Illegal insider trading refers to the buying and selling of securities while in possession or aware of material, nonpublic information in breach of a fiduciary duty or other relationship of trust or confidence. The SEC believes that such trading undermines investor confidence in the fairness and integrity of the markets, and recent cases indicate that the detection and prosecution of insider trading remain one of its enforcement priorities.
Late last year, Christopher J. Lollar, a petroleum engineer, settled SEC charges of insider trading. Lollar, an engineer for energy company Apache Corporation (“Apache”), became aware of a major oil and gas discovery through his work and purchased a number of Apache shares and call options before the public announcement of the discovery. After the announcement, Lollar sold the shares and options, resulting in alleged profits of $214,295. As part of the settlement with the SEC, Lollar agreed to disgorge the alleged profits, plus interest, and pay a civil penalty of $214,295.
In another case that settled earlier this year, Yao Li, a former executive for Alliance Fiber Optics Products, Inc. (“AFOP”), was alleged to have made a profit of approximately $200,000 by engaging in short sales and sales of already owned shares prior to three disappointing earnings announcements. The SEC used various data analysis tools to detect suspicious patterns, such as improbably successful trading in advance of earnings announcement over time. As an executive, Li learned through regular meetings that AFOP was likely to miss the revenue guidance in three different quarters. Additionally, AFOP had a policy which specifically prohibited its employees from engaging in short selling. In addition to a cease and desist order, Li agreed to disgorge $196,203, plus interest, and pay a civil penalty of $196,203. As part of his settlement, Li also agreed to a five-year prohibition on acting as an officer or director of a public company.
In late June 2018, three friends were charged with insider trading. Sebastian Pinto-Thomaz, an analyst for a credit agency, learned of the confidential plans for Sherwin-Williams Co. to acquire The Valspar Corp. through his work and then tipped two of his friends, Abell Oujaddou and Jeremy Millul, who purchased Valspar securities prior to the announcement of the acquisition. Following the announcement, Oujaddou and Millul sold their holdings, generating profits of almost $300,000. Along with the charges brought by the SEC, the U.S. Attorney’s office for the Southern District of New York brought criminal charges against Pinto-Thomaz, Oujaddou, and Millul.
More recently, Rep. Chris Collins, along with his son Cameron and the father of his son’s girlfriend, Stephen Zarsky were indicted on insider trading charges, and concurrently charged by the SEC. Collins, a director of Innate Immunotherapeutics, an Australian biotech company, allegedly shared confidential information regarding Innate’s failed clinical trial results with family and friends. Cameron Collins and Zarsky are charged with selling Innate shares before the public announcement of the negative clinical trial results and avoiding losses of more than $700,000, as well as tipping others on the basis of the material, nonpublic information. After the announcement, the company’s stock price dropped by more than 92 percent.
Although Rep. Collins did not sell shares himself, he is alleged to have breached his duty of confidentiality to the company and to have received a personal benefit from his tip of material, nonpublic information to his son Cameron by providing a gift of information to a close relative. Similarly, Cameron Collins and Zarsky are alleged to have received a personal benefit from such tip, to have improperly traded while aware such information was material and nonpublic, and to have personally benefited by tipping other relatives and friends.
The SEC also settled charges with Lauren Zarsky, Cameron Collins’ girlfriend, and her mother, Dorothy Zarsky, for trading on the basis of material, nonpublic information. Lauren Zarsky agreed to disgorge $19,440, plus interest, and pay a civil penalty of $19,440. Dorothy Zarsky agreed to disgorge $22,600, plus interest, and pay a civil penalty of $22,600. Lauren Zarsky, a CPA, also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes a prohibition on participating in the financial reporting or audits of public companies.
In light of these cases, companies should consider reviewing their insider trading policies, as discussed in our last newsletter, including the scope of restricted participants and training and education programs. In addition to criminal charges, insider trading penalties can results in large monetary fines as well as cease and desist orders and officer or director bars.