Enforcement actions by criminal and supervisory authorities are settled regularly. In light of these developments, companies are advised to take appropriate measures. This month we highlight two notable settlements that were reached in the US in December 2015. The Securities and Exchange Commission announced a settlement with Chinese traders for insider trading in two healthcare companies. The SEC also announced that it had charged Retrophin’s former CEO for fraud – in the form of a Ponzi scheme – from 2009 to 2014.

Traders in China and Hong Kong settle for over USD 920,000 for insider trading

The SEC announced in December 2015 that Zhichen Zhou and Yannan Liu, cousins and business associates from China and Hong Kong, had agreed to pay over USD 920,000 in an insider trading settlement. The two individuals had allegedly traded in the shares of two healthcare companies – MedAssets and Chindex International – while having non-public knowledge of imminent deals involving these companies. The USD 920,000 settlement consists of USD 306,930 in disgorgement plus a USD 306,930 penalty per trader, making the total amount due three times larger than the alleged profits made. Both Zhou and Liu did not admit or deny the allegations against them. This settlement comes one month after the SEC announced the charges against the cousins. The SEC had announced at that time that it had obtained an emergency freeze on their assets.

According to the SEC, Liu – who had previously worked at a private equity firm which took part in the biddings for both companies and who kept in touch with one of its employees – had provided non-public information to Zhou about the acquisitions. Moreover, it was alleged that Liu had provided Zhou with the funds to purchase shares. Subsequently, Zhou bought almost 40,000 shares in MedAssets for USD 900,000 and over 3,000 shares in Chindex International. After the announcement of the two acquisitions, the MedAssets stock rose by 30% and the Chindex stock by 13%.

Zhou and Liu are not the first Chinese traders charged by the SEC for insider trading. In April 2015, two Beijing residents were charged with insider trading in connection with a merger between two Chinese internet companies. Furthermore, in June 2015 the SEC announced that it had obtained an emergency court order allowing it to freeze the assets of a Chinese trader who had made more than USD 1 million in a trade by buying purchasing call options in Qihoo 360 Technology Co. and selling them quickly after it was announced that Qihoo had received “a buyout offer at a significant premium” and its stock price had risen. 

SEC charges Martin Shkreli with fraud

The SEC announced in December 2015 that it had charged Martin Shkreli, former CEO of pharmaceutical company Retrophin, with committing fraud between 2009 and 2014 while he was also working as a portfolio manager for the hedge funds MSMB Capital Management LP and MSMB Healthcare LP. Evan Greebel, Shkreli’s former outside counsel, was charged with aiding and abetting certain aspects of the alleged fraud.

According to the SEC, Shkreli used USD 120,000 belonging to MSMB Management to pay for personal expenses (such as clothing and medical costs) from October 2009 to July 2011. Furthermore, he misled existing and prospective investors by misinforming them about MSMB Management’s size and performance. On top of this, Shkreli allegedly used USD 900,000 of MSMB Healthcare in 2013 to settle claims arising out of MSMB Management’s losses (a Ponzi scheme). Finally, it was alleged that from September 2013 to March 2014, Shkreli together with Greebel “fraudulently induced Retrophin to issue stock and make cash payments to certain disgruntled investors in Shkreli’s hedge funds who were threatening legal action.” The investors entered into agreements believing that they were paying for consulting services, while the purpose of the agreements was actually to release potential claims against Shkreli.

Apart from charges brought by the SEC, the FBI announced that the U.S. Attorney’s Office for the Eastern District of New York had also issued a seven-count indictment against Shkreli and Greebel for securities fraud, securities fraud conspiracy and wire fraud conspiracy in the MSMB Management and MSMB Healthcare schemes. United States Attorney Capers stated that the indictment reflected the commitment of the Attorney’s Office “to hold accountable corporate executives and licensed professionals who betray their positions of trust in order to fraudulently enrich themselves.” If Shkreli is found guilty, he faces a maximum prison sentence of 20 years.

The FBI has emphasised that it is still investigating the different schemes and that more charges against other individuals are likely to follow as this investigation continues.