Insider trading continues to be a critical focus in securities enforcement actions. While few actions will match the significance of those filed against S.A.C. Capital and its founder, Steven Cohen, the issue continues to be a priority for the SEC. Its most recent action names as a defendant the CEO of a Huston based investor relations firm who began trading in the securities of clients and continued by repeatedly misappropriating material non-public information to profit in the securities markets, all after writing the firm code prohibiting such trades. SEC v. Gray, Civil Action No. 4:13-cv-2186 (S.D. Tx. Filed July 26, 2013).
Stephen Gray was the CEO, Managing Partner and a member of a Huston based investor relations firm. Prior to joining the firm he was the CEO of a public company. The IR firm assisted clients in drafting and publishing announcements concerning quarterly and annual earnings and other significant corporate events. Mr. Gray was frequently consulted by others at the firm because of his experience as a former CEO of a public company and his role at the investor relations firm.
The firm had a standard client agreement. It contained a confidentiality clause. The firm also had a Business Conduct and Ethics Code and Statement of Policy Regarding Securities Trades. The securities trading policies prohibited not just insider trading but any trading in the securities of a firm client. Mr. Gray drafted those policies.
Beginning in 2010, and continuing through the September 2011, Mr. Gray traded primarily in the securities of firm clients through his personal brokerage account. Over time he began trading in options. On at least nine occasions he traded in the securities of a firm client while in possession of material non-public information obtained from a client engagement:
- Superior Energy Services, Inc./Complete Production Services Inc merger: Prior to the October 10, 2011 deal announcement which caused the shares of Complete Production to increase by 31%, Mr. Gray purchased call options yielding after the announcement profits of $40,575.
- Powell Industries November 8, 2011 restatement announcement: The announcement caused the share price to drop 22%. Prior to the announcement Mr. Gray purchased options sold after it was issued, yielding profits of 482,370.
- Mitcham Industries record earnings June 6, 2011 announcement: The announcement caused a share price increase of 12%. Mr. Gray put a notation on his electronic calendar to purchase shares prior to the announcement. He did, reaping profits after it was issued of $6,043.
- Mitcham December 6, 2011 record earnings announcement. The announcement caused the share price to increase by 20%. Prior to that announcement Mr. Gray purchased options, yielding after issuance profits of $64,753.
- C&J October 24, 2011 announcement of a new contract: The announcement caused the share price to increase by 9%. Prior to the announcement Mr. Gray purchased options sold after issuance at a profit of $3,420.
- Men’s Wearhouse May 5, 2011 higher earnings announcement: The announcement cased a share price increase of 16%. Prior to that announcement Mr. Gray purchased common shares pursuant to another reminder on his electronic calendar. After the announcement he had profits of $17,397.
- MRC May 4, 2012 sales and earnings increase announcement: Following the announcement the share price increased 2%. Mr. Gray purchased options which yielded after announcement profits of $1,100.
- Hyperdynamics May 9, 2011 letter of intent announcement: Following the announcement the share price increased 6%. Prior to the announcement Mr. Gray purchased common shares which yielded post announcement profits of $6,832.
- Hyperdynamics November 8, 2011 loss and delayed drilling announcement: The announcement caused the share price to drop about 25%. Before the announcement Mr. Gray sold shares of the company he had previously purchased and bought put options. He avoided losses of $35,026 on the common shares and had post announcement profits of $37,500 on the put options.
Overall Mr. Gray had profits of $278,000 and avoided losses of at least $35,000 from trading in the securities of clients. The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). See also Lit. Rel. No. 22762 (July 26, 2013).