Institutional Investment Fraud Roundup: Ex-Analyst Guilty in $61.8M Insider Trading Scheme, SLUSA Precludes Investor Class Action Over Hedge Funds that Failed After Madoff Ponzi, & Dark Pool Operator Settles Subscriber Info. Breach Charges

Jon Horvath, an ex-research analyst at a New York hedge fund, has pled guilty to two counts of securities fraud and one count of conspiracy to commit securities fraud related to a $61.8 million insider trading scheme. Several other former hedge fund managers and analysts from different investment firms and hedge funds are also accused of allegedly trading key, nonpublic information about NVIDIA Corporation (NVDA), Dell, Inc. (Dell), and other publicly traded technology companies between 2007 and 2009. The information was obtained indirectly and directly from employees that worked at these companies.

Horvath admitted that when he received the insider information from the other analysts, he knew that they were all breaching their duties of loyalty. He caused certain trades to be executed based on such information. He also provided the other analysts with insider information about publicly traded companies.

In other securities fraud news, the U.S. District Court for the Southern District of New York has ruled that under California securities law, the Securities Litigation Uniform Standards Act bars a class action filed by investors in two hedge funds that failed after the Madoff Ponzi scheme was found out. The plaintiffs are contending that the defendants, investment advisor Tremont Partners and a number of affiliates, made misrepresentations and omissions connected with a covered securities’ sale. The case is Lakeview Investment LP v. Schulman.

Plaintiff Lakeview Investment LP, which is a hedge fund based in California, bought limited partnership interests in the Rye Select Broad Market Fund and the Rye Select Broad Market XL Fund LP. It invested $1.2 million in the Market Fund and nearly $24 million in the XL Fund. Tremont Partner was the sole general partner of both funds. While the Market Fund was a Madoff feeder fund, the XL Fund was set up to simulate the Market Fund’s returns with the use of swaps. Lakeview lost all that it invested in both funds after Bernard Madoff admitted to the running his multibillion-dollar scam.

The hedge fund would go on to file a class action securities case, for it and other California residents that had also bought limited partnership interests in both funds. The defendants then sought to have the lawsuit dismissed per SLUSA, which seals a loophole in the 1995 Private Securities Litigation Reform Act that lets plaintiffs file their cases in state courts to avoid its tighter pleading requirements. The district court said that all SLUSA preclusion elements were met here and it dismissed the investors’ class action case.

Meantime, eBX LLC, a dark pool operator, must pay $800,000 to settle Securities and Exchange Commission allegations that it did not keep subscribers’ information confidential. eBX LLC runs an alternative trading system LeveL ATS. According to the SEC, the dark pool operator “inaccurately informed” LeveL subscribers that data pertaining to their orders would be kept private when, in fact, contends the Commission, eBX let an outside firm run LeveL to use information about subscriber orders that hadn’t been executed (an act that violates Regulation ATS.) The regulator says that this information gave that firm’s “order routing business” a leg up as it used the data to its customers’ benefit.

Although eBX has agreed to settle, it is not denying or admitting to wrongdoing. It has, however, agreed to cease and desist from future securities violations, as well as to a censure.

Ex-SAC Analyst Horvath Pleads Guilty in U.S. Insider Case, Bloomberg, September 28, 2012

Lakeview Investment LP v. Schulman

In re eBX LLC, SEC, Admin. Proc. File No. 3-15058, 10/3/12 (PDF)

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FINRA Securities Fraud Roundup: Guggenheim Securities Fined $800K For Failure to Supervise CDO Traders, Brokerage Firm Managing TIC Securities Doesn’t Have to Arbitrate Investor Claims, & Investor Award in Morgan Keegan Funds is Upheld, Institutional Investor Securities Blog, October 12, 2012

CFTC Securities Fraud Roundup: Commissioner Bart Chilton Wants Financial System to Adopt Risk-Based Compensation System, Agency Nets $3M in Four Speculative Limits Cases, & Two Registered Futures Entities Pay $539K Over Inadequate Supervision Allegations, Institutional Investor Securities Blog, October 9, 2012

Securities Roundup: SLUSA Bars Investors’ State Securities Case Alleging Trust Account Management Negligence, Blocks Investors From Remanding Fraud Case to Puerto Rico & FINRA Enhances Proposed Rules’ Cost-Benefit Analysis, Looks at Non-Traded REIT Ads, Stockbroker Fraud Blog, October 8, 2012