The SEC and DOJ are being aggressive in bringing insider trading cases. DOJ and, in particular the Manhattan U.S. Attorney’s Office, have focused on the use of so-called blue collar tactics. The SEC has relied on more traditional methods keyed to analyzing the trading and the surrounding facts and circumstances. Whatever the method it is critical that the source of the inside information be found. No source and no inside information equals no case.
Last week the Commission brought another “friends and family” insider trading cases. SEC v. Carroll, Case No. 3:11-mc-99999 (W.D. Ky. Filed March 17, 2011). The complaint alleges insider trading based on the possession of material non-public information regarding the take over of Steel Technologies, Inc. by Mitsui & Co. Named as defendants are four employees of Steel Technologies, Patrick Carroll, William Carroll, David Stitt and David Calcutt. Each traded. Also named as defendants are four alleged tippees: James Carroll (son of Patrick), John Monroe (friend of Christopher Calcutt) , Stephen Somers (friend of John Monroe) and Christopher Calcutt (brother of David Calcutt). Each traded. In “family and friends” case such as this one the source of the inside information is typically one of the family members or friends named as a defendant.
Not here. None of the employee defendants were “over the wall,” that is part of the deal team. There is no allegation that any of the employee defendants misappropriated the inside information. If they do not have inside information then clearly the tippees do not.
Where then does the inside information come from? The complaint alleges two key sources. For three of the four employee defendants the source is, according to the SEC, Steel Technologies then President and COO Michael Carroll who is now the President and CEO. He is the brother of Patrick and Tad and uncle of James. Michael was involved in the transaction according to the complaint. Each employee defendant reported to Michael. The complaint specifically identifies him as the source for:
David Calcuitt: After detailing earlier trades unrelated to the case where the Commission suggests he had inside information, the complaint states that “[a]s a result of one or more of his communications with Michael . . .Calcutt learned material nonpublic information . . . “ about the deal;
Patrick Carroll: After noting that Mitsui representatives toured several company facilities including one where Patrick worked the complaint claims that “[a]s a result of those tours and one or more communications with his brother Michael . .. Patrick learned material nonpublic information . . . “ about the deal; and
William “Tad” Carroll: After alleging that on prior occasions not related to the case Michael had given him confidential information, the complaint states that as a result of “communications with his brother Michael . . . Tad learned material nonpublic information about the forthcoming … “ deal.
The source for David Stitt is also identified but is nameless. In this regard the complaint claims that Mr. Stitt made numerous telephone calls to and from individuals at the corporate headquarters after learning that he might have to make what was characterized as an unusual trip there on short notice. Then in the space of a few minutes he received five consecutive calls from the same number at corporate headquarters. This was also “unusual” according to the complaint. Trading commenced. There is no information about the telephone number, identification of the person to whom it belongs or the individual on the other end of the five calls.
The SEC’s case here hinges on a person identified but not named as a defendant or cooperating witness and an unnamed caller. To be sure the complaint contains a significant amount of detail regarding the securities transactions of each defendant, all of which are unusual according to the SEC. There are also instances where a defendant acted in a manner which suggests a cover-up, according to the complaint. In the end however, the complaint has two glaring omissions: one is COO Michael, identified in the complaint under the heading “Relevant Entities and Individuals.” The other is the unidentified caller who is simply missing.