Mar-15-2012

SEC Cracks Down on Pre-IPO Trading

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Following a yearlong probe of the shadowy trading practices in private shares of Silicon Valley's newest superstars, the Securities and Exchange Commission slapped a litany of fraud allegations against controversial broker Frank Mazzola for a trading scam based on fake and rigged pools of private shares. The SEC accused him and entities he controlled -- including Felix Investments -- of skimming secret and illegal commissions, self-dealing and that he flatly "lied about amount of stock the funds actually held." More than $70 million was improperly raised from hundreds of investors who were misled in some cases into believing they owned actual private shares of the tech companies ahead of the outfits' successful initial public offerings, the SEC said. Mazzola said he'd fight the accusations. The SEC wants him to pay penalties and disgorge unspecified gains from the actions. Collared in the SEC crackdown was SharesPost, which electronically matched buyers with private shares held by others in non-public companies such as Facebook. The SEC said Mazzola, 44, of Upper Saddle River, NJ, defrauded one investor by saying he owned private shares of Zynga when he had none at all. [1] The charges are the culmination of at least two years of a steadily building wave of interest in private shares of hot companies like Facebook, Twitter and Zyngaas well as steadily increasing scrutiny from the SEC. VentureWire and Venture Capital Dispatch wrote about one of the named managers, Frank Mazzola, and his firms Felix Investments and Facie Libre Management Associates, when they filed a lawsuit against another popular trading platform, SecondMarket, in June 2011, as well as when they sent an overheated email pitch to potential investors in January 2011 about a Twitter-focused fund Felix Investments was raising. Back in November 2010, we wrote about Laurence Albukerk and his firm when it was raising its fund. That was just the latest in a line of funds that were gaining traction buying up pre-IPO private shares, despite some concerns that these types of fundsmany of which were pitched to professionals who were not necessarily professional investors were potentially risky investments due to a relative lack of transparency. [2] "Investors in Albukerk's two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials," the SEC said. It said Albukerk and EB Financial, without admitting or denying the SEC's findings, had agreed to pay $310,499, including a penalty of $100,000. Frank Mazzola of Felix Investments and Facie Libre Management Associates face similar charges and the case against him and his two funds continues, the SEC said. The SEC alleged that Mazzola and his firms had earned "secret commissions" above the five per cent disclosed in offering materials on their acquisition of Facebook stock. They "misled one investor into believing a Felix fund had successfully acquired stock of Zynga" and "made false representations about Twitter's revenue to attract investors to their Twitter fund," the SEC said. [3] "Investors in Albukerk's two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials," the SEC said. EB and Albukerk neither admitted nor denied the charges, but they paid a total of $310,499 to settle. The SEC also charged Frank Mazzola and two of the funds he helms, Felix Investments and Facie Libre, with "improper self-dealing" -- making "secret commissions" on their purchases of Facebook stock. They were also charged with making false statements to investors, including allegedly lying about Twitter's revenue and about buying stock in FarmVille-maker Zynga. That case has not been settled. [4]

Separately, the SEC is charging Frank Mazzola and his two firms Felix Investments and Facie Libre Management Associates for engaging in "improper self-dealing -- earning secret commissions above the 5 percent disclosed in offering materials on the funds' acquisition of Facebook stock and on re-sales of fund interests to new investors." Mazzola is also accused of lying to investors about shares his firms said they had bought in Zynga and Twitter. "The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors," according to the SEC filing. "They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares." [5] See the consent order here. Through his firms Felix Investments and Facie Libre Management Associations, the SEC says, he engaged in what it calls "improper self-dealing," including earning commissions on the sale of Facebook shares that were above the 5 percent disclosed in marketing materials. The hidden charges effectively meant that investors paid more for their shares. The complaint also says that Mazzola's firms misled investors, telling them in one case that it had acquired shares of social gaming concern Zynga when it had not, and in another instance, misstating the number of investors participating in its Twitter fund. [6]

The hidden charges increased what investors paid for Facebook stock, according to an SEC press release. He also sold Facie Libre fund interests knowing the fund didn't own certain Facebook shares, the release says. According to the complaint, Mazzola and his firms also misled investors about other funds they formed to invest in other pre-IPO companies, including Zynga and Twitter. The complaint against Albukerk says he charged investors a mark up beyond the fees he disclosed 5% fee for an initial investment and a 5% fee when the shares were distributed upon a Facebook IPO using an entity controlled by his wife to purchase the Facebook stock. [7] The SEC alleges that Mazzola, who lives in Upper Saddle River, N.J., and his firms created two funds to buy securities of Facebook and other high profile technology companies. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. [8] The agency said Mazzola and his firms set up two funds to buy shares of Facebook and other prominent technology companies. They earned "secret" commissions on buying and selling the stock that exceeded the 5 percent level disclosed in offering materials, according to the SEC. The hidden charges effectively raised the prices paid by investors for Facebook shares because Mazzola and the firms didn't have an incentive to negotiate a lower price for investors, the agency said. The SEC also alleged that Mazzola and the firms misled an investor into believing that a fund had acquired Zynga stock when it hadn't, and made false representations about Twitter's revenue to lure investors to their Twitter fund. [9]

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. [10] The charges end a year-long investigation by the SEC and are a milestone in the fast growing but still emerging market in private company stock trading. Investors have been pouring into this market particularly in hopes of buying shares of consumer Internet names such as Facebook and Twitter. A number of firms in recent years have created "special purpose vehicles" or pooled funds specifically to purchase stock in one or more private companies such as Facebook. [11]

Laurence Albukerk and his firm, EB Financial, will pay about $310,000 to settle the S.E.C. charges. The S.E.C. also accused Mr. Albukerk of hiding fees from investors and using a separate entity owned by his wife to buy Facebook stock and to resell those shares to EB Funds at a higher price. That system apparently allowed Mr. Albukerk to extract additional profits and hide the costs from investors. "EB Financial Group believes this settlement with the S.E.C. is in the firm's best interests and we are pleased to put this matter behind us," the company said in a statement. "Furthermore, based on market prices at the time of their investment and today, each investor's investment in our funds appears profitable." [12] Now, however, the broker-dealer issue is academic for Sharespost, since it was approved as a broker-dealer and alternative trading system in 2011, Brogger says. EB Financial Group and its main executive Laurence Albukerk were targeted for an administrative proceeding because his firm hid compensation from investors in two Facebook funds, the SEC said. Albukerk told investors he charged 5% up front plus 5% when shares were distributed upon a Facebook IPO. But Albukerk had bought Facebook stock through an entity controlled by his wife and then sold those interests to EB funds at a mark-up, the SEC alleged. [11]

