A well-timed trade by a company employee sure draws the SEC’s attention in a hurry, as demonstrated once again in the Commission’s filing against Gregory Champe, an executive of Martek Biosciences Corporation, which make food supplements. It seems that Champe sold 2,600 shares of Martek on April 26, 2005, and the next day after the close of trading, the company disclosed that its revenues would drop over the next two quarters, which caused the shares to drop an eye-popping 46% the next day. Champe’s loss avoided was over $70,000, according to the SEC’s Litigaiton Release (here). In an example of virtual real-time enforcement in this type of investigation, the SEC announced a settlement of the case within a bit less than nine months from the transaction. Champe agreed to disgorge $54,825 and will not pay a civil penalty because of his "demonstrated inability to pay," which generally means the person has been fired by the company and the attorney’s fees have chewed up the remaining resources to settle the matter. There’s a pretty simple lesson in these types of cases: it ain’t worth it! (ph)
Category: Insider Trading
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Joe Nacchio, the former Qwest CEO was indicted yesterday (see Denver Post here). The indictment (Download nacchio_indictment.pdf) charges forty-two counts that are titled "Securities Fraud – Insider Trading.". It also includes a forfeiture count for the sum of $100,812,582.
Despite the number of counts and the inclusion of forfeiture, the entire indictment is only eight (8) pages long. Co-blogger Peter Henning in the Denver Post, "called the indictment ‘bare bones.’ ‘They don’t even try to link any of the information to any of the specific trading, which is uncommon,’ he said." The essence of the criminality as alleged in the indictment is that:
"Beginning on or about January 2, 2001, and continuing through and including September 10, 2001, NACCHIO, in the District of Colorado and elsewhere, did knowingly and willfully, directly and indirectly, by the use of means and instrumentalities of interstate commerce and of the mails, and the facilities of a national securities exchange use and employ, in connection with the purchase and sale of a security registered on a national securities exchange, a manipulative and deceptive device, scheme, artifice or contrivance to defraud in contravention of Rule 10b-5 (17 C.F.R.§ 240.10b-5) and Rule 10b5-1 (17 C.F.R. § 240.10b5-1) prescribed by the United States Securities and Exchange Commission. More specifically, NACCHIO, in furtherance of this scheme to defraud, did knowingly and willfully sell, using the instrumentalities of interstate commerce and the facilities of a national securities exchange more than $100 million worth of Qwest common stock on the dates and in the amounts set forth in Counts 1 through 42 while aware of and on the basis of material, non-public information on or about the dates and in the amounts set forth below." [the indictment lists the specific amounts]
According to the Denver Post, Attorneys Herbert Stern and John Richilano will be representing Nacchio and he will be pleading "Not Guilty."
One cannot discern from this indictment whether the government intends to try and prove this case through a witness, through correspondence, or via an email. There is no indication from this limited indictment as to how the government intends to try and prove that the accused acted "knowingly and willfully" in engaging in the alleged conduct.
(esp)
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Howard Stern decided to move to Sirius Radio and the information had a value. Now that proves well for Howard Stern, but not for those around him who might have decided to trade on that information. Unfortunately, an accountant and former VP of Sirius now find themselves entering into a civil settlement. (see here Fraud Update’s to an SEC Press Release). The press release states in part:
" Without admitting or denying the SEC’s allegations, …, a certified public accountant and former president of [an] accounting firm …., agreed to pay $52,000, and former Sirius executive vice president …. agreed to pay $35,000 to settle the Commission’s charges."
The Washington Post reports here that the accountant also plead guilty to criminal insider trading.
(esp)
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Former Ohio State University business school professor Roger Blackwell received a 6-year (72-month) prison term from his conviction in June on charges arising from an insider trading scheme. Blackwell is a well-known marketing expert who has worked with a number of companies on their business and marketing strategies. Blackwell’s business, Roger Blackwell Associates (RogerBlackwell.com), touts his many accomplishments but does not quite mention his conviction. Blackwell resigned his position at OSU after the conviction.
Blackwell was convicted of one count of conspiracy to commit insider trading, one count of conspiracy to obstruct justice, 14 counts of insider trading, two counts of making false statements, and one count of obstruction of an SEC proceeding. In addition, a Blackwell Associates employee and her husband were also convicted of the same charges (see U.S. Attorney’s Office press release on the conviction here). Blackwell tipped, among others, Jack Kahl, a wealthy Cleveland businessman, about a pending acquisition of Worthington Foods by Kellogg. Blackwell was a director of Worthington Foods at the time of the transaction. Kahl testified against Blackwell under a grant of immunity.
