Risk & Compliance

SEC: Ready to Pounce on Pension Fraud

The SEC is making an example of an insider-trading scheme at an Alabama state pension fund.
Kate PlourdMarch 7, 2008

The Securities and Exchange Commission has fired a shot across the bow of public pension funds, warning the entities that poor compliance policies could sink them. On Thursday the SEC issued a report on an insider-trading investigation at Alabama’s state pension fund that highlighted the fund’s poor compliance policies and procedures.

In a litigation release, the commission provided details about how the Retirement Systems of Alabama purchased shares of The Liberty Corp. in August 2005 while in possession of inside information about a potential acquisition of Liberty by Raycom Media Inc. Inside information is generally defined as material, nonpublic information.

The RSA was aware of the prospective merger and its “substantial” price-per-share because it provided financing for the deal, according to the SEC. When the acquisition was announced, the value of RSA’s Liberty shares reportedly increased by more than $700,000.

The SEC determined that while the RSA is a public pension fund and exempt from the federal statutes that regulate money managers, it is still subject to antifraud laws. However, it found the RSA’s main fault was a lack of oversight of investment activities. Further, because the RSA took remedial action that the commission would have sought, enforcement wasn’t necessary, noted the SEC.

However, the regulator warned other pension funds that they risk running afoul of antifraud laws if they don’t have proper compliance policies in place. “Today’s report reminds public pension funds of their obligation to prevent fraud and protect investors,” said SEC chairman Christopher Cox in a statement. “While public pension funds are exempt from most of the federal securities laws governing other money managers, they are not exempt from important anti-fraud provisions that prohibit insider trading and other manipulative and dishonest behavior that threatens the integrity of our markets.”

According to the litigation release, in June 2005, a business advisory firm that the RSA and Raycom had worked with in the past approached the RSA about financing the deal. Then in July, the advisers gave a deal presentation to the RSA investment staff and CEO.

During the presentation, the staffers asked questions that suggested they were no longer keen on the deal that valued Liberty at $1 billion — which represented a significant premium over the market price of Liberty shares at the time. Sensing their waning interest, one of the advisers told the RSA that the transaction was a done deal, noting it would be finalized “no matter what,” said the SEC. What’s more, the adviser counseled the RSA to purchase Liberty stock.

According to the report, the advisers, who had no formal federal securities law experience or expertise, said the statement was viewed as a casual investment suggestion. On the advice, the RSA purchased 73,700 shares of Liberty between August 10 and August 25, 2005, at an average share price of $37.14. After the market closed on August 25, the companies announced publicly that Raycom agreed to pay $47.35 per share to acquire Liberty.

A representative from the RSA did not return a phone call for comment at press time. However, the SEC release noted that the RSA cooperated in the investigation. In fact, after the SEC investigation revealed the individuals that sold the Liberty shares to the fund, the RSA offered to compensate the sellers for the improper sale. Including interest, the payment the RSA made to the sellers exceeded the profit it made from purchasing Liberty stock before the transaction took place, said the SEC.

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