The SEC complaint also alleges Mazzola and his firms made false statements to investorsthey misled one investor, according to the SEC, into believing a Felix fund had successfully acquired stock in Zynga. As for Albukerk, the SEC alleges he and his firms "hid from investors significant compensation earned in connection with two Facebook funds they managed." Albukerk and EB Financial have consented to entry of a SEC order finding that they violated the Securities Act of 1933 and the Investment Advisers Act of 1940. [2] Finra has imposed a fine of $250,000 on Felix and a total of $80,000 in fines on Mazzola and other representatives of the firm. It has also asked that Felix hire an independent consultant to review its policies and procedures, according to the document. Albukerk and his firm hid from investors compensation earned in connection with two Facebook (FB) funds they managed, according to the SEC. They charged investors a markup after using an entity controlled by Albukerk’s wife to buy Facebook stock before acquiring interests for his EB Funds, the SEC said. [13] The funds involved raised more than $70 million from investors. In the first case, the SEC has charged New York-based Felix Investments LLC, and Frank Mazzola of Felix with "improper self-dealing," that is, earning secret commissions on deals funds above the 5% that investors thought they were paying for Facebook stock. [11] Chester Higgins Jr. /The New York Times Frank G. Mazzola. In the case of Felix Investments, regulators are accusing Mr. Mazzola and his firm of taking secret commissions from the sellers of private shares, in addition to his firm's disclosed commissions. By taking commissions from both investors and sellers, Felix was not trying to get the lowest prices for its investors, according to the S.E.C.' s statement. The S.E.C. also accuses Felix Investments, a brokerage firm based in New York, of misleading investors with false information and selling stakes in one of its Facebook funds without fully disclosing how many shares the fund held. [12] In December 2010, the S.E.C. began to look more closely at secondary market trading, which flourished as enthusiasm rose for a new wave of social media companies. As investors eagerly bought shares in these private start-ups, regulators scrutinized brokers and studied how they attracted clients and extracted fees from transactions. In the case of Felix, regulators are accusing Mr. Mazzola and his firm of taking secret commissions from the sellers of private shares, in addition to the fees they received from investors. Taking commissions from both sides gave Felix no incentive to get the lowest prices for its investors, according to the S.E.C.' s statement. The S.E.C. also accused Felix of misleading investors with false information and of selling stakes in one of its Facebook funds without fully disclosing how many shares the fund held. [12]

SharesPost, based south of San Francisco in San Bruno, was founded in 2009 and said it did $184 million in transactions last quarter with a matchmaker approach for buyers and sellers. SecondMarket, which said it is not a subject of the SEC probe, began offering a trading platform for private stock in 2008, and processed more than $500 million in such deals last year. Both work closely with the companies whose stock they deal, and SecondMarket won't allow any transactions in shares of companies that object. SecondMarket said a third of its sales volume last year came from "asset managers," including funds dedicated to buying up a single company's stock. Another 9 percent came from funds devoted to owning stock in a series of private companies. Gary Ream, a sporting goods executive who invested $100,000 through Felix for Facebook shares in early 2010, said he never saw any financial statements from the company. Instead he listened to a telephone presentation by Felix and followed his gut instinct. "We sat through a conference call and they laid out where they were," he said. Mazzola says that Felix does not claim to have any special access to inside information for its clients. [14] Felix, the New York brokerage firm, was an early player in the trading of shares of private companies, raising capital from clients to invest in "Facebook funds" or "Twitter funds." It aggressively accumulated shares of the hot social-networking companies. The firm cold-called Facebook employees to try to get them to sell their shares, and promoted their offerings in e-mails to prospective clients. According to the Financial Industry Regulatory Authority, Frank G. Mazzola, the chief executive of Felix, received a Wells Notice from the both the S.E.C. and Finra last year. [15]

Federal regulators are close to bringing cases against two brokerage firms that trade stocks of privately held companies, the first legal actions resulting from a yearlong investigation into the buying and selling of shares of closely held Internet start-ups. The Securities and Exchange Commission is preparing civil charges against Felix Investments, a Manhattan-based broker-dealer that was among the pioneers in the trading of social-networking companies, according to a person with direct knowledge of the inquiry who requested anonymity because he was unauthorized to discuss it publicly. Felix has raised pools of money from outside investors who wanted to buy shares of Facebook, Twitter, LinkedIn and Zynga before they became publicly traded. The firm aggressively marketed its funds, sending e-mails to potential investors. Last year, the firm e-mailed its clients that Twitter was a "must buy." [15] CHARGES AGAINST FUND MANAGERS: Federal regulators filed charges against two managers of investment funds that buy stocks of privately held Internet companies like Facebook. They were accused of misleading investors and failing to disclose fees. ONLINE EXCHANGE FOR HOT STOCKS: In addition the Securities and Exchange Commission settled charges with SharesPost, an online exchange for trading stock in companies before they go public, and its CEO. The market for that kind of stock has been growing fast, and the SEC has been investigating it for a year. [16]

Federal regulators are cracking down on an obscure but booming market for trading shares in companies before they go public. The Securities and Exchange Commission brought charges against two money managers, alleging they misled and overcharged investors on funds formed to buy shares of Facebook Inc., Twitter Inc. and other social-media companies. [17]

The Securities and Exchange Commission (SEC) filed charges against online trading platforms and private funds that were selling private shares in Facebook. [18] It looks like the Securities and Exchange Commission's yearlong investigation into trading private shares on the secondary market may finally be coming to a close. Yesterday afternoon, Bloomberg first reported that the SEC is preparing to bring civil charges against Felix Investments, a Wall Street broker-dealer perhaps best-known for its twin funds Facie Libre 1 and Facie Libre I I -meaning face book in Latin. [19] The Securities and Exchange Commission on Wednesday detailed charges against two investment funds created to buy up shares of Facebook Inc. and other companies ahead of their initial public offerings, part of a widening investigation into the practice. The agency charged Frank Mazzola, as well as Felix Investments LLC and Facie Libre Management Associates LLC, with engaging in improper self-dealing that earned the funds commissions above the 5% disclosed in their offering materials. [20]

