The SEC brought another insider trading case based on a conclusion reached by a trader from a mosaic of information he heard and observed. In this case the action is against the brother of a corporate official who overheard bits of his sister’s telephone conversations, observed her office and then traded in shares of the company which employed her. Later the company became the subject of a take over bid. The case settled. SEC v. Ni, Case No. CV 11 0708 (N.D. Cal. Filed Feb. 16, 2011); Lit. Rel. No. 21859 (Feb. 16, 2011).
Defendant Zhenyu Ni is an IT Team Lead Manger for a public company. His sister was employed by Bare Essentials, Inc., a cosmetics company with its principal office in San Francisco, California. The sister was the Director of Tax for Bare Essentials.
In November 2009 the sister began work on due diligence in connection with a potential acquisition of the company by Shiseido Co., Ltd, a large Japan based cosmetics manufacturer. As part of her work she had access to the deal’s data room which contained confidential information.
In early December Mr. Ni visited his sister at her office. During the visit she took “several phone calls” according to the complaint. During the calls his sister spoke “key words” such as “due diligence file,” “potential buyer” and “merger structure.” Mr. Ni realized from looking around the office and the fact that she received “numerous” phone calls that “she was very busy at work.”
On December 10 Mr. Ni purchased 1,000 shares of Bare Essentials through his father’s brokerage account. Subsequently he also made four purchases of Bare Essentials securities for his account on December 16, 22, 23 and 31. In each instance he bought 3,000 share blocks of the then Nasdaq listed securities. Mr. Ni’s last purchase was on January 14, 2010 when he acquired 280 call options for his account and that of his father. The trades were made while in possession of material non-public information misappropriated from Mr. Ni’s sister and in violation of his duty of confidentiality to his sister according to the SEC. The sister also had a duty of confidentiality to the company.
Following the close of the market on January 14 Shiseido announced a tender offer for the shares of Bare Essentials. Mr. Ni sold the securities the next day for a profit of $157,066. By the end of the day the share price had increased by 42%.
Mr. Ni settled the Commission’s claims which were based on alleged violations of Exchange Act Sections 10(b) and 14(e). He consented to the entry of a permanent injunction prohibiting future violations of each section cited in the complaint. In addition, he agreed to pay $157,615 in disgorgement and prejudgment interest and a civil penalty in the same amount. Mr. Ni’s sister was not charged.
This case appears to represent a growing trend of SEC insider trading cases predicated on a conclusion reached by a trader about a company drawn from observed or heard events. The individual bits of information may not be adequate to support the ultimate conclusion the trader reached with the composite of information. Last year for example the Commission brought SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 30, 2010) against family members and their claimed tippees who observed various occurrences at work, reached a conclusion based on the information pasted together, and then traded in the shares of their company prior to its acquisition. Steffes, discussed here, is in litigation with the exception of one defendant who settled. SEC v. Tedder, Civil Action No. 08-1013 (N.D. Tex. Filed June 17, 2008) is similar. Again employees observing various events, pasted them together to reach a conclusion, and trade in the shares of their company. All defendants settled on filing in that case except one who proceeded to trial and was found liable by a jury as discussed here. This trend has the potential to redefine the edges of insider trading.