The former husband of Playboy CEO Christie Hefner, attorney William Marovitz, settled insider trading charges with the SEC. The complaint alleges that Mr. Marovitz repeatedly traded in Playboy shares while in possess of inside information that he misappropriated from his wife. SEC v. Marovitz, 1:11-cv-05259 (N.D. Ill. Aug. 3, 2011).
The complaint is based on three transactions. The first centers on a potential takeover of Playboy. On November 10, 2009 Mr. Marovits purchased 9,000 shares at $2.77. At the time his wife, on behalf of the company, was in negotiations with Iconix Brand Group, Inc. to be acquired. The discussions began in October 2008.
Two days after the purchase Bloomberg reported the acquisition talks. The stock price increased 42%, closing up at $4.07 per share. Although Iconix sent Playboy a non-binding offer letter on November 13, 2009 on the morning of December 15 the CEO of the company sent an e-mail to Ms. Hefner ending the talks. That afternoon Mr. Marovits instructed his broker to sell his Playboy shares. Most but not all of the shares were sold. After Bloomberg announced the collapse of the talks on December 16 the share price declined 10%. The same day Mr. Marovits’ broker called to see if he wanted to sell the balance of his holdings. He declined although the share price still exceeded his purchase price. Selling before the Bloomberg announcement permitted Mr. Marovits to avoid a loss of $9,911.70.
The second transaction occurred the year before the takeover deal. On May 5, 2008 Mr. Marovitz sold 14,700 shares of Playboy. The next day the company announced a first quarter loss and the stock declined 9%. Mr. Marovitz avoided a loss of $11,507.20.
The third transaction began on April 15, 2004 when Mr. Marowitz purchased 5,000 shares. On April 21, 2004 the company announced an offering of its Class B stock. Following the announcement the share price increased by 8%. Mr. Marovitz’s unrealized gain totaled $2,806.
At the time of each of the three transactions the complaint alleges that Mr. Marovitz had material inside information that he misappropriated. The complaint also reiterates after each transaction that in 1998 Ms. Hefner told her then husband that she expected him to keep any information confidential and referred him to the general counsel of the company. The general counsel faxed Mr. Marovitz a memorandum warning that all the rules which apply to his wife also apply to him and cautioned about insider trading.
What the complaint does not say is that Ms. Hefner ever told her husband about the merger negotiations, the earnings release or the stock offerings. The complaint does not specify that Mr. Marovitz saw documents about the merger negotiations, the earnings release or the stock offerings. In fact, the complaint does not identify any source of inside information. Rather, the claim appears to be based on possible access through his wife and the trading pattern which is incomplete since he continued to hold part of the shares bought in 2009 and the 2004 gains are “unrealized,” that is the shares were not sold.
Nevertheless, Mr. Marovitz settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(a) and Exchange Act Section 10(b). He also agreed to pay $168,352 in disgorgement, prejudgment interest and civil penalties. The case originated from an inspection of a broker dealer according to the Litigation Release, No. 22059 (Aug 3, 2011).
Program: Is FCPA Enforcement To Aggressive? August 5, 2011, ABA Annual Meeting Toronto. The program links are here and here. The program is co-chaired by Thomas Gorman, Dorsey & Whitney, and Frank Razzano, Pepper Hamilton. The panel includes Ret. Judge Stanely Sporkin, Greg Andres, Deputy AG, DOJ; Peter Clark, Cadwalder, Wickersham & Taft; Joseph Warin, Gibson, Dunn & Crutcher; and Eric Bruce, Kobre & Kim.