Felix and co-owner Frank Mazzola were sued Wednesday by the Securities and Exchange Commission, which accused Mazzola of taking hidden commissions and misleading investors about how many Facebook shares Felix funds had been able to buy. Carmel's phone message had surfaced in a now-settled lawsuit by his former employer, Advanced Equities, which objected to him calling its customers after joining Felix. Carmel, who is not accused of any wrongdoing, said in an interview that he was not selling anything at the time. "I didn't know them," he acknowledged, but added: "It was just to introduce myself." [14] The Securities and Exchange Commission today charged two managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms with misleading investors and pocketing undisclosed fees and commissions. [8] After a yearlong investigation into the fast-growing online secondary markets for private company shares, the Securities and Exchange Commission has charged two fund managers with misleading investors and racking up undisclosed fees and commissions. [21]

As part of that probe, the Securities and Exchange Commission also announced charges against two private funds and their managers for allegedly misleading investors about hidden fees in Facebook stock offerings. [22] SharePost settled with the SEC, paying $80,000 in penalties. The SEC is charging two private funds and their managers with misleading investors in their offerings of Facebook stock. [18] One manager, Frank Mazzola, created two funds to buy shares in Facebook and other high profile technology companies, the SEC said today. Mazzola allegedly pocketed more than the 5% percent management fee he ostensibly charged for acquiring Facebook stock and selling the equity to new investors, the SEC said. [21] 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. [10] 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. [10]

The pools enabled more people to get shares in popular start-ups without forcing the firm to file public financial disclosures -- a requirement for companies with more than 499 shareholders. SecondMarket and SharesPost said last year that the SEC had requested information from them about the so-called pre-initial public offering pooled investment funds. Trading on those exchanges is reserved for so-called accredited investors -- people with at least $1 million in assets or $200,000 in annual income -- and a basic premise of securities laws is that they are sophisticated enough to fend for themselves without regulators' protection. [23] The top U.S. securities regulator, which has been investigating the trading of equity in closely held companies for more than a year, will also take action regarding SharesPost Inc., a marketplace for trading equity in closely held startups, said two people, who asked not to be identified because the moves haven't been announced. The SEC is probing whether the trading leaves investors open to fraud because closely held firms aren't required to disclose key figures such as revenue, cash flow and debt obligations, and frequently carry restrictions, including on share sales. [23] The agency has been scrutinizing trading in closely held companies such as Facebook, which has filed to sell shares in the largest initial public offering of an Internet company. The SEC is examining whether the trades expose investors to fraud because the companies aren’t required to disclose financial data, including revenue, cash flow and debt obligations, and frequently carry restrictions, such as limits on share sales. [13]

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. 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. [10]

The fines were due to the firm's facilitation of securities transactions, before it acquired a broker-dealer firm and its membership was approved by the Financial Industry Regulatory Authority (FINRA). The SEC announced the action as part of a larger enforcement effort over firms trading private company shares without proper clearances from the SEC. The SEC said that the newly emerging secondary marketplace for pre-IPO stock "presents risk for even savvy investors", and that SharesPost "skirted" important broker-dealer provisions in its operations. [24] The SEC also settled Wednesday with two other firms, Sharespost and EB Financial Group. Sharespost, which provides a platform for trading in private company stock, has entered into a settlement with the SEC regarding its past actions in 2010 to 2011. [11]

Albukerk and EB Financial settled without admitting charges and agreed to pay fines and return illegal profits. In Dec. 2010, the SEC started its probe into the way secondary markets such as SharesPost offer stock in private tech companies. [18]

According to a source familiar with the situation, the SEC's interest in EB relates to pricing. It's tricky, because the firm's exchange fund products basically are comprised of shareholders in hot private companies, who contribute shares rather than cash. EB is the one that values those shares upon acquisition, with theoretical incentive to mark stock higher if the investor is less enthusiastic, and also sells the shares via private transactions. [25] The SEC is no doubt concerned about that. Felix creates "special purpose vehicles," or pooled funds created to buy shares in one or more large private companies, such as Facebook or Twitter. Felix was one of the firms relatively early to buy significant blocks of secondary stock of companies such as Facebook, creating funds with Latin-sounding names like "Facie Libre" to buy into Facebook and "Pipio" to buy into Twitter. [26]

New York-based Felix creates pools through which investors can purchase shares of non-public companies, including Facebook and Twitter Inc. The SEC also sued another of Mazzola’s firms, Facie Libre Management Associates LLC, in the matter. [13]

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. Another manager, Laurence Albukerk, and his firm EB Financial Group, will settle similar allegations by the SEC and pay a $100,000 penalty. [22] Frank Mazzola of Felix Investments and Facie Libre Management Associates and Laurence Albukerk of the EB Financial Group were accused of misleading investors and pocketing undisclosed fees and commissions. [27]

SharesPost and EB Financial have settled the charges, while the S.E.C. is pursuing a legal case against Felix Investments, a Manhattan brokerage firm, and its chief executive, Frank G. Mazzola. [12] The Securities and Exchange Commission said Wednesday that it had filed civil charges against three firms that trade the shares of privately held technology companies: Felix Investments, EB Financial and SharesPost. [12]

The U.S. Securities and Exchange Commission (SEC) also said it was pursuing charges against the manager of two other private investment funds dealing in shares of Silicon Valley companies which have yet to go public. [3] The SEC separately announced charges against two managers of private investment funds dealing in shares of Silicon Valley firms. [27]

Before companies cross that milestone, investment funds can try to buy shares privately -- for example, from former employees. Such investments are especially risky because investors don't have access to the kind of detailed financial reports that publicly traded companies issue. Neither Mazzola nor a lawyer the SEC said is representing him responded to requests for comment. [28] Mazzola solicited investors by falsely claiming that Facie Libre was "Facebook-approved" and thus more likely to obtain Facebook shares, the SEC said. The SEC said, a Facebook attorney had warned Mazzola not to make any such claim. At times, Mazzola was stymied in his efforts to acquire shares of Facebook and another company, Zynga, but allowed investors to believe otherwise, the SEC said. [28] Frank Mazzola, 44, who allegedly created funds that raised tens of millions of dollars to invest in shares of the companies, was charged with civil securities fraud. Among his alleged violations: telling investors his funds owned Facebook shares when they did not, collecting hidden fees and giving investors false information about Twitter's revenue -- a closely held secret that the privately held company was not required to disclose. [28] The agency alleges that Mazzola sold various pre-IPO shares in the secondary market, including Facebook, but mislead investors about how much commission he was earning, participated in undisclosed self-dealing, lied about the amount of stock the funds actually held and misstated material facts about the companies to attract potential investors. He is currently preparing a Wells submission to the staff in which he will aggressively defend himself in this matter. [29] In written offering materials for the funds, Albukerk told investors he charged only a 5 percent fee for an initial investment and a 5 percent fee when the shares were distributed to fund investors upon a Facebook IPO. However, Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Funds while charging investors a mark-up. [8] Larry Albukerk, and his firm EB Financial Group, were charged for similar crimes, including pocketing secret commissions and lying to investors. "Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Fu nds while charging investors a mark-up. [5]

