No matter how bad the underlying conduct, you can always make it worse – that was the message of then Director of the SEC’s Enforcement Division Steve Cutler to a meeting of the D.C. Bar Association. There is no doubt that Mr. Cutler was correct. Receiving a subpoena from the Enforcement Division is, for example, clearly a bad day for any company or executive. Nevertheless, the company or executive can always make it worse, much worse.
Consider the case of Charlie J. Chen. He was the owner of an Asian restaurant in Chelmsford, Massachusetts. He and his wife, Shui Foon Mok, had friends and a nice life. Then then it got worse. The FBI showed up. Mr. Chen lied to the agents. The SEC showed up. Mr. took the Fifth Amendment in testimony. Mr. Chen elected to go to trial. The jury found him liable for securities fraud – insider trading. SEC v. Chen, Civil Action No. 1:18-cv-10657(D. Mass. Verdict Feb. 3, 2020). See Lit. Rel. No. 24733 (Feb. 5, 2020).
Mr. Chen and his wife were long time close friends with a Couple that lived in the same town. Each had two daughters that attended school together. The families dined, camped and vacationed together. For example, the two couples took a trip to Hawaii in August 2013 and another to Copenhagen in June 2015. There were frequent cell phone calls and text messages.
Husband was employed at VistaPrint N.V., a Dutch issuer with U.S. operations based initially in Lexington, Massachusetts and later in Waltham. Husband was employed at VistaPrint from late 2005 until early 2015. As a result of his position at the firm Husband regularly had access to material non-public information regarding the firm’s financial position during at least a two year period beginning in July 2012.
Mr. Chen, according, to the SEC’s complaint, traded in the shares of VistaPrint in advance of eight earnings announcements over the two year period cited above. Typically, Mr. Chen purchased options during the month after VistaPrint’s fiscal quarter ended, but prior to the company’s earnings announcement. Those options were generally out of the money, in one direction (either a put or a call but never both) and had an expiration date set at three weeks after the quarterly earnings announcement. The trades were profitable with only two exceptions. In those instances, Mr. Chen had correctly predicted the movement of the stock price but the return was very small. Overall, he had trading profits of $952,082.
In March 2016 FBI agents questioned Mr. Chen about his trading. During the conversation he denied knowing anyone at VistaPrint. When the agents identified Husband, Mr. Chen downplayed the relationship, claiming that he knew the man through his daughters’ school but they were not close. Two months later he invoked the Fifth Amendment during testimony before the Commission staff.
Mr. Chen did not resolve the charges with the Commission. To the contrary, he took the case to trial. On February 3, 2020 the jury returned a verdict in favor of the Commission, finding that Mr. Chen violated Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will determine remedies at a later date.