U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19424 / October 12, 2005
Securities and Exchange Commission v. Scott R. Sacane, et al., Civil Action No. 3:05cv1575-SRU (D. Conn., filed October 12, 2005)
SEC CHARGES CONNECTICUT HEDGE FUND MANAGER IN SECURITIES FRAUD SCHEMES
The Commission today filed a civil fraud action against two Connecticut-based investment adviser companies that managed hedge funds and two individuals associated with the companies: Durus Capital Management, LLC ("Durus"), and Durus Capital Management (N.A.), LLC ("Durus N.A."); Scott R. Sacane (the founder and managing member or director of Durus and Durus N.A.); and J. Douglas Schmidt (the chief operating officer and chief compliance officer of Durus). The Commission's complaint, filed in federal district court in Connecticut, charges the defendants for their involvement during 2002 and 2003 in fraudulent schemes concerning the purchase and sale of the common stock of two biotechnology companies: Esperion Therapeutics, Inc. and Aksys Ltd. Once the defendants' schemes were exposed in July 2003, the complaint alleges that: Aksys' closing stock price fell 43%, from $15.01 to $8.49, which resulted in lost market capitalization value of approximately $193,753,595; and, Esperion's closing stock price fell 23.5%, from $19.88 to $15.20, which resulted in lost market capitalization value of approximately $137,601,201.
The Commission's complaint alleges that the defendants manipulated the price of both Esperion and Aksys stock by making regular and substantial purchases of both stocks through the hedge funds that they managed and concealing these purchases by failing to file various forms and schedules with the Commission as required by the federal securities laws and making false filings with the Commission. According to the complaint, Sacane also made misrepresentations to officers of Esperion and Aksys about the stock purchases, made misrepresentations to Sacane's former employer about purported non-public information Sacane possessed about both companies in order to prevent the former employer from selling Aksys and Esperion stock. The Complaint further alleges that Sacane and Durus later sold stock of both companies without disclosing their ownership position as required by the federal securities laws. The Commission's complaint alleges that the defendants' undisclosed purchases of Esperion and Aksys stock artificially inflated the price of both stocks by creating the appearance of a greater demand for the stocks than actually existed in the market. According to the complaint, from November 2002 through July 2003, Esperion's stock price more than tripled from $5.65 per share to approximately $20 per share, and Aksys' stock price quadrupled from $3.65 per share to approximately $15 per share. By July 24, 2003, the defendants' undisclosed purchases also resulted in them controlling approximately 33% of Esperion's outstanding stock and approximately 78% of Aksys' outstanding stock.
The Commission alleges in its complaint that: Sacane and Durus violated Section 17(a) of the Securities Act of 1933 ("Securities Act"); Sacane, Durus, and Durus N.A. violated Sections 10(b), 13(d), 13(f), 13(g), 16(a), and 16(c) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13d-1, 13d-2, 13f-1, and 16a-3 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"). The complaint further alleges that Schmidt violated Sections 13(d) and 13(f) of the Exchange Act and Rules 13d-1, 13d-2, and 13f-1 thereunder, and that he aided and abetted Durus', Durus N.A.'s and Sacane's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act. The Commission is seeking injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties.
In addition to the Commission's civil action, the United States Attorney's Office for the District of Connecticut announced the filing of related criminal charges.