The SEC launched administrative proceedings against Laurence Albukerk and his management firm EB Financial Group as well as SharesPost, an online platform. According to SEC claims, Albukerk also hid his compensation in connection with two Facebook funds he managed. He settled with the SEC for $210,499 and a penalty of $100,000. [29] Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000. SharesPost and its CEO, Greg Brogger, have consented to an SEC order finding that they violated the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. [2] Without admitting or denying wrongdoing, Albukerk and EB Financial agreed to pay $210,499 in "disgorgement and prejudgment interest" plus a penalty of $100,000. "EB Financial Group believes this settlement with the SEC is in the firm's best interests and we are pleased to put this matter behind us. [11] Albukerk and EB Financial agreed to pay combined restitution plus interest of $210,499 and a $100,000 fine. They neither admitted nor denied the allegations. In a statement, EB Financial said it "believes this settlement with the SEC is in the firm's best interests and we are pleased to put this matter behind us." [9]

Albukerk and EB Financial, without admitting or denying the SEC's findings, agreed to pay $310,499, including a penalty of $100,000. [27]

In a separate lawsuit, the SEC charged Laurence Albukerk and EB Financial Group with not properly disclosing how additional fees were collected as part of private stock offerings. [18] As Fortune first reported Tuesday, ahead of the SEC's announcement, the second case is against EB Financial Group and managing director Laurence Albukerk. They were charged with hiding mark-ups on their Facebook investments. [4] The SEC reached a settlement with one of the managers it charged, Laurence Albukerk, and his firm EB Financial Group. [9] The SEC also separately filed similar charges in the agency's administrative court against Laurence Albukerk, and his firm EB Financial Group. [7]

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. Based on market prices at the time of their investment and today, each investor's investment in our funds appears profitable. [11] The S.E.C. said fund managers at Felix and EB Financial had misled investors and reaped "undisclosed fees and commissions." [12]

Mazzola and his firms also misled an investor into believing a Felix fund had acquired stock of Zynga Inc. (ZNGA) and made false representations about Twitter’s revenue to attract clients, the SEC said. In his public broker filings, Mazzola said that he acted appropriately and “will aggressively defend himself. [13] The fees essentially raised prices investors paid for Facebook stock by creating a disincentive for Mazzola and his firms to negotiate for investors, the SEC said. [13] According to the SEC, Mazzola and his firms engaged in self-dealing, earning secret commissions above the disclosed 5 percent on two funds’ purchases of Facebook stock and resales to new investors. [13]

The SEC complaint, filed in San Francisco, also alleges that Mazzola and associates made false statements to investors in other funds. Felix "misled" one investor into believing Felix had acquired stock of Zynga, the SEC alleges. [11] The SEC complaint alleges Mazzola sold the pre-IPO tech stocks through Felix as well as through Facie Libre Management Associates, his other firm. Prior to launching his own firm, Mazzola was a senior managing director and sales manager at Advanced Equities from May 2006 to September 2009. [29] 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. [7] Demand for some closely held technology companies has surged in recent years, with secondary-market transactions reaching $9.3 billion in 2011 from $4.6 billion a year earlier, according to Nyppex LLC. Frank Mazzola, principal and chief executive officer of New York-based Felix Investments, received a so-called Wells notice from the SEC in August, saying investigators intended to sanction him for violating securities laws in "certain sales activities in 2010," according to his public broker records. [23]

New York-based Felix Investments creates pools through which investors can purchase shares of non-public companies, including Facebook Inc. and Twitter Inc., while SharesPost helps match buyers and sellers of the equities. [23] Greg Brogger, founder and president of SharesPost, commented: "With the launch of the ATS and acquisition of our broker dealer, SharesPost is better able to directly facilitate transactions in private company shares, expanding the range of services we provide to our clients. This also represents an important step in the evolution of the private capital markets." With a total secondary sales volume of $180 million in the fourth quarter of 2011 - not including primary capital raised for client companies - SharesPost has clearly emerged as the most robust private company marketplace both by number of transactions and dollar volume. The integration of SharesPost Financial Corporation into the SharesPost platform is expected to only further enhance SharesPost's service offering to its private company clients, the fastest growing private companies. SharesPost is the market for today's fastest growing companies, their shareholders and qualified investors. [30] The charges specifically relate to laws about "soliciting investors," the New York Times reported. The secondary market in private company stock has boomed in recent years as initial public offerings have been delayed for many private companies. Buying interest, meanwhile, has spiked particularly for hot consumer Internet names such as Facebook. The purchasing of private company stock however has been fraught as much basic financial information about private companies is not available to most if not all buyers on private markets, even if they are “accredited” investors. [26]

Last year, some $9.3 billion in stock in private companies changed hands, up four-fold in two years. Ownership in such companies was historically limited to venture capital funds, wealthy angel investors and early employees, but the emergence of private exchanges for non-public shares has changed the game dramatically. [14] When that changes, lawyers could challenge the legality of the transactions. In the meantime, securities law experts and veteran Silicon Valley investors say operators like Felix are gaming the system with tactics such as creating limited liability companies to hold the private shares and then selling interests in the LLCs. That sidesteps regulations barring resale of the stock itself for six months or more. [14]

