March 13th, 2014
Econintersect: The Securities Exchange Commission late today took the following actions:
- charged motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.
- fraud charges and an emergency asset freeze against a promoter behind a platform of affiliated microcap stock promotion websites.
- charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.
Note: the following statements come directly from the Securities and Exchange Commission Press Release.
Lions Gate Disclosure Failures
The Securities and Exchange Commission today charged motion picture company Lions Gate Entertainment Corp. with failing to fully and accurately disclose to investors a key aspect of its effort to thwart a hostile takeover bid.
Lions Gate agreed to pay $7.5 million and admit wrongdoing to settle the SEC’s charges.
According to the SEC’s order instituting settled administrative proceedings, Lions Gate’s management participated in a set of extraordinary corporate transactions in 2010 that put millions of newly issued company shares in the hands of a management-friendly director. A purpose of the maneuver was to defeat a hostile tender offer by a large shareholder who had been locked in a battle for control of the company for at least a year. However, Lions Gate failed to reveal that the move was part of a defensive strategy to solidify incumbent management’s control, instead stating in SEC filings that the transactions were part of a previously announced plan to reduce debt. In fact, the company had made no such prior announcement. Lions Gate also represented that the transactions were not “prearranged” with the management-friendly director, and failed to disclose the extent to which it planned and enabled the transactions with the expectation that the director would get the shares. Said Andrew J. Ceresney, director of the SEC’s Division of Enforcement:
Lions Gate withheld material information just as its shareholders were faced with a critical decision about the future of the company. Full and fair disclosure is crucial in tender offers given that shareholders rely heavily on corporate insiders to make informed decisions, especially in the midst of tender offer battles.”
According to the SEC’s order, the large shareholder had made several tender offers and acquired more than 37 percent of Lions Gate’s outstanding stock. For its part, Lions Gate management believed that allowing the shareholder to control the company was not in the best interest of Lions Gate or its shareholders. The company engaged in an active campaign to discourage shareholders from tendering their stock to the shareholder, and vigorously looked for a management ally to purchase available shares of Lions Gate stock. Lions Gate went on to establish the basic framework for an extraordinary three-part set of transactions that would begin by exchanging $100 million in notes from a holder for new notes convertible to stock at a more favorable conversion rate. The note holder would then sell the notes to the management-friendly director at a premium, and the director would then immediately convert the notes to shares.
According to the SEC’s order, the Lions Gate board of directors approved the transactions at a midnight board meeting on July 20, 2010, while facing an imminent tender offer from the large shareholder. Completed in hours, these transactions allowed the friendly director to obtain control of approximately nine percent of the company’s outstanding stock, effectively blocking the takeover bid.
The SEC’s order finds that Lions Gate then failed to meet its disclosure obligations. First, Lions Gate stated in a July 20 press release and 8-K filing that the transactions were done to reduce the company’s debt, and failed to disclose the effort to foil the takeover bid. Furthermore, Lions Gate management knew that a large, direct sale of stock from the company to the friendly director would have required prior approval from its shareholders under a New York Stock Exchange (NYSE) rule. After the transactions, NYSE contacted Lions Gate to inquire whether the transactions violated the NYSE rule requiring shareholder approval. In response to the NYSE inquiry, Lions Gate said it would disclose additional information. In its subsequent tender offer filings made to the SEC in September, Lions Gate represented that the note exchange was not part of a prearranged plan to get shares to the management-friendly director.
Among the facts admitted by Lions Gate, reflecting the extent to which the company planned and enabled the transactions, include:
- Lions Gate did not announce a plan to reduce total debt prior to issuing the press release on July 20, 2010.
- Lions Gate amended its insider trading policy at the midnight board meeting to allow the friendly director to immediately convert the notes to stock.
- Lions Gate approved the friendly director’s last-minute request to change the conversion price.
- Lions Gate allowed the friendly director to review the new note terms, term sheet, and exchange agreement before they were provided to the note holder.
- Lions Gate failed to include other required information in its tender offer filings, including the fact that the friendly director converted the notes at favorable price resulting in the director owning a near 9 percent interest in Lions Gate.
The SEC’s order finds that Lions Gate violated Sections 13(a) and 14(d) of the Securities Exchange Act of 1934 and Rules 12b-20 13a-11, and 14d-9. In addition to the financial penalty, the order requires Lions Gate to cease and desist from future violations.
The SEC’s investigation was conducted by Nicholas A. Brady with assistance from Jeffrey T. Infelise. The case was supervised by Anita B. Bandy and Moira T. Roberts.
Asset Freeze Against Promoter Behind Microcap Stock Scalping Scheme
The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against a promoter behind a platform of affiliated microcap stock promotion websites.
The SEC alleges that John Babikian used AwesomePennyStocks.com and its related site PennyStocksUniverse.com, collectively “APS,” to commit a brand of securities fraud known as “scalping.” The APS websites disseminated e-mails to approximately 700,000 people shortly after 2:30 p.m. Eastern time on the afternoon of Feb. 23, 2012, and recommended the penny stock America West Resources Inc. (AWSRQ). What the e-mails failed to disclose among other things was that Babikian held more than 1.4 million shares of America West stock, which he had already positioned and intended to sell immediately through a Swiss bank. The APS emails immediately triggered massive increases in America West’s share price and trading volume, which Babikian exploited by unloading shares of America West’s stock over the remaining 90 minutes of the trading day for ill-gotten gains of more than $1.9 million.
