to trade on Robert's behalf.  Robert Stewart and Cunniffe earned more than $100,000 in profits after the acquisition was publicly announced. 

In the summer of 2011, SEAN STEWART learned that the Financial Industry Regulatory Authority ("FINRA") was conducting an inquiry into suspicious trading in Kendle securities, including trading by Robert Stewart.  SEAN STEWART at first falsely claimed to compliance officials at Investment Bank A that he did not recognize his father's name on a list of individuals who traded prior to the public announcement of Kendle's acquisition.  After FINRA and compliance officials at Investment Bank A recognized the connection between SEAN STEWART and his father, SEAN STEWART told a series of lies to those compliance officials, to make it seem as if Robert Stewart had decided on his own initiative to invest in Kendle without the benefit of inside information. 

In October 2011, SEAN STEWART joined an investment banking advisory firm headquartered in Manhattan ("Investment Bank B") and was later promoted to managing director.  During his tenure with Investment Bank B, SEAN STEWART provided his father with tips concerning nonpublic acquisition negotiations involving three more public companies:  (1) the acquisition of Gen-Probe Inc. by Hologic, Inc., announced on April 30, 2012; (2) the acquisition, by tender offer, of Lincare Holdings Inc. by Linde AG, announced on July 1, 2012; and (3) the acquisition of CareFusion Corp. by Becton, Dickinson & Co. ("Becton"), announced October 4, 2014.  Investment Bank B represented Hologic in connection with its acquisition of Gen-Probe, Linde in connection with its acquisition of Lincare, and CareFusion in connection with its acquisition by Becton.  As before, Robert Stewart passed the information to Cunniffe in order to place trades for the two of them. 

During the course of the scheme, SEAN STEWART became aware that his father was having financial problems.  Rather than loan his father money, SEAN STEWART gave his father stock tips so that his father could profit from the information that STEWART stole from Investment Bank A and Investment Bank B and their clients.  In total, with respect to all five deals, Robert Stewart and Cunniffe earned profits of more than $1.1 million.

SEC Charges Hedge Fund Adviser and Top Executives with Fraud (SEC Release)
In a Complaint filed in the United States District Court for the Northern District of Illinois, the SEC charged:
  • SBB Research Group LLC with violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2), 206(4), and 207 of the Investment Advisers Act of 1940 ("Advisers Act") and Rules 206(4)-1, 206(4)-2, 206(4)-7, and 206(4)-8 thereunder; 
  • SBB's Chief Executive Officer/Founder Samuel Barnett with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, and with aiding and abetting SBB's violations of Section 206(4) of the Advisers Act and Rules 206(4)-1 and 206(4)-2 thereunder; and 
  • SBB's Chief Operating Officer/Chief Compliance Officer Matthew Aven with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section 17(a) of the Securities Act, and Sections 206(1), 206(2), 206(4), and 207 of the Advisers Act and Rule 206(4)-8 thereunder, and with aiding and abetting SBB's violations of Section 206(4) of the Advisers Act and Rules 206(4)-1, 206(4)-2, and 206(4)-7 thereunder. 
As alleged in part in the SEC Release:

[B]arnett founded the firm in 2010 while still in college, raised millions from friends and family members, and invested almost exclusively in structured notes. The complaint alleges that as SBB sought outside investors, Barnett and Chief Operating Officer and Chief Compliance Officer Matthew Aven promised prospective investors that they would use "fair value" when recording investments. Instead, they used their own valuation model to artificially inflate the value of the structured notes. As a result, SBB misstated the funds' historical performance and overcharged investors approximately $1.4 million in fees. According to the complaint, once the valuation issues were uncovered by SEC exam staff, the defendants took steps to conceal their fraud from investors and SBB's auditor. The complaint alleges that when SBB hired an outside valuation firm in 2016, performance for its flagship fund was slashed, and SBB surreptitiously credited investors for the overcharged fees but did not disclose the underlying problem.
WeWork, a highly touted 2019 unicorn, was supposed to have gone public by now, It hasn't. Instead, it withdrew its IPO, restated its financials, fired its CEO, and plans to lay off thousands of employees. WeWork seems to have had a business plan based upon the wisdom that if you build it, they will come. WeWork sort of built it. They didn't come. 

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue,  John A. Borsellino submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. The AWC asserts that Borsellino was first registered in 1990, and from 2009 until January 2018, he was registered with FINRA member firm Morgan Stanley. In accordance with the terms of the AWC, FINRA imposed upon John A. Borsellino $5,000 fine (of which $3,500 was earmarked for violations of MSRB Rules G-17 and G-19); $23,931 in disgorgement of commissions, and a three-month suspension from association in any and all capacities with any FINRA member firm. As set forth in part in the AWC:

Between January 2014 and December 2016, Borsellino recommended that eight customers purchase 28 municipal bonds and 15 non-municipal securities in their brokerage accounts, which caused the customers to incur upfront sales charges. In each instance, Borsellino transferred the security to the customer's existing fee-based account shortly after purchasing it (generally within 90 days), and, in each instance, Borsellino could have purchased the security in the fee-based account without any upfront sales charges. 

The upfront sales charges associated with the 43 unsuitable purchases made in the customers' brokerage accounts totaled approximately $58,000, all of which Morgan Stanley has reimbursed to Borsellino's customers. Borsellino earned $23,931 in  connection with the unsuitable recommendations. 

Borsellino lacked a reasonable basis to believe that the recommended securities purchases made in the customers' brokerage accounts were suitable because he failed to exercise reasonable diligence and failed to consider the costs associated with the transactions. By virtue of the foregoing, Borsellino violated FINRA Rules 2111 and 2010 and MSRB Rules G-19 and G-17.
In a FINRA Arbitration Statement of Claim filed in May 2019 and as amended, associated person Claimant Worrell sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Kestra generally denied the allegations of wrongdoing but took no position on the requested relief. Although notified of the expungement hearing, the customer did not contest the requested relief and did not participate at the hearing. The sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous, and false. In a succinct rationale, the Arbitrator offers the following findings and explanations:

Claimant testified that the customer became his client in 2010. The customer's investment objective was capital preservation with a conservative risk tolerance and a five-year investment time horizon. Over the course of multiple conversations, Claimant recommended, and the customer agreed, to establish a non-discretionary 1% fee-based account consisting of a variety of low-cost mutual funds. From that time until the account was closed in 2013, it performed well and produced significant positive returns with minimal trading or portfolio adjustments. 

Due to back office failure, the annual fee was over-charged by one-half to one percent per annum essentially from inception. On being apprised of the situation, Claimant was able to have it eventually corrected and a credit for the overcharges posted back to the customer's account. 

In October 2013, the customer communicated with the firm and complained of the overcharges and that the account had not been traded as frequently as he had anticipated. The firm investigated the complaint and denied it. The customer took no subsequent action by way of litigation or arbitration. 

The allegations made by the customer are false, clearly erroneous, or both. The customer was fully compensated for the erroneous fee overcharges, and since the account was non-discretionary, trades could not be placed absent his approval. Moreover, Claimant testified that he had had no substantive conversations with the customer concerning trading frequency. By reason of the foregoing, the claim is clearly erroneous, false, or both and should be expunged pursuant to Rule 2080(b)(1)(A) and (C). 

This occurrence is the sole blemish on Claimant's record. Claimant further testified as to the negative impact this disclosure has had on his business marketing efforts. The interests of consumer protection and awareness being in no way negatively implicated, the Arbitrator recommends the above occurrence be expunged from Claimant's CRD.