In December 2010, the S.E.C. began to look more closely at secondary market trading, which flourished amid rising enthusiasm for the new wave of social media companies. As investors eagerly bought shares in these private start-ups, regulators were scrutinizing brokers and studying how they attracted clients and extracted fees from transactions. [12] The trading can also serve as a form of guerilla marketing, as reports of escalating valuations in private deals drive anticipation of a future debut on the public markets. Most CEOs - who are barred from hyping the prospects of their companies after they begin the IPO process - are glad that resellers are pushing their valuations up, said Geoff Yang of venture capital firm Redpoint Ventures, who sits on a dozen boards. Regulators say that there has been no rash of investor complaints only because most pre-IPO stocks have gained value since their purchase amid a broader rally in U.S. equities. [14] U.S. stock market regulators filed charges on Wednesday against SharesPost, which specializes in trading stock in private Internet companies such as Facebook before they go public. U.S. stock market regulators filed charges on Wednesday against SharesPost, which specializes in trading stock in private Internet companies such as Facebook before they go public. [27] 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. [10] In 1998, Arkansas regulators issued a cease-and-desist order to the firm after an agent told a customer that shares in a pre-IPO company called Cartoon Saloon would quintuple when the company went public. In 2006, Turner paid $195,000 and agreed to a consent order with New Jersey regulators who found that its agents had engaged in unsuitable trading for clients and misled them about risks. The same year, the National Association of Securities Dealers fined Turner $211,000 after two brokers sold private placements in a hedge fund without disclosing the commissions they would get from trading in its accounts. [14]

U.S. securities regulators, following a year-long investigation, announced settlements Wednesday with two companies trading in private shares of high-flying technology firms such as Facebook. [3] Securities regulators began more closely examining trading of private shares in 2010. The market formed around sellers who were largely former employees and early venture-capital backers of Facebook and other companies who were looking to sell their stakes that had sharply appreciated in value. [15]

The Securities and Exchange Commission has just sued SharesPost, a market for trading shares of private companies. [31] Updated: The Securities and Exchange Commission has brought cases against three entities after an investigation of private company stock trading in companies such as Facebook. [11] After a yearlong investigation into the trading of private-company stock, the Securities and Exchange Commission filed charges on Wednesday against four firms involved in the shadowy secondary market. [4]

The U.S. Securities and Exchange Commission is preparing sanctions against Felix Investments LLC over trading of private-company shares, the first action to emerge from a broad investigation of transactions involving non- public startups, two people with knowledge of the matter said. [23] March 13 (Bloomberg) -- Bloomberg's Sheila Dharmarajan reports that the U.S. Securities and Exchange Commission is preparing sanctions against Felix Investments LLC over trading of private-company shares, the first action to emerge from a broad investigation of transactions involving non-public startups, two people with knowledge of the matter said. [23]

Carmel, who does not dispute making the call, was touting companies that were not publicly traded. His employer, Felix Investments, was not a typical investment firm, but one capitalizing on a new and rapidly growing realm for U.S. markets: trading in the shares of privately held companies. It hasn't taken long for that business, super-charged by the hunger for Facebook shares, to become problematic. [14]

The commission says that Albukerk and his firm failed to disclose compensation earned from two funds consisting of Facebook shares. Having told investors he charged only 5 percent beyond an initial investment and 5 percent upon distribution, he charged a fee when buying shares in an entity controlled by his wife that had bought some Facebook shares and then charged his own investors a mark-up that wasn't disclosed. [6] The SEC alleged that Albukerk and his firm concealed from investors substantial compensation gained from managing two Facebook funds. [9] The SEC alleges that Mazzola and his firms made numerous false statements to investors about offerings in Facebook as well as Zynga and Twitter. [10]

"We are serving a growing need," David Weir, the former chief executive of SharesPost, said in an interview in December 2010 when news emerged of the S.E.C.' s interest in the market. "A decade ago, these companies would be public by now. Investors can now buy into these businesses and sellers can exit their already valuable stakes." S.E.C. rules helped scuttle a deal last year in which Goldman Sachs offered its clients in the United States a chance to invest in Facebook. [15] "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, Director of the SEC's Division of Enforcement. "Fund managers must fully disclose their compensation and material conflicts of interest. Investors deserve better than the kind of undisclosed self-dealing present in these cases," said Robert Kaplan, Co-Chief of the SEC Enforcement Division's Asset Management Unit. SharesPost and affiliated broker-dealers also created a commission pool that was distributed by an executive to employees who were representatives of these broker-dealers. [31]

Marc Fagel, director of the SEC's San Francisco Regional Office, said the "newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors. "Broker-dealer registration helps ensure those who effect securities transactions can be relied upon to understand and faithfully execute their obligations to customers and the markets," Fagel said. "SharesPost skirted these important provisions." In a statement, SharesPost, which was founded in 2009, said it had been in discussions with the SEC since December 2010 and had conduced an "exhaustive review" of all of its practices and transactions. [32] The SEC is also close to a settlement with Sharespost, a private company secondary marketplace, on the issue of private company stock, the Times reported. [26] SharesPost will pay $80,000 and Brogger will pay $20,000. A SharesPost spokesperson told VatorNews that the company was neither confirming or denying the SEC's charges, but "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." [5] SharesPost will pay $80,000 to resolve the SEC claims and company President Greg Brogger will pay $20,000. [13]

SharesPost and its president, Greg Brogger, neither admitted nor denied wrongdoing but agreed to pay penalties of $80,000 and $20,000, respectively, the SEC said. [28] SharesPost and Brogger, who is a resident of Park City, Utah, agreed to pay penalties of $80,000 and $20,000, respectively, the SEC said. [33] According to a release from the SEC, SharesPost is paying $80,000, and Brogger is paying $20,000 in fines, as part of an SEC order which found that SharesPost and Brogger violated Section 15(a) of the Exchange Act of 1934. [24] SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. [31]

On Wednesday, one of the largest exchanges where pre-initial public offering stock can be traded, SharesPost, was censured by the SEC and fined $80,000. [14] The moves would mark the first action by the SEC concerning the trading of stock in non-public startups including Facebook, which has filed to sell shares in the largest-ever technology initial public offering. [23] The SEC charges resulted from a year-long investigation into the growing business of trading pre-initial public offering shares on the secondary market. [27] The charges stem from the SEC's yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market. [31]

The charges are the culmination of a investigation that has been going on for a year by the SEC into the trading of pre-IPO shares. [5]

The cases stem from a year-long SEC investigation of trading in shares of companies that have not yet undergone initial public offerings, or IPOs, the agency said. The cases may be noteworthy for another reason: the fact that there are not more of them. [28]

The SEC alleged that various players involved in trading the private shares committed violations. [28] The SEC is also reportedly "nearing a settlement" with SharesPost, an online platform for selling private shares,. [19]