A Cleveland Plain Dealer story (here) notes that Blackwell sent a letter to the district court before the sentencing stating that he succumbed to the temptations of wealth and fame. Tipping by a director cannot be more obviously wrong in this day and age, so the temptation (or perhaps the love of money and honor) must have been particularly powerful. A post by Doug Berman on the Sentencing Law & Policy blog (here) notes an e-mail from a reader that the judge sentenced Blackwell in the upper range of the Sentencing Guidelines for the offense (63-78 months) and departed upward in imposing a $1 million fine on Blackwell. His codefendants received 33 and 27 months. (ph)
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Former broker David Pajcin was arrested in New York for insider trading based on receiving advance copies of issues of Business Week and trading in stocks touted in the magazine’s "Inside Wall Street" column. This is a type of scheme that has been tried with alarming regularity since the 1980s, particularly with Business Week, although it also was the underlying misconduct in the well-known Carpenter v. U.S. decision by the Supreme Court that upheld the conviction of defendants who traded in advance of "Heard on the Street" columns in the Wall Street Journal. An AP story (here) notes that Pajcin is accused of trading in shares of ten companies, including Alltel, thestreet.com, Arbitron, and Spectrum Pharmaceuticals.
This is not Pajcin’s first brush with insider trading allegations. He was named in an SEC amended complaint on Aug. 18 alleging insider trading in Reebok stock options immediately before the company announced it agreed to be taken over by adidas, trades that generated over $2 million in profits. According to the SEC’s Litigation Release (here), some of the trading took place through an account in the name of Pajcin’s aunt who lives in Croatia. Look for the U.S. Attorney’s Office to pursue criminal charges against Pajcin (and others) in this case, too. (ph)
UPDATE: Bruce Carton has an interesting post on the Securities Litigation Watch blog (here) noting how Pajcin’s trading fits a transparent pattern of insider trading that will (usually) be noticed by the SEC.
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The SEC announced the settlement of an insider trading case against Dr. Zvi Fuks and Sabina Ben-Yehuda , who received material non-public information from ImClone CEO Dr. Sam Waksal about a negative FDA response to the drug application for the company’s primary product, the colon cancer drug Erbitux. The SEC alleged that Waksal told Ben-Yehuda the information, and she in turn tipped Fuks at Waksal’s direction. While Ben-Yehuda sold $73,000 worth of ImClone stock, avoiding a loss of $9,679, Fuks sold over $5 million worth of shares, avoiding a loss of approximately $1.2 million. Fuks had been a member of ImClone’s scientific advisory board. In settling the matter, Fuks agreed to disgorge the amount of the loss avoided plus pay a penalty of approximately $1.2 million, while Ben-Yehuda will disgorge the loss avoided and pay a $50,000 civil penalty. An SEC Litigation Release (here) describes the settlement.
Fuks and Ben-Yehuda were originally charged with criminal insider trading, but those charges were dropped pending a resolution of the SEC civil case. The conduct of Dr. Waksal landed him in a federal prison to serve a seven-year sentence, and the disclosure of the information to Peter Bacanovic triggered the investigation that ultimately ensnared Martha Stewart, who sold her shares at the same time. An AP story (here) discusses the settlement. (ph)
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It’s an oft-repeated scenario: an offer is made for a company at a premium to its market price, and a few days later the SEC files a suit in the U.S. District Court for the Southern District of New York (effectively its home court) for a freeze on brokerage accounts through which options in the target were purchased right before the announcement. The latest example is a suit filed over the purchase of 10,000 call options in Placer Dome 5-6 days before Barrick Gold announced an unsolicited $9.2 billion bid for the company on Oct. 31. Placer Dome’s stock increased by 20%, and the options increased in value by $1.9 million. Needless to say, the options market makers for Placer Dome raised the roof over that kind of gain in only a few trading days, and the SEC responded by filing an emergency action to freeze the accounts. According to a Bloomberg story (here), the trading was through accounts at a Swiss asset management firm, and it is unlikely the true owners will identify themselves any time soon. Once again, it’s not free money, but it’s awfully tempting to reach for it. (ph)
UPDATE: The SEC Litigation Release is now available (here), and it states:
The Commission further alleges that on October 25 and 26, while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 10,000 call option contracts for Placer stock in an account at a broker-dealer in the United States. As the complaint alleges, over 5,000 call option contracts were "out of the money" and set to expire in November, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of Placer stock following the Announcement, the unrealized illicit profits on these option contracts total over $1.9 million.
Large purchases of out-of-the-money call options + $1.9 million in profits almost overnight = SEC TRO. (ph)
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A recent Second Circuit decision in United States v. Cassese (available on court website here) deals with the always-tricky issue of interpreting the "willfully" element in a securities fraud prosecution. The case involves the CEO of Computer Horizons Corp., John Cassese, whose company received a tender offer from Compuware Corp. that it turned down. A few months after rejecting the offer, Compuware’s CEO told Cassese that Compuware planned to acquire Data Processing Resources Corp. (DPRC), and might be interested in acquiring Computer Horizons at a future date. Upon learning about Compuware’s plans, Cassese purchased 15,000 shares of DPRC and, after the announcement that Compuware would acquired the company through a tender offer, sold his shares for a profit of approximately $150,000. Two months after the DPRC transactions, Cassese discussed the trades with another Compuware officer and said that "he had made a stupid mistake." The SEC filed a civil insider trading action, which Cassese settled, and the U.S. Attorney brought a criminal case based on a violation of Rules 10b-5 and 14e-3, which prohibits trading while in possession of nonpublic information about a tender offer. The district court dismissed the Rule 10b-5 charge because the government could not establish that Cassese breached of fiduciary trading (or other duty or trust and confidence) by misappropriating the information from Compuware.
