Cautionary Tale – SEC & U.S. Congress Examining Regulations Governing Private Share Trading
SEC charges SharesPost, Felix over pre-IPO trading
By Sarah N. Lynch and Aruna Viswanatha | Reuters – Wed, Mar 14, 2012
WASHINGTON (Reuters) – U.S. securities regulators brought charges against an online trading platform and two private funds that were offering Facebook shares, the first major actions following a year-long probe into lightly regulated trading in private company shares.
The Securities and Exchange Commission on Wednesday charged SharesPost, which matches buyers and sellers of private shares, and Chief Executive Greg Brogger with failing to register as a broker-dealer before offering securities.
SharesPost and its CEO agreed to settle without admitting or denying the allegations. The company will pay $80,000 in penalties while Brogger will pay $20,000.
The SEC also brought charges against two private funds and their managers for allegedly misleading investors about hidden fees in Facebook stock offerings.
The SEC’s interest in the world of private share trading was piqued roughly a year ago as Wall Street banks and electronic markets all clamored to offer investors a chance to actively trade stakes in hot technology companies such as Facebook, Zynga and Twitter before they went public.
In a lawsuit filed in a federal court in San Francisco, the SEC alleges that Frank Mazzola and his firms, Felix Investments, and Facie Libre Management Associates, engaged in improper self-dealing and earned secret commissions.
The case against Mazzola is ongoing.
The SEC also separately filed similar administrative charges against Laurence Albukerk, and his firm EB Financial Group. Those charges alleged that Albukerk’s offering materials failed to inform investors that he was collecting additional fees by using an entity controlled by his wife to purchase Facebook shares.
Albukerk and his company also settled without admitting or denying the charges, agreeing to pay a $100,000 fine and return another $210,499 in allegedly illegal profits.
RULES UNDER REVIEW
Both the SEC and the U.S. Congress are examining whether regulations governing private share trading are outdated. The U.S. Senate is expected this week to vote on a bill that could make it easier for companies to raise capital before they file an initial public offering.
“While we applaud innovation in the capital markets, new platforms and products must obey the rules and ensure the basic fairness and disclosure that are the hallmarks of sound financial regulation,” said Robert Khuzami, the director of the SEC’s enforcement division.
Online games developer Zynga went public in December. Social networking phenomenon Facebook is preparing for an IPO expected later this year. Twitter, the short-message service, has said it is not rushing to go public.
SharesPost, which eventually registered as a broker-dealer late last year, issued a statement on Wednesday saying it had complied with all of the SEC’s requests during the probe, and that no customer has ever complained about its practices.
The company said it has “concluded that it better serves its client by entering into this administrative settlement with the SEC, and believes its time, energy and resources are best spent continuing to build what has become the industry’s largest, most active platform during a crucial phase of its growth.”
EB Financial Group said it believed the settlement with the SEC was in the firm’s best interests.
“The agreement with the SEC settles the SEC’s claims that EB Financial Group should have disclosed legally earned compensation in our offering materials, not just in response to investor inquiries and in post-closing disclosures,” said a spokesman for EB Financial.
An attorney for Mazzola did not respond to requests for comment. But in earlier interviews, Mazzola has denied doing anything wrong.
The SEC alleges that Mazzola and his firms made numerous false statements to investors about offerings in Facebook as well as Zynga and Twitter. The offering documents to investors, for instance, failed to disclose certain commissions that essentially raised prices for investors.
The SEC charges that Facie Libre sold interests in Facebook even though it lacked ownership of certain Facebook shares. Mazzola and his firms also made misrepresentations about Twitter’s revenue and led one investor to falsely believe they had acquired Zynga stock, the SEC said.
In addition to the SEC’s case, Mazzola and Felix Investments, the brokerage arm of his business, separately settled a related action on Wednesday with the Financial Industry Regulatory Authority without admitting or denying the allegations.
Under that settlement, Felix will pay a fine of $250,000 and hire an independent consultant to review the firm’s policies.
Mazzola also agreed to a $30,000 fine and he will be suspended from associating with any member firm for 15 days. Two other employees of the firm were also fined under the terms of the FINRA settlement.
(Reporting By Sarah N. Lynch and Aruna Viswanatha; additional reporting by Joseph Menn in San Francisco.; Editing by Andre Grenon, Carol Bishopric and Tim Dobbyn)