Last April, the SEC proposed rule changes to the way the law treats shares of private companies. These rules were created in part because of the various loopholes private companies have attempted to use to keep from reaching the 499 shareholder threshold that forces a company to go public. [18] In Felix's case, according to the SEC suit, the company's "false and misleading solicitations" included claims that it was buying Facebook shares at $66 when that deal never closed. [14] If you already own Twitter you need to add to your position. In another more recent email sent on January 21, 2012, just before Facebook filed its IPO, which I wrote about, Felix encouraged people to purchase Facebook stock. It also said the firm believes Facebook will be "north of $100 per share by November. [26] Facebook shares have represented a large proportion of the booming private-shares market. The eight-year-old social network is aiming to go public this spring, in an initial public offering of stock that analysts believe could give it a market value of at least $100 billion -- more than Yahoo, AOL and Hewlett Packard Co. combined. [9]

The government's actions come as the so-called secondary market for private stock has reached a crossroads. Facebook, the company whose shares have driven much of this market's growth, recently filed to list its shares on a public exchange. Other companies that were actively traded on these private exchanges -- like Zynga, Groupon and LinkedIn -- have already gone public. [15] The charges capped a yearlong effort to investigate the workings of so-called secondary markets, where firms trade privately owned pre-IPO shares and options of companies like Facebook that have not yet completed initial public offerings. [6] The charges cap a yearlong investigation into the frenzied trading of shares in still-private Internet companies like Facebook and Twitter. [12]

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As secondary trading has increased, investment firms including Felix have set up pooled funds, letting several wealthy investors to work as a group to buy stakes in venture- backed companies. [23] The hidden charges created a disincentive for Mazzola and his firms, Felix Investments and Facie Libre Management, to negotiate a lower price for fund investors. [21]

The men agreed to fines totaling $80,000 and suspensions from the industry for two to three weeks. FINRA said they had cold-called investors and sent mass emails without learning whether their funds would be suitable investments for the recipients. It also said a "Facebook Due Diligence Report Presented by Felix Investments," which it sent to 125 people, "was only based upon favorable, publicly available information" and that it failed to disclose that Felix had no access to Facebook financial data or management. [14]

"Strikingly, investors who purchased shares" in one of the funds "bought interests in a fund that held no Facebook shares," the SEC said. [28] The funds lied to one investor about acquiring Zynga shares and also falsely represented Twitter's revenue figures to attract interest, the SEC said. The other manager, Laurence Alburek, allegedly hid the "significant compensation" his funds earned. [21] Felix also made "false representations" about Twitter's revenue to attract investors in a Twitter fund, the SEC says. [11]

The SEC alleged the fund managers raised more than $70 million from investors. [27] The CEO was arrested and returned to jail. Advanced Equities and three of its leaders later joined three Pixelon representatives in settling an investor class-action suit for $2.6 million, though executives said Pixelon's insurance company picked up the tab. Those settling included Advanced Equities co-founders Keith Daubenspeck and Dwight Badger, who received so-called Wells Notices from the SEC this year warning of likely enforcement action over a private 2009 offering. [14] Albukerk and Mazzola together raised more than $70 million from investors, according to the SEC. [9] According to the SEC, Mazzola sent an e-mail to a potential investor in 2010 saying that "we have several senior Twitter execs as clients and we have a very good comfort level that the rev for 2010 is north of $100 million." [28]

"You have got to worry about the fly-by-night operations," said Ian Sobieski, managing director of the Band of Angels venture fund and an investor in SharesPost. "They are doing a work-around of the SEC rules." [14] The SEC alleges in the charges announced today that the firms were "misleading investors and pocketing undisclosed fees and commissions." [11] According to the charges filed on Wednesday, the S.E.C. has found evidence of brokers misleading investors and cutting hidden fees. [12]

Mazzola's firms are also charged with misleading investors about other private companies. [21] Many Silicon Valley investors support loosening regulations to make it easier for private companies to raise money. Others warn that Congress is headed toward helping to inflate a bubble in private stock. "If these markets don't get more regulated - which I think is a reasonable thing to do - they are almost certainly going to get shut down" in the wake of scandal, said Scott Sandell, a general partner at big venture firm New Enterprise Associates. [14] Executives at Advanced, which is also a big reseller of stakes in private companies, are also likely to face enforcement action, according to records on file with the Financial Industry Regulatory Authority. Regulators and some securities attorneys warn that those actions won't do much to tamp down an exploding market that is ripe for abuse. They also say a package of proposed laws that has passed the House and drawn support from some Senate Democrats and the Obama administration would make fraud easier by allowing advertisements for private stock sales and raising the maximum number of investors to 999 from 499 before public financial filings are required. [14]

SharesPost's innovative technology platform enables private companies to raise primary capital and customize liquidity programs online; provides investors access to unique investment opportunities and offers shareholders company approved liquidity. [30]

The buyers were mostly wealthy investors looking to own a piece of the next Google or Apple. Another factor that drove the growth of the private company trading was the weak market for initial public offerings after the financial crisis of 2008. [15] The other main company in secondary private company stock trading is SecondMarket. [26] Description: SharesPost makes private equity liquid by efficiently matching buyers, sellers of private company stock and giving them the information,. [5]

"With the launch of the ATS and acquisition of our broker dealer, SharesPost is better able to directly facilitate transactions in private company shares, expanding the range of services we provide to our clients. This also represents an important step in the evolution of the private capital markets." [30]

The SEC wants Mazzola to also give back the cash and face penalties. SharesPost operated as both a venue and auction platform for shares in pre-IPO companies. [21] The SEC says that Mazzola and Facie Libre sold interests in Facebook, despite owning certain Facebook shares. [18] The SEC's complaint, filed in federal court in San Francisco, says Mazzola earned "secret commissions" above the 5 percent disclosed in offering materials and sold Facie Libre fund interests "despite knowing the funds lacked ownership of certain Facebook shares." [2]

Mazzola and associates sold interests in "Facie Libre," the name of the Facebook fund, despite knowing that Felix did not have any Facebook shares to sell. [11] The white-hot demand for pre-IPO Facebook shares sparked a bevy of new funds devoted to snapping up those private shares from employees and other shareholders, as well as brisk business for marketplaces facilitating private trades. [2] Consumer interest has grown to a fever pitch ahead of Facebook's IPO. Many newly public social media and Web companies, like Groupon, Pandora and Linkedin, first traded private shares online. [21] They've been some of the most coveted investments of recent years -- pre-IPO shares of technology companies such as Facebook and Twitter -- and the demand for them has spurred the emergence of a hot new private marketplace. [28] In late 2009, Felix Investments had a plan: buy as many shares of the largest private Internet companies as quickly as possible, and keep buying. [23]

