This is part eight (continued) of a series of articles that will be published periodically analyzing the direction of SEC enforcement.
SEC insider trading cases for 2010 can, for purposes of discussion, be divided into three group: 1) Market and other professionals; 2) corporate executives; and friends and family.
Market and other professionals
Last year the Commission brought several insider trading cases which involved market and other professions who had access to inside information. Cases involving market professionals frequently center on insider trading rings. For example, last year the SEC settled with David Slane, formerly a hedge fund portfolio manager with Chelsey Capital. SEC v. Slane, Civil Action No. 10-CV-752 (S.D.N.Y.). Previously Mr. Slane had pleaded guilty to criminal charges. Lit. Rel. No. 21 652 (Sept. 16, 2010). The case stems from the long running Guttenberg prosecutions which were based in part on trading in advance of UBS analyst publications. See, e.g., SEC v. Guttenberg, No. 07 cv 1774 (S.D.N.Y.).
SEC v. Poteroba, (S.D.N.Y.) Filed March 25, 2010 and U.S. v. Poteroba (S.D.N.Y. Filed March 25, 2010) are similar. In these cases the defendants are Igor Poteroba, a managing director at UBS Securities in their Healthcare Group, and Alexander Koval, previously employed at Citigroup Asset management, and Alexander Vorobiev. Each defendant is a Russian National.
The criminal and civil cases are based on essentially the same scheme. The criminal information, alleging one count of conspiracy and three counts of securities fraud, alleges that Mr. Poteroba tipped defendant Koval about six different companies over a four year period beginning in 2005. The trading generated about $870,000 in illegal profits. The SEC complaint, alleging violations of Exchange Act Sections 10(b) and 14(e), centers on the same conduct but adds five additional deals. Both cases are in litigation.
In other cases the market professionals are alleged to have traded for their own account. SEC v. Garcia, Civil Action No. 10 C 5268 (N.D. Ill filed Aug. 20, 2010) is an example of this type of case. The defendants are Juan Jose Fernandez Garcia, the head of European equity derivatives at Banco Santander, S.A. and Luis martin Caro Sanchez. Both are residents of Madrid, Spain. The case centers on the unsolicited bid for Potash Corporation of Saskatchewan by BHP Billiton Plc announced on August 17, 2010. The announcement of the deal was followed by a share price increase of 27%. Banco Santandar was an adviser to Potrash.
Prior to the bid Mr. Garcia purchased 282 Potash call options for $13,669. After the announcement they were sold at a profit of $576,033. Mr. Sanchez purchased 331 call options in Potash in mid-August at a cost of $496,953.33. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See also In the Matter of David W. Baldt, Adm. Proc. File No. 3-13887 (Filed May 11, 2010)(portfolio manager for bond funds learned of large redemptions and is alleged to have suggested to family members that they liquidate their holdings); SEC v. Marquardt, Civil Action No. 10-10073 (D. Mass. Jan. 20, 2010)(settled action against fund administrative officer who learned that certain actions would result in a reduction of NAV after which he and his family redeemed their holdings).
Market professionals were not the only individuals to use their professional position to access inside information, SEC v. Flanagan, Civil Action No. 10-CV-4885 (N.D. Ill. Filed Aug. 4, 2010) is an action against Thomas P. Flanagan, former Vice Chairman of Deloitt, resident in its Chicago office and his son Patrick, the COO of a private company. According to the complaint, between 2005 and 2009 Mr. Flanagan traded on inside information nine times, making 71 trades through multiple accounts. The information concerned audit clients of the firm. Overall Mr. Flanagan made profits of about $430,000. The complaint also claims that Mr. Flanagan in some instances tipped his son who traded, making profits of about $57,000.
The action was resolve with each defendant consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act sections 10(b) and 14(e). Each defendant also agreed to disgorge their trading profits and pay prejudgment interest along with a civil penalty equal to the trading profits. In addition, Mr. Flanagan consented to the entry of an order denying him the right to appear and practice before the Commission as an account in a separate administrative proceeding. Lit. Rel. 21612 (Aug. 4, 2010). See also SEC v Gansman, Civil Action No. 089-CV – 4918 (S.D.N.Y. Filed May 18, 2008)(settled insider trading case against attorney James Gansman who was employed in the transaction advisory group of Ernst & Young an is alleged to have repeatedly tipped his friend and former stock broker Donna Murdoch); SEC v. Foley, Civil Action No. 1:00-CV-00300 (D.D.C. Filed Feb. 25, 2010)(settled case in which Mr. Foley obtained inside information from his employment at Deloitte and tipped two others).
A number of SEC insider trading cases involve corporate executives. As with the cases against professionals, in some instances the executives traded for their own account. In some instances they passed the information on to others.
SEC v. Horn, Civil Action No 1:10-CV-00955 (N.D. Ill. Feb. 16, 2010) is a case where the executive traded for his own account. Defendant Gerald Horn was the medical director for one of the facilities of LCA Visions, Inc. According to the complaint, from December 2005 through August 2006, the defendant made six separate trades while in possession of inside information. The information came from reviewing internal reports about the number of eye surgeries done. From this data Mr. Horn estimated revenue. By trading in LCA options the defendant made profits of $869,629. The case is in litigation. Lit. Rel. No. 2114 (Feb. 16, 2010).
