July 9, 2014
Today's BrokeAndBroker.com Blog offering is based upon a truly superb FINRA Office of Hearing Officers ("OHO") Decision -- and, yes, that's rare praise from me! Not only do we get a behind-the-scenes glimpse of how an insider trading investigation develops, but we also see how an industry registered person manages to step on multiple land mines as he foolishly ambles into a regulatory minefield.
Jonathan Kohanof, 31, Los Angeles, CA, started working in the securities industry in 2006 as an analyst in the financial restructuring group of FINRA member firm Houlihan Lokey Capital, Inc.; and by July 2009, he had been promoted to an associate's position, which included managing analysts and working directly with clients, who were for the most part hedge funds and private equity firms. Department Of Market Regulation, Complainant, v. Jonathan Kohanof, Respondent (FINRA OHO Hearing Panel Decision, 20110275168-01, July 3, 2014).
Kohanof had a cousin (identified as "DS" in the OHO Decision), who was a doctor and purportedly followed the market and subscribed to a stock picker service. In a role reversal, it appears that doctor DS recommended stock picks to his securities industry cousin Kohanof. During the three years leading up to the events at issue in this disciplinary case, for example, FINRA alleged that the doctor made about a dozen or so recommendations to Kohanof. Apparently, the doctor's tips were sound because Kohanof asserted that he usually accepted them without question.
In April 2011, DS recommended that Kohanof purchase stock in Volcom, Inc. (a designer and marketer of athletic apparel and accessories for young consumers) purportedly because he thought that it was a "good stock" and believed that "it's gonna go up."
On April 18, 2011, Kohanof bought 350 shares for $8,495.13; and on April 28, 2011, he bought 200 shares for $3,715.81.
On May 2, 2011, PPR SA (the French parent company to Gucci, Yves Saint Laurent, Balenciaga, and Puma) publicly announced that it would acquire Volcom at $24.50 per share; and by the close of the market, Volcom's price had increased 24%.
FINRA's Office of Fraud Detection and Market Intelligence ("OFDMI") investigated the spike in Volcom's price by focusing on the period from December 16, 2010, through the last trading day before the announced merger, April 29, 2011. OFDMI had purportedly determined that this period covered the time when material, nonpublic information about the merger existed.
On The Radar
Following its initial inquiry, OFDMI compiled a list of approximately 60 individuals and entities (including Kohanof and DS) whose trading merited further review; and on September 16, 2011, that list was sent to Volcom, PPR, and the involved investment bankers with the request that the names be circulated to anyone who had access to material, nonpublic information about the merger prior to the announcement. OFDMI requested that if anyone recognized a name, that they provide a description of the circumstances under which the listed individual or entity could have obtained advance knowledge of the merger.
SIDE BAR: Yes -- you got it; Kohanof traded a total of 550 shares at a cost of $12,210.94 and winds up on a surveillance list! All of which should put to rest that useless water-cooler wisdom that you only get snagged by large lot trades and that no regulator will bother you over chump change trades. The other lesson to learn from this revelation is that you can literally jeopardize your Wall Street career over a sum as paltry as about $12,000 -- which becomes even more foolish when you consider that Kohanof's likely profit on this position was about $3,000.
Up Close And Personal
OFDMI received a response from Volcom's outside counsel disclosing that two of its attorneys who had worked on the merger, identified only as JN and AF in the FINRA OHO Decision, had taken a weekend trip to Las Vegas on April 8, 2011, with DS and had met a cousin of DS and that cousin's friend but could not recall names.
JN disclosed that she and DS had been involved in a personal relationship from March to May 2011, but she denied divulging any information about the merger to him. JN noted that during the time of their relationship, that she had deal binders at her and at his home but did not know whether Kohanof had looked through them. In response to those disclosures, OFDMI asked JN to contact DS and inquire as to the name of the cousin she met during the Las Vegas trip, but the lawyer declined citing the end of their relationship and the fact that they were no longer communicating.
