The following is from the SEC...
The Securities and Exchange Commission today charged a New York-based fund manager with conducting a pair of illegal trading schemes to financially benefit his investment fund Octagon Capital Partners LP.
The SEC alleges that Steven B. Hart made $831,071 during a four-year period through illicit trading while he also worked as a portfolio manager and employee at a New Jersey-based firm that served as an adviser for several affiliated investment funds. In one scheme, Hart illegally matched 31 pre-market trades to benefit his own fund at the expense of one of his employer’s funds. In the other scheme, Hart conducted insider trading in the securities of 19 issuers based on nonpublic information he learned in advance of their offering announcements. Furthermore, Hart signed two securities purchase agreements in which he falsely represented that he had not traded the issuer's securities prior to the public announcement of the offerings in which he had been confidentially solicited to invest.
Hart agreed to pay more than $1.3 million to settle the SEC’s charges.
“By engaging in more than 50 instances of illegal activity in his securities trading, Hart showed a complete disregard for the securities laws and our markets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Hart also misused his position of authority as a portfolio manager of his employer’s fund in order to make handsome profits for his own fund.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Hart conducted his schemes from 2007 to 2011. He caused Octagon to purchase stock in small, thinly traded issuers at the going market price so that he could sell the same stock the following day to his employer’s fund at a price substantially above the prevailing market price. Each of the sales from Octagon to the employer’s fund occurred in pre-market trading, thus Hart was able to ensure that the trades matched. Later that same day or within a few days of the matched trades, Hart directed the employer’s fund to sell the recently-acquired stock on the open market at a loss. Hart generated ill-gotten gains of $586,338 for Octagon in this scheme.
According to the SEC’s complaint, Hart was confidentially solicited by 19 issuers to invest in securities offerings where he expressly agreed to go “over-the-wall” and keep confidential the information he received and not trade on it. Nevertheless, Hart traded for Octagon on the basis of material nonpublic information about the offerings in breach of his duty of trust or confidence. Hart’s illegal trades involved PIPE offerings, registered direct offerings, and confidentially marketed public offerings. Octagon derived ill-gotten gains of $244,733 as a result of Hart’s misconduct.
The SEC alleges that in order to induce two issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that Octagon had not traded the issuers’ securities after he had been solicited. Despite going “over-the-wall” during the solicitations conducted by the two issuers, Hart directed short sales of these issuers’ securities and obtained insider trading profits. He subsequently signed the securities purchase agreements misrepresenting that he hadn’t traded in their securities in the days leading up to the public announcements about the offerings.
The SEC’s complaint against Hart alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. Hart agreed to pay $831,071 in disgorgement, $103,424 in prejudgment interest, and a $394,733 penalty to settle the SEC’s charges without admitting or denying the allegations. Hart also consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act. The settlement is subject to court approval.
The SEC’s investigation was conducted in the New York Regional Office by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz with assistance from Frank J. Milewski. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.