Another case in which the executive traded for his own account is SEC v. Wagner, Case No. 1:10-cv-10031 (D. Mass. Filed Jan. 11, 2010). The defendant, Brooke D. Wagner, is the former VP of Corporate communications of Indevus Pharmaceuticals, Inc. According to the SEC Mr. Wagner learned that the FDA had expressed concerns about the side effects of a drug for which the company was seeking approval. Prior to the public announcement about the FDA letter, the defendant sold his shares and later sold short. The share price fell about 69% following the announcement. To settle the case Mr. Wagner consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions of the federal securities laws. He also agreed to pay disgorgement of about $64,000 along with prejudgment interest and a civil penalty equal to the amount of the disgorgement. Lit. rel. No. 21370 (Jan. 11, 2010); See also SEC v. Lyva, Civil Action No. 09 CV 1565 (S.D. Cal.)(settled action against the former director of strategic marketing analysis for Qualcomm who traded in call options before the announcement that the company had obtained a significant litigation settlement); SEC v. Navarro, Civil Action No. 4:10-CV-189 (N.D. Okla. Filed march 31, 2010)(settled action against a crude oil purchasing manager who liquidated his holdings after learning of unannounced cash flow difficulties); SEC v. Fogel, Case No. 1:10-CV-10097 (D. Mass. Jan. 22, 2010)(settled case against former vice president who traded prior to an acquisition by his company).
In some cases the executive passed the information on to others. For example, in SEC v. Self, Civil Action No. 10-cv-430 (E.D. Pa. Filed Sept. 1, 2010) James Self, executive director at Merck & Co., tipped his friend, Stephen Goldfield, an unemployed former hedge fund manager according to the complaint. Prior to the acquisition in April 2007 of AstraZeneca by Medimmune, Inc., Mr. Self and others were solicited by investment bankers representing Medimune about a possible acquisition. Mr. Self was on the team which reviewed the material non-public information about the deal.
By March 2007 Mr. Self furnished his friend with information on the subject. Mr. Goldfield purchased Medimmune options and, following the deal announcement, made profits of $13.9 million. The case settled with each defendant consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act section 10(b). Mr. Self also agreed to pay a civil penalty of $50,000 based on his financial condition. Mr. Goldfield agreed to disgorge the trading profits along with prejudgment interest. All but $600,000 of that amount was waived based on his financial condition. Lit. Rel. No. 21638 (Sept. 1, 2010); see also SEC v. Berrettini, Civil Action No. 10-CV-01614 (N.D. Ill. Mar. 31, 2010)(action against former director of real estate for Philips Electronics who tipped his friend about a take over by his company).
Family and friends
The Commission also brought several insider trading cases in 2010 involving family and friends. In some instances the family and/or friends traded together. In others, one family member misappropriated inside information from the other to trade.
SEC v. McClellan, Case No. CV 10 5412 (N.D. Cal. Filed Nov. 30, 2010) is an action against two couples who are alleged to have formed an international insider trading ring. Arnold McCelland and his wife Annabel reside in San Francisco. Mrs. McCelland’s sister and her husband, James and Miranda Sanders, reside in London. According to the complaint, Arnold McCelland, is a mergers and acquisition tax partner at Deloitte. He misappropriated inside information on six deals over a two year period beginning in 2006. Both couples used the information to trade. In addition, Mr. Sanders, in some instances, furnished the information to customers at the brokerage where he worked. The FSA in London has filed charges against the Sanders in the U.K. as well as customers of the brokerage. Mrs. McCelland has also been indicted on obstruction of justice charges in connection with the SEC investigation. The cases are in litigation. See also SEC v. Cohen, Case No. 10 CV 2514 (S.D. Cal. Filed Dec. 8, 2010)(insider trading ring involving two brothers, a fraternity brother and an uncle where the source of the information is alleged to have been the employment of one brother); SEC v. Temple, Case No. 10-cv-1058 (D. Del. Filed Dec. 7, 2010)(action involving two brothers-in-law where one is alleged to have misappropriated the inside information from the law firm where he worked).
In some instances one spouse misappropriated the information from another. In SEC v. Mcdonald, Case No. 3:10cv151 (D. Conn. Filed Feb. 2, 2010) defendant Bruce Macdonald’s wife is a corporate secretary and vice president of human resources of Mamry Corporation. The company put itself up for sale. Mrs. Macdonald, who was involved in the process, periodically discussed it with her husband who later purchased shares and tipped friends. Overall Mr. Macdonald had gains in one account of $890 and $25,509 in another. His friends had profits of about $20,000.
To resole the case Mr. Macdonald, and the friend he tipped, consented to the entry of permanent injunctions prohibiting future violations of the antifraud provisions of the Exchange Act. Each man also agreed to the entry of an order requiring him to disgorge the trading profits along with prejudgment interest and to pay a penalty equal to the trading profits. Lit. rel. No. 21404 (Feb. 2, 2010).
Finally, last year there was a renewed interest in Reg FD. One group of cases involved Office Depot, Inc. and its CEO, Stephen Odland and former CFO, Patricia McKay. SEC v. Office Depot, Inc, Civil Acton No 9:10-cv-81239 (S.D. Fla. Filed Oct. 21, 2010); In the Matter of Stephen Odland, Adm. Proc. File No. 3-14095 (Filed Oct 21, 2010); In the Matter of Patricia McKay, Adm. Proc. File No. 3-14096 ( Filed Oct. 21, 2010). The cases center on a series of talking points used by the director of investor relations in would not make guidance. The CEO and CFO worked out a series of talking points for the IR director to deliver in a meeting. Those talking points did not reference material non-public information. Rather, they focused on publicly available information regarding the difficulty of making guidance.
Following the talk, a number of analysts lowered guidance. The company settled the Reg FD charge as part of an overall global settlement of other filing violations. The two individuals also settled. Each consented to the entry of a cease and desist order based on Exchange Act Action 13(a) and Reg FD. Each also undertook to pay a civil penalty of $50,000. See also SEC v. Presstek, Inc. Civil Action No 10-1058 (E.D.NY. Filed March 9, 2010)(settled action against manufacturer and its former audit committee chairman who, after learning of performance difficulties in some segments discussed the matter with an investment adviser).