OFDMI obtained DS's investment account statements and confirmed that he had purchased Volcom shares on Friday, April 29, 2011. Also, OFDMI obtained information from a commercial service suggesting that Kohanof and DS might be related
Outside Counsel Steps In
By letter dated January 4, 2012, OFDMI contacted FINRA member firm Houlihan's Chief Compliance Officer and asked for an informal telephone interview of Kohanof for the purpose of exploring his Volcom trades. By letter dated January 5, 2012, the CCO forwarded the OFDMI request to Houlihan's outside regulatory counsel, Andrew Weinstein, who spoke that day with Kohanof. During the conversation between Kohanof and Weinstein, Kohanof purportedly asserted that although someone had recommended the Volcom purchase to him, he could not recall that person's name.
The Informal Interview
On January 10, 2012, Kohanof, two attorneys representing him, Weinstein, and OFDMI staff participated in a telephone interview that was not transcribed and Kohanof was not sworn in. During that so-called informal interview, Kohanof identified DS as his cousin, noting that they grew up as brothers and were college roommates for a year, and that they communicated several times a week.
Kohanof asserted that he was familiar with the Volcom brand from growing up in Southern California and associating with surfers and skateboarders; and, in fact, he had been thinking about investing in the company for over a year. Kohanof claimed that he had reviewed the company's financial reports and an earnings conference call transcript prior to the purchases under investigation. Pointedly, however, Kohanof denied speaking with anyone before making his purchases, and he specifically denied speaking with DS.
Leaving Las Vegas
Initially, Kohanof denied taking any trips in April 2011, but when OFDMI asked about the April Las Vegas weekend, he purportedly paused and stuttered. At that point, OFDMI put the telephone call on hold in order to permit Kohanof time to reconsider his answer. Upon resuming the call, Kohanof admitted to the trip and allowed that DS might have been there. Despite that change of recollection, Kohanof did not recall meeting JN or AF in Las Vegas.
SIDE BAR: First he didn't recall the Las Vegas trip. Then he did. Then he only remembered his cousin DS possibly being on the trip. Nary a word was said about his girlfriend JN. In the days when I was a lawyer for two regulatory organizations, this would have been about the time when I winked at my colleagues gathered around the speakerphone and either gave them the thumb's up or slowly drew my finger across my neck.
A Dim Outlook
Apparently skeptical of Kohanof's answers, OFDMI demanded that he produce credit card statements, phone records, and electronic communications. Because Kohanof's telephone contact list was synchronized with his employer Houlihan's Outlook system, Kohanof's personal lawyer suggested that the firm produce it, which occurred on January 25, 2012.
The Outlook contacts included lawyer JN's name and telephone number. The FINRA OHO Decision alleges that Houlihan knew his employer was providing FINRA with his cell phone contact information, and had deleted JN's name and number from his contacts; however, he subsequently reconsidered, and re-entered the information.
During his oversight of Houlihan's response to OFDMI's information demands, outside counsel Weinstein saw JN's name among Kohanof's phone contacts, which prompted the lawyer to ask Houlihan's technology staff to review the contact list metadata for creation dates. That in-house query disclosed that Kohanof had entered JN's contact information on January 24, 2012. Troubled by that finding and growing inconsistencies in Kohanof's version of events, Weinstein telephoned Kohanof on February 14, 2012, during which time the lawyer admonished him to be honest with FINRA. Thereafer, on February 17, 2012, Weinstein told Kohanof that Houlihan expected him to set the record straight with FINRA or else the employer would have to consider its next steps.
Lemme Ask You A Question
Shortly after the OFDMI telephone interview, Kohanof called his cousin DS and asked if he had obtained advance knowledge of the Volcom merger. During this conversation, Kohanof asserted that DS first informed him that he had learned about Volcom from JN. DS asserted, however, that JN had not given him inside information but had merely mentioned Volcom ''in passing."
Hey, Guess What?
Apparently in response to Weinstein's blunt talk, Kohanof contacted his personal lawyer and stated that he had lied to OFDMI and his firm, and wanted to correct his mistakes.
During March 9, 2012, on-the-record testimony with OFDMI, Kohanof, admitted that he had not previously told the truth and in the face of his firm's insistence, he now wanted to rectify things. Kohanof said that later in the week following the Las Vegas trip, DS merely said that "I think you should buy this stock." In response to questions about why he had not previously disclosed that conversation, Kohanof said that he had been scared, thought something serious was going on, and didn't want to implicate his cousin.
