Small Cap Analyst Barred For Illegally Cashing In On Research Reports
On Tuesday, the Securities and Exchange Commission charged a stock market analyst with insider trading prior to the publication of research reports and articles he authored with the false disclaimer that he wasn’t trading in the companies being covered. He agreed to settle the charges and be barred from trading in penny stocks for the rest of his life.
The SEC alleges that Jason Napodano, who headed a division called Zacks Small Cap Research within a larger investment research firm, misled investors in penny stocks by representing that he wasn’t trading or holding positions in the companies he was writing about while secretly trading the same stocks based on nonpublic information about the publication date of his research. In an effort to evade detection, Napodano allegedly limited his profits from each illegal trade by taking small positions and closing the positions shortly after his reports and articles were published.
In addition to a permanent penny stock bar, Napodano agreed to pay full disgorgement of his insider trading profits totaling $143,865.48 plus interest of $17,620.87 and a penalty of $143,865.48.
“Retail investors seek honest rather than conflicted research to help them make decisions about which stocks to buy and trade. It is unacceptable for analysts to represent they have no stake in the companies they’re writing about while secretly cashing in on trades in those stocks,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.
The SEC’s complaint also charges a pair of investment bankers who, along with Napodano, allegedly traded on nonpublic information that they and Napodano shared about certain small-cap issuers. According to the SEC’s complaint, Bilal Basrai and Bryce Stirton worked at Chicago-based brokerage firm LBMZ Securities and together with Napodano breached the duties of trust and confidentiality owed to microcap issuers that retained Zacks Small Cap Research to provide sponsored research or LBMZ to act as a financial adviser.
Basrai agreed to settle the charges by paying disgorgement of his insider trading profits of $39,668.37 plus interest of $4,617.89 and a penalty of $39,668.37. Stirton agreed to settle the charges without admitting or denying the allegations by paying disgorgement of his insider trading profits totaling $2,218.87 plus interest of $257.43 and a penalty of $2,218.87. Basrai and Stirton also agreed to be barred from trading penny stocks and from working in the securities industry, with Stirton having the right to reapply after five years.
In a parallel action, the U.S. Attorney’s Office for the Northern District of Illinois today announced criminal charges against Napodano and Basrai.
LBMZ Securities separately agreed to be censured and pay a $240,000 penalty without admitting or denying the SEC’s findings that the firm failed to enforce policies and procedures designed to prevent its employees from misusing nonpublic information. According to the SEC’s order, LBMZ failed to obtain or review complete trading records of many employees, including Basrai, and conducted only a minimal review of employee communications to monitor potential misuse.
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