In SEC v. Alberto Perez, Case No. 09-CV-21977 (S.D. Fla.) a jury found defendant Alberto Perez liable for insider trading. The court however refused the SEC’s request for a permanent injunction. It did grant a request for an order requiring the payment of disgorgement which defendant did not contest, prejudgment interest and a civil penalty of $50,000. In assessing the penalty, the court rejected the SEC’s request one in the amount of $1,298,185 or three times the disgorgement.
The action centers on the acquisition of Neff Corporation by Odyssey Investment Partners, LLC in a deal announced on Aril 7, 2005. The transaction originated with a November 2004 letter from Odyssey to Neff about a potential business combination. On November 9, 2004 the two companies entered into a confidentiality agreement. Subsequent negotiations resulted in a letter of intent under which Odyssey would purchase Neff for $450 million. That offer was later increased to $470 million.
Beginning on March 1, 2005, and continuing through March 14, 2005, representatives of Odyssey conducted due diligence at Neff headquarters. Juan Carlos Mas, CEO of Neff, made office space available during this period to his long time acquaintance, Alberto Perez, who he also employed to manage real estate projects. While the due diligence was in progress a securities account jointly owned by Mr. Perez and his brother made thirty-nine purchases of Neff stock totaling 17,000 shares.
Following the deal announcement the SEC brought insider trading charges against six individuals. Three settled. A fourth prevailed on a motion for summary judgment (here). Defendants Sebastian de la Maz and Perez proceed to trial. The jury concluded that Defendant de la Maz was not liabile. It rejected claims by Mr. Perez that he did not have any knowledge of the trades which he claimed were placed by his brother. In this regard the SEC presented evidence that on the days of the trades Mr. Perez and his brother spoke repeatedly on the telephone.
Following the verdict the SEC requested a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The Commission also requested the entry of an order requiring the payment of disgorgement, prejudgment interest and a civil penalty equal to three times the amount of the disgorgement.
The court rejected the request for an injunction. To warrant injunctive relief the SEC must establish that there is a reasonable likelihood that the defendant will engage in future violations of the securities laws absent the requested relief, the court found. This requires more than a showing of past violations. Rather, the court should consider six key factors: 1) the egregiousness of the defendant’s actions; 2) the isolated or recurrent nature of the infractions; 3) the degree of scienter; 4) the sincerity of the defendant’s assurances against future violations; 5) the defendant’s recognition of the wrongful nature of his conduct; and 6) the likelihood that the defendant’s occupation will present opportunities for future violations.
As to the first factor, there is no question that the violations were flagrant. At the same time there is no evidence “that anyone suffered any financial losses –significant or de minimis due to Prez’s Neff trades.” Likewise, there is no indication that this involved a complex scheme. Thus, on balance, the evidence leans against a finding of egregiousness.
The evidence also did not support a finding that the violation was recurrent rather than isolated. Although there were numerous trades they all occurred in one period. Likewise, the defendant is a first time violator. In contrast, the jury found Mr. Perez had the requisite scienter which is the third factor.
The fourth factor centers on the sincerity of the assurances against future violations. Here Mr. Perez submitted an affidavit detailing his respect for the legal process, the detrimental impact the action had on him and his relationship with his brother and assuring the court that he will never be in a position again like he was here since he does not intend to “seek any association with a publically traded company . . .” Based on these assurances the court concluded that Mr. Perez was “genuinely humiliated by his involvement in such a serious violation of the law.” That fact, coupled with his personal history and the impact of the investigation and prosecution on Mr. Perez, lead the court to conclude that “Perez is not likely to violate the securities laws in the future.”
The last two factors also do not support the entry of an injunction. While Mr. Perez did not admit the violation, that is not dispositive. Here Mr. Perez has been steadfast in his denials, his testimony was not inconsistent, and he his statements demonstrate an appreciation of the seriousness of the charges and the verdict and of the importance of the securities laws. Finally, his profession does not place him in a position to be a repeat violator. Accordingly, the court declined to enter an injunction.
Finally, the court ordered the payment of disgorgement, which the defendant did not contest, in the amount of the trading profits which was $399,395 along with prejudgment interest. The defendant was also ordered to pay a $50,000 civil penalty. The court rejected the SEC’s demand for a penalty which would equal three times the disgorgement. Critical to this determination was the net worth of the defendant along with an evaluation of several factors previously considered in connection with the request for an injunction. Mr. Perez argued that his net worth is only slightly over $150,000. While the SEC argued that number was wrong and that the net worth of Mr. Perez is about $1.4 million, the claim lacks evidentiary support the court found. There is noting in the record to support the SEC’s assertions. Indeed, its $1.4 million number is based on including the value of certain real estate without deducting $1.2 million in mortgages that encumber the property. Accordingly, the court rejected the SEC’s penalty claim.