After being convicted by the jury, the district court granted the defense motion for a judgment of acquittal on the ground of insufficient evidence that the defendant acted with the requisite willfulness to violate the law. The district court held that that the government’s evidence did not establish that Cassese knew he was trading in securities that would be subject to a tender offer, a requirement for a Rule 14e-3 violation. The lower court rejected the government’s argument that it need only prove that Cassese knew his trading was unlawful, but not that he knew that a tender offer was the method for conducting the transaction.
In affirming the district court, a majority of the Second Circuit held that even under the government’s "more expansive" reading of the intent element, its evidence was insufficient to show Cassese knew his conduct was unlawful. At the outset, the court noted:
Before analyzing the Government’s evidence, it is helpful to keep in mind the context in which the trades occurred. In purchasing the DPRC shares, Cassese did not breach any fiduciary duty, nor did he misappropriate any confidential information . . . The information Cassese had received was not related to Computer Horizons or to any company in which he could be considered an insider by virtue of a directorship or otherwise. Accordingly, he was under no legal duty to refrain from trading on the information by virtue of being an insider, or to keep it confidential. Finally, and significantly, the Government did not prove – and does not contend – that, when Cassese traded, he knew DPRC would be the subject of a tender offer. In other words, the Government contends it proved willfulness despite the lack of any of the traditional warning signals that would put one on notice that he ought to refrain from trading.
The Second Circuit rejected the government’s argument that Cassese’s use of two brokerage accounts to conduct the trades shows knowledge of wrongfulness as "frivolous" Regarding Cassese’s statement about doing something "stupid," the court stated: "Viewing this bit of evidence in a light most favorable to the Government, the fact that Cassese may have felt he made a mistake two months after the trades makes, at best, the most modest of contributions to the Government’s responsibility of proving beyond a reasonable doubt that Cassese willfully violated the securities laws." The court concluded:
Since few events in the life of an individual assume the importance of a criminal conviction, we take the "beyond a reasonable doubt" requirement with utmost seriousness. Here, we find that the Government’s evidence failed to reach that threshold. As discussed above, viewed singly, each of the areas of proof by the Government was characterized by modest evidentiary showings, equivocal or attenuated evidence of guilt or a combination of the three. More importantly, when the evidence is viewed in its totality, the evidence of willfulness is insufficient to dispel reasonable doubt on the part of a reasonable fact finder.
Circuit Judge Raggi dissented, arguing that the evidence was sufficient when viewed in the light most favorable to the verdict. (ph)
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Husbands are frequently accused of not listening to their wives, although I’ve never heard that complaint in my household. In an insider trading case filed by the SEC, it seems that Robert Petrosky not only listened to his wife, but he used the inside information she provided about an upcoming deal to buy ahead of the announcement. Petrosky’s wife is an employee of Valero Energy, and she discussed a pending acquisition by Valero of Premcor, Inc. Without his wife’s knowledge, Petrosky purchased Premcor shares, and reaped profits of approximately $41,000 after the announcement of the acquisition, which he will now have to disgorge in a settlement with the SEC, along with a civil money penalty of approximately $20,000. Petrosky may want to revert to nodding his head and occasionally mumbling "uh-huh" in the future. The SEC’s Litigation Release (here) discusses the settlement. (ph)
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A Washington Post story (here) discloses that the SEC sent a subpoena to Senate Majority Leader Bill Frist for documents related to the sale of HCA Inc. stock from the so-called "blind trusts" that held shares on behalf of the Senator and his family. The sales took place in late June, and a short time later the company disclosed a revenue shortfall that caused its stock to drop more than 10%, and the SEC investigation is focusing on possible insider trading by a number of HCA executives in advance of that announcement. While one can draw the impression from the story that the Commission issued the subpoena in just the past few days, which might signal a new direction in the case, in fact the article notes that the subpoena was sent out at some time in the past two weeks. The Commission issued a formal order of investigation at the start of the case, so the subpoena would likely have been issued to Senator Frist early on. Moreover, once the Enforcement Division staff has the power to compel the production of documents, they will use subpoenas rather than voluntary requests for documents.
I doubt much should be drawn from the fact that the Senator received a subpoena because, most likely, so did everyone else involved in the inquiry, including HCA and any financial institutions through which the shares were traded. At this stage, the SEC is most likely just sorting through the records it has received, and preparing to take the testimony of witnesses (including Senator Frist) under oath. Whether the case advances past the investigative phase depends on what is revealed by the documents and depositions, a process that will take quite a while. (ph)
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