The SEC and the U.S. Attorney’s Office, New Jersey, brought civil and criminal insider trading charges against, respectively, six and seven individuals based on a five year insider trading ring that garnered over $1.4 million in illegal profits. Three of the individuals are executives at pharmaceutical companies. Several been friends since high school. Overall there were ten tippees At the center of the trading was four take-over transaction and six earnings releases which spawned trading tracing to 2007 and continuing through mid-2012. Elaborate steps were taken to conceal the trading. Those steps failed. SEC v. Lazorchak, Case No. 2:12-cv-07164 (D.N.J. Filed Nov. 19, 2012).
The Commission’s complaint named as defendants: John Lazorchak, Director of Financial Reporting at pharmaceutical company Celgene Corporation; Mark Cupo, Director of Accounting at Sanofi-Aventis Corporation, another pharmaceutical company and a former co-worker of Mr. Lazorchak; Mark Foldy, employed in the marketing department at a third pharmaceutical company, Styker Corporation; Michael Castelli, a friend of defendant Cupo; Lawrence Grum, who holds a brokers license and attended high school with defendant Castelli; Michael Pendolino; and James Deprado who is not named as a defendant in the criminal case. Defendants Larzorchak, Pendolino, Foldy and Deprado attended the same high school.
The ring is alleged to have traded on inside information in advance of four corporate take-over announcements:
- Celgene’s acquisition of Pharmion corporation, announced on November 19, 2007;
- Sanofi’s acquisition of Chattem, Inc., announced on December 21, 2009;
- Celgene’s of Abraxix BioSciences, Inc., announced on June 30, 2010; and
- Stryker’s acquisition of Orthaveta, Inc., announced on May 16, 2011.
Insider trading also is alleged to have occurred prior to the announcement by Celgene that it was withdrawing an application from the European Medicines Agency’s Committee on June 21, 2012 and earnings announcements for the quarters ended: September 30, 2009; March 31, 2010; June 30, 2010; September 30, 2010; June 30, 2011; and March 31, 2012.
The basic scheme involved an arrangement devised by Messrs. Castelli and Grum. It called for Mr. Lazorchak, through defendant Cupo, to furnish them inside information obtained from his position at Celgene. Mr. Cupo served only as a middleman. Defendants Castelli and Grum placed the trades, often in options. Mr. Cupo would be compensation for his role.
The idea behind the scheme was to separate the source of the information from the securities transactions to conceal the activity. Other steps were also taken to avoid detection. The members of the scheme typically interacted with Mr. Cupo in person. The traders also purchased Celgene securities at times when then did not have inside information. In some cases they sold portions of their holdings in advance of the corporate announcement. The traders also created contemporaneous research files and e-mails regarding the transactions to justify the trades.
Over time the scheme expanded. Mr. Lazorchak illegally tipped Messrs. Pendolino and Foldy and was in turn compensated by them. Messrs. Pendolino also tipped others as the number of tippees multiplied.
At the outset of the scheme FINRA identified the trading of Messrs. Foldy and Pendolino following the acquisition of Pharmion by Celgene. The regulator circulated a questionnaire to executives at Celgene asking that they specify if they knew anyone on a list of names which included Messrs. Foldy and Pendolino. Mr. Lazorchak falsely reported that he did not know either man. He later informed both men along with defendant Cupo about the FINRA questionnaire and his actions. Mr. Cupo reassured the group that their plan would evade detection, a step he took repeatedly according to the SEC.
The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e) and Securities Act Section 17(a). Each defendant in the criminal case is charged with multiple counts including conspiracy and securities fraud. The defendants voluntarily surrendered in the criminal action. Both cases are pending.