In response to questions about JN, Kohanof said that the only time they had met was during the trip, that he knew she was a lawyer, but he was unclear as to how her name and number made its way into his contact list. He opined that, perhaps, DS has entered JN's name into his contacts. Kohanof admitted that he had deleted JN's name after FINRA had asked for his telephone contacts; however, he re-entered the deleted information upon the realization that the deletion might be discovered.
SIDE BAR: Oh what a tangled web we weave: When first we practice to deceive. Kohanof is literally pulling the noose tighter around his own neck. A la Bill Clinton's protestations about Monica Lewinsky, JN has now been relegated to "that woman." JN is not presented by Kohanof as his girlfriend but merely as a lawyer he met once during the Las Vegas trip. He adds to this yarn some hopefully plausible details that her name may have been entered into his contacts list by his cousin DS. In what now smacks of desperation, Kohanof explains that he deleted JN's name from his contacts once he learned that an insider trading investigation was underway but, in a further bit of panic, re-entered the deleted information out of fear that what he had removed would be detected. I mean, seriously?
On October 15, 2012, Kohanof's employment with Houlihan ended and his FINRA registration terminated on October 30, 2012, when the firm filed a "voluntary" Uniform Termination Notice for Securities Industry Registration ("Form U5").
After FINRA filed a Complaint on June 18, 2013 and the matter progressed to an OHO Hearing, Kohanof testified that he had lied to protect his cousin DS and not himself. He claimed that his actions, particularly those that hindered the investigation, arose out of his being scared and that, in retrospect, he wished he had acted differently.
A Matter Of Intent
The OHO Hearing Panel deemed Kohanof's false statements to OFDMI as neither inadvertent or thoughtless but as intentional. Pointing to the deletion of JN's information, the Panel underscored that such conduct was
consistent with his intent to hide a significant fact. Only when he realized that his deletion could be discovered, and could be interpreted as an attempt to conceal information from FINRA, did Respondent restore JN's name and number to his contact list. And it was only after Houlihan insisted that he "come clean" with OFDMI, and admonished him that if he did not do so the firm would find it necessary to take action, that Respondent acted to correct the record.
For providing false information to FINRA when interviewed in connection with an insider trading investigation, in violation of FINRA Rules 8210 and 2010, Kohanof was barred from associating with any FINRA member firm in any capacity.
Bill Singer's Comment
Compliments to FINRA on an excellent Decision -- well crafted and persuasive.
A few points to consider.
Ya got yer in-house lawyers and ya got yer personal lawyers. A lot of folks figure it's okay to open up to the outside guy. You know, after all, the firm is paying for that mouthpiece and he or she is going to look out for me. In reality, outside counsel is counsel to your employer; and while such lawyers are often able to discharge their ethical obligations to both the employer and an employee, sometimes the interests of those two diverge. As such, be careful about getting too cozy, too quick with the outside guy -- and if you are going to work with outside counsel, you probably should ask for something in writing explaining the limits of such a representation and what happens if and when a conflict arises. Finally, if you are going to avail yourself of outside counsel retained by your employer, don't do what Kohanof did to Weinstein: Tell the truth or don't talk to the outside guy.
Sure, there's a DEL key on your computer. You're a pretty clever fellow too. You know how to get into your firm's main hard-drive and to sort of modify -- yeah, that's how we'll put it -- modify files. The thing is, though, you may not be as clever as you think you are. You may not realize that there was a record made when you logged on, and a record made when you entered a directory, and a record made when you modified a file. You left footprints. If someone is looking, there's a good chance they will find you.
Finally, it's generally not a great idea to lie to regulators. It's an even less great idea to do so under oath. Frankly, if you feel compelled to lie, it's probably best to propose a settlement and cut the best deal that you can. Kohanof certainly took a bad situation and made it worse. There might have been a chance that he could have negotiated a suspension rather than a bar if he had not lied to his firm, lied to outside counsel, and lied to FINRA -- and let's not forget that amazingly idiotic bit of self-help pertaining to the deletion and re-entry of his girlfriend's contact information.