According to documents filed simultaneously with the SEC’s complaint in federal court in Manhattan, Babikian was actively attempting to liquidate his U.S. assets, which he holds in the names of alter ego front companies. He was seeking to wire the proceeds offshore. The Honorable Paul A. Crotty granted the SEC’s emergency request to preserve these assets by issuing an asset freeze order. Said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement:
The Enforcement Division, including its Microcap Fraud Task Force, is intensely focused on the scourge of microcap fraud and is aggressively working to root out microcap fraudsters who make their living by preying on unwitting investors.
Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement in Washington, D.C. stated:
By obtaining today’s emergency asset freeze, we have thwarted Babikian’s attempts to liquidate and expatriate assets that should be used to return his ill-gotten gains and pay appropriate penalties.
According to the SEC’s complaint, America West’s stock was both low-priced and thinly traded prior to Babikian’s mass dissemination of the APS e-mails promoting it. America West’s trading volume in 2011 averaged approximately 15,400 shares per day. There was not a single trade in America West stock on Feb. 23, 2012, before the touting e-mails were sent. However, in the immediate aftermath of Babikian’s e-mail launch, more than 7.8 million shares of America West stock was traded in the next 90 minutes as America West’s share price hit an all-time high. Absent the fraudulent touts, Babikian could not have sold more than a few thousand shares at an extremely lower share price.
The court’s order, among other things, freezes Babikian’s assets, temporarily restrains him from further similar misconduct, requires an accounting, prohibits document alteration or destruction, and expedites discovery. Pursuant to the order, the SEC has taken immediate action to freeze Babikian’s U.S. assets, which include the proceeds of the sale of a fractional interest in an airplane that Babikian had been attempting to have wired to an offshore bank, two homes in the Los Angeles area, and agricultural property in Oregon.
The SEC’s investigation, which is continuing, has been led by Andrew R. McFall, John P. Lucas, Robert W. Nesbitt and supervised by J. Lee Buck II. The case will be litigated by Matthew P. Cohen and Michael J. Roessner. The SEC appreciates the assistance of the Quebec Autorité des Marchés Financiers, Financial Industry Regulatory Authority, and OTC Markets Group Inc.
CR Intrinsic Analyst Charged with Insider Trading
The Securities and Exchange Commission today charged a former analyst at an affiliate of hedge fund advisory firm S.A.C. Capital Advisors with insider trading based on nonpublic information that he obtained about a pair of technology companies.
The SEC alleges that Ronald N. Dennis got illegal tips from two friends who were fellow hedge fund analysts. They provided him confidential details about impending announcements at Dell Inc. and Foundry Networks. Armed with inside information, Dennis prompted illegal trades in Dell and Foundry stock and enabled hedge funds managed by S.A.C. Capital and affiliate CR Intrinsic Investors to generate illegal profits and avoid significant losses.
Dennis, who lives in Fort Worth, Texas, has agreed to be barred from the securities industry and pay more than $200,000 to settle the SEC’s charges. Said Sanjay Wadhwa, senior associate director of the SEC’s New York Regional Office:
Like several others before him at S.A.C. Capital and its affiliates, Dennis violated the insider trading laws when he exploited confidential information about public companies, in this case Dell and Foundry, to unjustly benefit the firms and enrich himself. His actions have cost him the privilege of working in the hedge fund industry ever again.
According to the SEC’s complaint filed in federal court in Manhattan, Dennis received illegal tips about Dell’s financial performance from Jesse Tortora, who was then an analyst at Diamondback Capital. Tortora and Diamondback were charged in 2012 along with several other hedge fund managers and analysts as part of the SEC’s broader investigation into expert networks and the trading activities of hedge funds. Dennis separately received an illegal tip about the impending acquisition of Foundry from Matthew Teeple, an analyst at a San Francisco-based hedge fund advisory firm. The SEC charged Teeple and two others last year for insider trading in Foundry stock.
The SEC alleges that Dennis caused CR Intrinsic and S.A.C. Capital to trade Dell securities based on nonpublic information in advance of at least two quarterly earnings announcements in 2008 and 2009. Dennis obtained confidential details from Tortora, who had obtained the information from a friend who communicated with a Dell insider. Dennis enabled hedge funds managed by CR Intrinsic and S.A.C. Capital to generate approximately $3.2 million in profits and avoided losses in Dell stock. Within minutes after one of the Dell announcements, Tortora sent an instant message to Dennis saying “your welcome.” Dennis responded “you da man!!! I owe you.”
The SEC’s complaint also alleges Dennis was informed by Teeple in July 2008 about Foundry’s impending acquisition by another technology company. Shortly after receiving the inside information, Dennis caused a CR Intrinsic hedge fund to purchase Foundry stock and generate approximately $550,000 in profits when the news became public.
The SEC’s complaint charges Dennis with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933. Dennis has agreed to pay $95,351 in disgorgement, $12,632.34 in prejudgment interest, and a $95,351 penalty. Without admitting or denying the allegations, Dennis also has agreed to be permanently enjoined from future violations of these provisions of the federal securities laws. The settlement is subject to court approval. He would then be barred from associating with an investment adviser, broker, dealer, municipal securities dealer, or transfer agent in a related administrative proceeding.
The SEC’s investigation, which is continuing, has been conducted by Michael Holland, Daniel Marcus, and Joseph Sansone of the Enforcement Division’s Market Abuse Unit in New York and Matthew Watkins, Diego Brucculeri, James D’Avino, and Neil Hendelman of the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.