The SEC filed two settled insider trading cases against two professionals who traded in the same take over stock. The defendants had no relationship. One was on the East Coast. The other was on the West Coast. Both settled on essentially the same terms with the Commission. One however was told about the deal in the course of his employment. The other assumed a deal would be forthcoming based on the information available to him. SEC v. Williams, Civil Action No. 12-1126 (E.D. Pa. Filed March 5, 2012); SEC v. Duncan, Civil Action No. CV 12-1785 (C.D. Ca. Filed March 5, 2012)
Each case is based on the acquisition of aerospace and defense industries manufacturer Hi-Shear Technology Corporation by Chemring Group PLC. The deal was announced on September 16, 2009. The defendant in the first case is John M. Williams, an employee of Deloitte Tax LLP since 1997. He was a tax manager resident in their Philadelphia, Pennsylvania office. In the second the defendant is William F. Duncan, the President of Duncan Insurance Service, Inc., dba The Olson Duncan Agency, a California insurance brokerage firm. Mr. Duncan and his agency had a long term relationship with Hi-Shear. The agency had provided property and casualty brokerage services to Hi-Shear for 8-10 years. The firm also wrote D&O insurance for the company.
Defendant Williams was told about the deal as part of his work at Deloitte. As the a tax manager for firm, Mr. Williams began assisting with Chemring’s proposed acquisition of Hi-Shear, code named “Project Harriet,” in late July. On August 31 he circulated a memorandum containing his tax analysis for the acquisition of Harriet. At about the same time he was told that the target was Hi-Shear. Subsequently, on September 9, 2009 he received an e-mail chain about the deal which again identified Hi-Shear.
From September 10 to 14 Mr. Williams purchased 850 shares of Hi-Shear stock. He did not report the transactions to Deloitte as required. Following the deal announcement he liquidated his holding, realizing profits of $6,803.18.
Mr. Duncan deduced that a transaction would be forthcoming from the information available to him through his work with the company. In late 2008 Hi-Shear conducted a review of its D&O insurance and concluded that additional coverage was required. Olson Duncan presented the company with a proposal to expand its coverage in late January 2009 pursuant to a request by Hi-Shear. Toward the end of the next month Hi-Shear gave Mr. Duncan an attorney-client privileged memorandum which analyzed its D&O coverage and specifically questioned if it was adequate in the event of a strategic transaction and, in one section, if control of the company was sold.
Five months later Mr. Duncan received an e-mail from the company asking about a 6-year “tail” for its existing D&O policy. Such a policy is “specific coverage to extend a D&O policy when a company is acquired or sold,” according to the complaint. Mr. Duncan furnished an estimate the day after he received the e-mail but noted that the underwriters would not give a specific quote until they were furnished with an actual agreement.
Mr. Duncan began purchasing Hi-Sear stock the day he furnished the company with the quote on the tail. By September 9 he had acquired 10,000 shares at a cost of over $102,000. Following the September 16 announcement he liquidated his holdings, realizing a profit of $85,525.
Each defendant settled on essentially the same terms, consenting to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, which prohibits future violations of Exchange Act Section 10(b). Each defendant agreed to pay disgorgement along with prejudgment interest and a penalty equal to their trading profits. Mr. Williams also agreed to the entry of an administrative order which suspends him from appearing or practicing before the Commission as an accountant for five years.