SAN FRANCISCO, March 14 (Reuters) - The voicemail from Felix Investments broker Jared Carmel sounded like a typical cold-call from an aggressive stock salesman. "What's interesting is some of the access to opportunity that we have, i.e. companies like Groupon, Facebook, we had LinkedIn before the IPO, things of that nature," Carmel told a prospect he had never met, according to court documents. [14]

For now, SEC rules clearly prohibit general solicitation for private stock sales, though not all-purpose introductions. Felix executive Carmel's phone message surfaced in a now-settled lawsuit by his former employer, Advanced Equities, which objected to him calling its customers. Felix and two of its three largest owners, Mazzola and William Barkow, along with Vice President of sales Emilio DiSanluciano, settled FINRA's accusations. [14] The case was one of three lawsuits the SEC announced today as a part of a crackdown on alleged fraud in the market for secondary shares of pre-IPO stocks. [34]

The SEC should also look into Fidelity and T-RowePrice's use of retail Mutual funds to purchase IPO stock to prop up their venture investments. [21] In a series of enforcement actions, the SEC spotlighted hazards on stock trading's new frontier. [28] "The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors," Marc Fagel, director of the SEC's San Francisco regional office, said in a statement. [28]

The nation's major securities laws were enacted after the 1929 stock market crash and a wave of interstate investment scams that bankrupted thousands of smaller investors. The laws generally forbid companies from selling stock to the public without SEC-reviewed and audited disclosure of their finances and business risks. [14] The private exchanges are more lightly regulated than public exchanges like Nasdaq and the New York Stock Exchange. That's because "retail" investors -- your average stock buyers -- can't shop on them. [4]

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"As a result of the fee and mark-up, investors in Albukerk's two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials," the commission said. [6] Separately, Laurence Albukerk of the EB Financial Group was accused of misleading investors and pocketing undisclosed fees and commissions. [3] Without admitting or denying wrongdoing, Albukerk and his firm, EB Financial Group, agreed to give up $210,499 of alleged ill-gotten gains, including interest, and to pay a $100,000 penalty. [28] EB Financial Group said it believed the settlement with the SEC was in the firm's best interests. [10] Under the terms of the settlement, EB Financial Group has neither admitted nor denied any of the SEC's claims." [11]

Our source says that the SEC believes there may have been discrepancies between sale prices and ultimate distributions to investors, and that the Agency has already reached a settlement with EB and its CEO Larry Albukerk (who has a pretty good reputation in the secondary markets). [25] Fortune has learned that the SEC also is interested in a third firm, EB Exchange Funds, and that it may already have reached a settlement. [25] The subject of the probe, Larry Albukerk, started EB Exchange Funds of San Francisco and is a broker at affiliated firm Growth Capital Services Inc. A spokesman for. [35]

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Current Felix executives Mazzola and Carmel used to work at Laidlaw, home of the Pre-Game Partners fund. They and former executive Barkow also previously worked at Chicago-based venture banker Advanced Equities, which is known for paying a premium for stakes in companies that have run into difficulty and may never go public. Unlike most venture firms, which raise money and then decide where to invest it, Advanced Equities buys stakes, adds commissions and resells to its clients. [14] Attorneys for the other defendants did not immediately respond to requests for comment. The charges against Mazzola and his firms allege he earned secret commissions above the 5% disclosed in his fund offerings. [7]

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Turner made a $25 million Facebook fund offering, according to media reports, saying it would collect 12 percent in fees and could not guarantee that it would obtain the shares. It is unclear whether the offering was ever completed. [14] "We are closing next week on our Twitter fund (Pipio Associates). This stock is series C and it is priced at $22 per share which is an implied valuation of $4.1 billion. That is just $200 million more than the value Kleiner Perkins just put their $150 million in. Our next close after this will be $26 per share. [26]

The SharesPost platform was used to create an auction process for interests in funds managed by a SharesPost affiliate and designed to buy stock in pre-IPO companies. [31] A Wells Notice typically means that the agency is planning enforcement proceedings against a firm or individual. In Finra's report, Mr. Mazzola said he believed that "he acted appropriately at all times" and that he would "aggressively defend himself in this matter." Despite the secondary market's growing pains and the transformation of some of its most actively traded companies into public stocks, the leading players say the business can grow. [15] With Facebook set to go public, there is what could only be described as a frenzy of people trying to get their hands on the stock before it makes its public debut. Unfortunately, and perhaps not surprisingly, there were at least a few investment firms ready to take advantage of people desperate to get their hands on it. [5] "We have Facebook stock at $34 which implies a market cap of about $74 billion. They will file on Tuesday "we believe" and price the IPO in May in the mid $50′s and we believe the stock will be north of $100 when we can sell in November. [26] The once-frozen IPO waters have thawed, and 2011 was jammed with splashy public debuts, including Groupon ( GRPN ), LinkedIn ( LNKD ), Zynga ( ZNGA ) and Pandora ( P ). The hottest startup of them all, Facebook, filed for a $5 billion IPO last month. That immediately set off speculation about whether the secondary market will survive. [4]

The business gained attention last year after Goldman Sachs Group Inc. halted a plan to offer as much as $1.5 billion in Facebook equity to wealthy U.S. investors. [23] Only accredited investors, like investment funds and individuals with a net worth of at least $1 million, can participate. [4] SharesPost reportedly will be accused of operating as a broker-dealer without having first obtained a broker-dealer license, while Felix Investments is reported to be in trouble for improper solicitation of investors. [25] The SEC is likely to impose a fine on Felix Investments, two of the people said. Mazzola said in the filing that he acted appropriately and "will aggressively defend himself." [23] Mazzola has denied the SEC’s claims in public broker filings. The SEC approached SharesPost in December 2010 to probe its compliance strategy, Brogger said in a telephone interview. “The exact legal question is whether or not SharesPost itself should have been a broker-dealer in 2010,” he said. “They came to the conclusion that we ought to have been a broker-dealer in 2010. [13] San Bruno-based SharesPost issued a statement confirming that it had paid $80,000 following discussions that started in December 2010, but said it "neither confirms nor denies the SEC's finding of fact or legal conclusions." [33]

