Insider trading is a key focus of SEC enforcement. With the formation of the market abuse unit which focuses on insider trading the Commission has been very aggressive. Not only has the Commission followed-up on inquiries initiated by the FINRA market surveillance unit, it has generated other inquiries from painstakingly analyzing trading data to identify potential repeat traders and other possible trends. While in many instances it is the high profile criminal charges which grab the headlines, SEC Enforcement has worked closely with criminal investigators and frequently has initiated the inquiry as it did with the investigation that lead to a guilty plea by an FDA chemist last week (here).
On Friday the SEC expanded its father-son insider trading action that centers on the acquisition of Mariner Energy by Apache Corporation in a deal announced on April 15, 2010. SEC v. Peterson, Civil Action No. 11-cv-5448 (S.D.N.Y. Filed Aug. 5, 2011). In the amended complaint the Commission added as defendants, Drew Brownstein, the founder and chief executive officer of the registered investment adviser and hedge fund management firm Big 5 Asset Management LLC and that firm.
The initial action centered on tips about the deal Clayton Peterson furnished to his son Drew. Clayton Peterson was the chairman of the audit committee and a member of the board of directors of Mariner Energy. Following the initiation of acquisition discussions in late March 2010, and prior to the April 2010 public announcement of the deal, Clayton Peterson repeatedly furnished information about the evolving transaction to his son, an investment adviser in Denver, Colorado. Drew purchased shares in several accounts. Following the public announcement of the deal the share price for Marine Energy rose 42%. Within days the accounts for which Drew Peterson had traded liquidated their positions, yielding a profit of about $150,000.
The Commission’s initial complaint alleged that Drew Peterson tipped a hedge fund manager who also traded. The unidentified hedge fund manager liquidated the positions taken in Mariner Energy for a $5 million profit. The amended complaint identifies that fund manager as a long time friend of Drew Clayton, Drew Brownstein and his fund Big 5 Asset Management.
Drew Peterson repeatedly tipped Mr. Brownstein about the impending acquisition according to the amended complaint. In their conversations Mr. Peterson told his friened that he should purchase the stock because his father had attended board meetings and “something good was going to happen for Mariner.” Mr. Brownstein subsequently purchased 200,000 shares or about $3.3 million worth of Mariner stock. Later the same day he bought 1,488 options on the stock.
Following additional conversations with Drew Peterson, Mr. Brownstein increased his option position, causing Big 5 funds to purchase a total of 2,512 contracts. He also caused his relatives to purchase a total of 25,000 shares of Mariner stock and 200 option contracts.
Additional conversations resulted in more purchases. Following a discussion between the two men on April 14, Mr. Brownstein purchased 200 option contracts for his account and increased Big 5 hedge funds’ position by acquiring an additional 1,000 options. The positions were liquidated following the announcement for a profit of almost $5 million.
Previously, the father and son pleaded guilty to criminal charges. Specifically, Clayton Peterson and his son Drew each pleaded guilty to criminal charges on August 5, 2011 of conspiracy to commit securities fraud and securities fraud. They are scheduled to be sentenced on January 12, 2012.
The amended SEC complaint against the Petersons, Mr. Brownstein and his hedge fund is pending. SEC v. Peterson, 11 Civ. 5448 (S.D.N.Y.).