Steven B. Hart’s stock market fraud was a pair of trading schemes he ran between 2007 and 2011 through his New York investment fund, Octagon Capital Partners LP, that produced more than $830,000 in illegal profits. The SEC sued him in December 2012, and he settled the same day for $1,329,228 and accepted a permanent bar from the securities industry. He was later criminally charged for impersonating his boss on calls with SEC attorneys and lying under oath during the investigation, and he served four months in federal prison.
The Two Schemes at Octagon Capital Partners
Hart controlled Octagon, a small private fund, while also working as a portfolio manager at an investment management firm based in Englewood Cliffs, New Jersey. Sitting on both sides of the table let him run trades between his own fund and one of his employer’s funds.1SEC. SEC Charges Steven B. Hart With Fraudulent Trading Schemes
The first scheme was matched trading. From January 2008 through June 2009, Hart directed 31 trades in which Octagon bought shares of small, thinly traded companies at market price and then sold the same shares to his employer’s fund the next day at inflated prices. His employer’s fund would then unload the shares on the open market at a loss. Octagon pocketed $586,338; his employer absorbed the difference.1SEC. SEC Charges Steven B. Hart With Fraudulent Trading Schemes
The second was insider trading. Between June 2007 and March 2011, 19 different companies confidentially approached Hart about investing in their securities offerings, including PIPEs, registered direct offerings, and confidentially marketed public offerings. Each time, he agreed to keep the information secret and not trade on it. Each time, he traded on it anyway, directing purchases or short sales for Octagon based on what he had learned. That produced another $244,733 in illegal gains. On at least two occasions, he also signed securities purchase agreements falsely representing that Octagon had not traded the issuer’s stock before the offering was announced.2SEC. SEC Charges New York-Based Fund Manager in Matched Trading and Insider Trading Schemes1SEC. SEC Charges Steven B. Hart With Fraudulent Trading Schemes
The SEC Settlement and Industry Bar
The SEC filed its civil complaint in the Southern District of New York on December 11, 2012. Hart settled the same day without admitting or denying the allegations, agreeing to a permanent injunction and to pay a total of $1,329,228: $831,071 in disgorgement matching the full illegal gains from both schemes, $103,424 in prejudgment interest, and a $394,733 civil penalty. Final judgment was entered two days later.3Courthouse News Service. Trader Settles With SEC for $1.3 Million4FINRA. BrokerCheck Report for Steven Brett Hart
On December 20, 2012, the SEC issued an administrative order that Hart consented to, permanently barring him from association with any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization. Any future application to re-enter the industry could be conditioned on full satisfaction of the disgorgement and any related arbitration awards.5SEC. In the Matter of Steven B. Hart, Release No. 3524
Impersonating His Boss to the SEC
The criminal case grew out of what Hart did while the SEC was still investigating. In December 2009, SEC attorneys were trying to reach the president of Hart’s investment management firm. Hart intercepted the calls and, over three of them, impersonated the president and other employees to build a story that would make his trading look authorized.6U.S. Department of Justice. Manhattan U.S. Attorney Announces Charges Against Former Investment Management Firm Employee
On December 9, 2009, posing as the firm’s president, Hart told an SEC attorney that the president was aware of Hart’s improper trading, wanted to keep him on as an employee, and had personally approved the matched trades as a way to dispose of restricted shares. Two days later, still posing as the president, he told two SEC attorneys that Hart was a “valued employee” whose contributions to the firm outweighed the losses from his trading, and that Hart had disclosed his use of material nonpublic information, which the president supposedly regarded as a “one-time mistake.” Hart also gave false sworn testimony to the SEC during the investigation.7U.S. Department of Justice. Former Investment Manager Employee Sentenced to Four Months in Prison8U.S. Department of Justice. Former Investment Manager Employee Pleads Guilty to Obstruction and Perjury
Guilty Plea and Four Months in Prison
The U.S. Attorney’s Office for the Southern District of New York announced charges on February 17, 2015. Hart initially pleaded not guilty, then reversed course on March 13, 2015, pleading guilty before U.S. District Judge Katherine Polk Failla to obstruction of justice under 18 U.S.C. § 1505 and perjury under 18 U.S.C. § 1621. He faced a maximum of ten years.6U.S. Department of Justice. Manhattan U.S. Attorney Announces Charges Against Former Investment Management Firm Employee8U.S. Department of Justice. Former Investment Manager Employee Pleads Guilty to Obstruction and Perjury
On August 6, 2015, Judge Failla sentenced him to four months in prison on each count, running concurrently, followed by two years of supervised release. Hart was released from custody in March 2016.7U.S. Department of Justice. Former Investment Manager Employee Sentenced to Four Months in Prison9CourtListener. United States v. Hart, Case No. 1:15-cr-00084