The SEC filed a complaint in the U.S. District Court for the Northern District of California (San Francisco) alleging that Anthony Sudol, a former employee of Cisco Systems Inc., tipped his two brothers (Michael and Richard), about five companies Cisco intended to acquire before the information was publicly disclosed. The SEC alleges (complaint here) that the brothers made profits of more than $400,000 and details their trading in the companies to be acquired by Cisco. (ph)
Category: Insider Trading
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The My Shingle blog (Carolyn Elefant) has an interesting post (here) highlighting an article in the Seattle Times (here) about how a former SEC attorney, Peter Romeo of Hogan & Hartson, was able to persuade the SEC to file an amicus brief on behalf of a selling shareholder accused of violating Section 16 (the short-swing insider trading profits provision) and being liable for returning $247 million to his company. The executive, Naveen Jain, was the founder of InfoSpace, a casualty of the dot.com boom that is the subject of numerous shareholder lawsuits. The newspaper article raises questions about why the SEC supported Jain on appeal of the district court’s Section 16 ruling rather than investigating him for insider trading. Moreover, the article seems to question whether Romeo traded on his contacts at the agency to get it to support Jain’s position. In reading the article, it seems that the writers may have gotten Section 16 mixed up with Section 10(b), the anti-fraud provision. While Section 16 (here) deals with so-called short-swing trades by directors, officers, and 10% shareholders, it is not something the SEC ever pursues for enforcement purposes, and the provision is designed for companies (and individuals who discover the violations) to recover profits in private actions. The law is also notoriously difficult to understand, as any corporate counsel can attest — sometimes the statute is almost a "gotcha" provision that does not require any proof of scienter or even negligence. Section 10(b) and Rule 10b-5 are the classic anti-fraud provisions used to prosecute insider trading, such as the recent civil and criminal cases involving ImClone Systems (earlier post here). There may well be an insider trading (or other type of securities fraud) case against Jain, it’s just not the one that Romeo represented him on related to his sales of InfoSpace shares. The fact that Romeo was able to convince the SEC’s General Counsel’s office to file an amicus brief is not nefarious, or even surprising, if the lower court’s ruling truly was incorrect. In fact, the Ninth Circuit reversed the district court’s decision, vindicating the Commission’s intervention in the proceeding, and Jain eventually settled for a $65 million payment. Romeo may have known who to call at the SEC, but that is about as far as his contacts will get him. Moreover, Romeo worked at the Commission from 1969 to 1984, and I doubt whether there are many colleagues left from his tenure that ended over 20 years ago. (ph)
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The SEC and the U.S. Attorney for the Eastern District of New York (Brooklyn) have filed civil and criminal insider trading charges against Frank Furino, who was employed as a clerk for one of the floor brokers at the New York Stock Exchange. The floor brokers are responsible for maintaining an orderly market in the stocks they are responsible for overseeing, and the government accused Furino of tipping off a day-trader about large block trades so the trader could buy or sell ahead of the larger transaction, i.e. front-running. Accord to the SEC’s Litigation Release:
As a floor clerk, Furino had access to the purchase and sell orders of the floor broker’s customers. Furino routinely informed the day trader by telephone of the security, quantity, price, and side (buy or sell) associated with large customer orders, after the floor broker received, but before it executed, these orders. On at least 58 occasions, the day trader used the information obtained from Furino to trade ahead of the floor broker’s customers. For example, after Furino informed the day trader about a customer’s block order to purchase shares of Computer Associates International, Inc. stock on October 25, 2000, the day trader bought 17,000 shares of Computer Associates stock at an average price of $28.27. Within one minute, the day trader sold the 17,000 shares of Computer Associates stock through the floor broker at $29 per share, at the same time that the floor broker’s customer’s buy order for 84,500 shares was executed. The rise in share price resulted in the day trader making a profit of approximately $12,091. Overall, the day trader made more than $300,000 from this scheme. Additionally, the day trader compensated Furino for the confidential order flow information through undisclosed cash payments (approximately $50,000) and commissions.
Furino was arrested and arraigned on the criminal charge. The press release issued by the USAO is here. (ph)
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