The S.E.C. is also said to be nearing a settlement with SharesPost, one of a group of exchanges that has popped up in recent years to accommodate the fast-growing market for privately held shares. [15] Early last year, following the SEC's investigation, SharesPost acquired a brokerage firm and its registration was approved by the SEC and securities industry regulators. SharesPost said in a statement Wednesday it concluded "that it better serves its clients by entering into this (settlement), 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." [9] Subsequent to the SEC's investigation, SharesPost acquired a broker-dealer and its membership agreement was approved by the Financial Industry Regulatory Authority. [2] Looks like SharesPost and its CEO had to pay a fine for not following SEC ]] SEC regulations and have reached an agreement with the Financial Industry Regulatory Authority (FINRA). [31]

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SharesPost and its CEO Greg Brogger also agreed to settle the SEC charges without admitting or denying the allegations. [7] In the wake of the investigation, SharesPost acquired a company with a broker-dealer license. That move brought it into SEC compliance. [4]

Secondary markets have featured for more than a year in congressional hearings about whether regulatory requirements imposed by the 2002 Sarbanes-Oxley Act and the 2010 Dodd-Frank Act have made accessing public markets more expensive. The SEC has said it is reviewing whether its rules are too restrictive, while cautioning that a loosening of regulatory requirements could lead to investor harm. [23] There are some important exceptions, most notably the use of unadvertised private placements in which so-called accredited investors can buy shares. [14] Goldman had planned to raise a $1.5 billion pool to buy Facebook shares. [15] Albukerk also earned a brokerage fee on the acquisition of Facebook shares from the original stockholders. [8]

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Felix sends out aggressive sales pitches, which are delivered via email, among other methods. I wrote the first story in January 2011 about these emails. Felix in that email called Twitter and Facebook "absolute must have positions" and said that Twitter "will continue to trade up in price rapidly!" The firm even had the logos of companies like Facebook on its website at that time. Those were later removed. [26] Among Felix's potential customers is Pre-Game Partners LLC, created in December by investment bank Laidlaw & Co (U.K.). It also said it intends to buy stakes in private companies "such as Foursquare Labs Inc, Palantir Technologies Inc, ZocDoc Inc, Liquidnet Holdings Inc, Kabam Inc, Chegg Inc" and others, though no deals are signed. [14]

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As hot companies like Facebook grew, investors started clamoring for a piece of the action. [4] At issue is the lack of protection for investors who are largely investing blind. They are often not getting basic financial information about the companies they are investing in and have precious little knowledge about some of the vehicles they are investing through. [14]

The actions created a "disincentive" for Mazzola and his funds to get a lower price for fund investors. [11] Some investors in that market have been duped, the Securities and Exchange Commission said Thursday. [28]

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“The newly emerging secondary marketplace for pre-IPO stock presents risk for even savvy investors,” Marc Fagel, head of the SEC’s San Francisco office, said in the agency’s statement. “Broker-dealer registration helps ensure those who effect securities transactions can be relied upon to understand and faithfully execute their obligations to customers and the markets. SharesPost skirted these important provisions. [13] The best-known means of selling private stock are SharesPost and New York-based SecondMarket. [14] "There is a nearly infinite variety of things that could be wrong with a private company that you don't know anything about," said Robert Robbins of Pillsbury Winthrop Shaw Pittman, who teaches an annual joint course on private stock sales for the American Law Institute and American Bar Association. [14]

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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. [10] The SEC said, Mazzola had no information to support the revenue projection and no senior Twitter executives as clients. [28]

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The online secondary markets have emerged as a popular way to trade shares in recent years after the recession stalled many companies' plans to go public. [21]

SOURCES

1. Shadow markets - m.NYPOST.com
2. SEC Brings Charges In Wake Of Facebook Pre-IPO Feeding Frenzy - Venture Capital Dispatch - WSJ
3. US regulator crackdown on private shares
4. SEC charges SharesPost and others in Facebook trading probe - Mar. 14, 2012
5. VatorNews - SEC cracks down on SharesPost, Felix Investments
6. SEC Cracks Down On Firms Trading Facebook Pre-IPO Shares - Arik Hesseldahl - News - AllThingsD
7. SEC Charges Two Secondaries Fund Managers Over Facebook Trades And Separately SharesPost | | peHUBpeHUB
8. BizLawCentral: USA's SEC issues charges re Facebook shares / BizLawNews / Biz Law Central / Management / The Chief Officers' Network - your business advantage - The Chief Offficers' Network
9. 2 Managers of Private-Share Funds Charged by SEC - ABC News
10. US charges SharesPost, Felix over pre-IPO trading | Reuters
11. SEC Brings Cases Against Three Secondary Firms - Forbes
12. Charges Filed Against Brokerage Firms That Trade Private Shares - NYTimes.com
13. SEC Settles With SharesPost Over Private-Share Trading Probe - Businessweek
14. UPDATE 1-INSIGHT-Pre-IPO stock trading boom could be scary for investors | Reuters
15. S.E.C. Close to Bringing Cases on 2 Brokerage Firms - NYTimes.com
16. Summary Box: SEC files charges against 2 managers of funds that buy private shares - The Washington Post
17. SEC Cracks Down on Pre-IPO Trading - WSJ.com
18. SEC Files Charges Over Pre-IPO Facebook Trading
19. SEC's Yearlong Secondary Markets Investigation Reportedly Yields Charges Against SharesPost and Felix Investments | The New York Observer
20. SEC Details Charges Against Facebook-Share Brokers - WSJ.com
21. SEC Charges Two Fund Managers Over Misleading Facebook, Twitter Investments - Forbes
22. US SEC charges SharesPost, Felix over Facebook offerings | Reuters
23. SEC Said to Plan Action Over Felix, SharesPost in Stock Inquiry - Bloomberg
24. SharesPost Pays Fines To SEC | socalTECH.com
25. Exclusive: Secondary trading probe grows - The Term Sheet: Fortune's deals blog Term Sheet
26. Report: SEC Close To Bringing Cases On Two Secondary Firms - Forbes
27. PhysOrg Mobile: US regulators file charges against SharesPost
28. SEC probes trading in pre-IPO tech shares - The Washington Post
29. SEC Goes After Venture Capital B/D Over Sale of Facebook Shares
30. SharesPost Becomes Registered Broker-Dealer and Alternative Trading System | Business Wire
31. SEC SUES SHARESPOST
32. AFP: US regulators crack down on private share traders
33. SharesPost fined as unregistered broker - San Francisco Business Times
34. SEC says Bergen County man misled investors in Facebook, Twitter funds | NJ.com
35. SEC Eyes Broker Over Disclosure for Funds Holding Facebook Shares - WSJ.com



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