Blotter: November 2011

Bad Chemistry

In October, a Food and Drug Administration (FDA) chemist pleaded guilty before U.S. District Court Judge Deborah K. Chasanow in the District of Maryland to securities fraud in an insider trading scheme that spanned nearly five years and earned him more than $3.7 million.

According to court documents and statements, Cheng Yi Liang, 57, of Gaithersburg, Md., had access to the FDA's password-protected internal tracking system for new drug applications and reviewed that system for information relating to the progression of experimental drugs through the FDA approval process.

“In a shocking abuse of trust, Mr. Liang exploited his position as a chemist in the FDA's Office of New Drug Quality Assessment to cash in, using the accounts of relatives and acquaintances to hide his illegal trading. Now, like many others on Wall Street and elsewhere, he is facing the significant consequences of trading stocks on inside information,” said Lanny Breuer, Assistant Attorney General of the Justice Department's Criminal Division.

During the time he was employed by the FDA, Mr. Liang was required to disclose, among other things, investment assets with a value greater than $1,000 and sources of income greater than $200. While he was conducting his insider trading, Liang annually filed these forms and failed to disclose his use of the controlled accounts or his income from the illicit securities trading.

“Dogshi!t” CDO

The Securities & Exchange Commission charged Citigroup Global Markets, Citigroup's principal U.S. broker/dealer subsidiary, with misleading investors about a $1 billion collateralized debt obligation (CDO) called Class V Funding III, which was tied to the U.S housing market.

In effect, Citigroup bet against its own clients, the SEC says. Citigroup allegedly took a significant role in selecting about $500 million worth of mortgage-related assets held by the CDO, and then took proprietary short positions against those assets, just as the housing market showed signs of distress. The CDO defaulted within months, and investors lost virtually their entire investment while Citigroup made $160 million in fees and trading profits. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select, the SEC said.

One experienced CDO trader characterized the Class V III portfolio in an e-mail as “dogsh!t” and “possibly the best short EVER!” Citigroup has agreed to settle the SEC's charges by paying a total of $285 million, which will be returned to investors. The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction.

Eco-Ponzi

The Securities and Exchange Commission in early October halted a Ponzi scheme that promised investors rich returns on an eco-friendly project, nabbing $26 million from them between 2006 and 2010. The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, alleges that convicted felon Eric Aronson and others defrauded about 140 investors in PermaPave Companies, a group of companies controlled by Aronson and located on Long Island, N.Y. that sold water-filtering natural stone pavers. Many of the investors were in the construction or landscaping businesses, according to SEC allegations.

Investors were told that PermaPave Companies had a backlog of orders imported from Australia, which could be sold in the U.S. at a big markup, yielding monthly returns to investors of 7.8 percent to 33 percent. The SEC complaint states that there was, in fact, little demand for the pavers and the cost of purchasing them exceeded revenues.

Unable to pay the returns promised, Aronson and other PermaPave executives used new investments to pay earlier investors and then spent the rest themselves, purchasing luxury cars, making gambling trips to Las Vegas and buying jewelry.

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