Dentist, Claiming Tip Was a Rumor, Wins Insider Trading Case

A jury found Jessie Roberts, a Louisiana dentist who claimed what the government called an illegal tip was just a rumor, not guilty of insider trading. U.S. v. Roberts, No. 15-ct-00020 (M.D. La. Filed Feb19, 2015). The case centered on trading in advance of the acquisition of the Shaw Group, Inc. by Chicago Bridge & Iron, announced on August 30, 2012. The two count indictment contained one count of conspiracy to commit securities fraud and one count of securities fraud.

The underlying facts are sketched in the parallel action brought by the Commission. SEC v. Zeringue, Civil Action No 3:15-cv-00405 (W.D. La. Filed Feb. 19, 2015). That action named as defendants Scott Zeringue and Jessie Roberts. Mr. Zeringue was a the vice president of construction operations at Shaw Group, Inc., an energy construction company. Mr. Roberts is his brother-in-law.

Prior to the deal announcement Mr. Zeringue learned of the then pending transaction through his employment. He purchased 125 shares of Shaw, told his brother-in-law about the deal and asked him to purchase additional shares for him. Mr. Roberts made purchases and tipped Friend A and a relative of that person. Both traded. Overall Mr. Roberts had trading profits of $765,000 while the other traders profits totaled $154,000. Mr. Roberts paid his brother-in-law $30,000 for the tip. The action alleged violations of Exchange Act Section 10(b). Mr. Zeringue pleaded guilty in the parallel criminal action and settled with the Commission.

Mr. Roberts, however, went to trial. Following seven hours of deliberations the jury returned verdicts of not guilty on each count. The defense claimed that Mr. Roberts relied on his research but not a rumor of a transaction he received from his brother-in-law, according to a report by Law 360 (Aug. 15, 2017). While Mr. Roberts chose not to testify, his version of the trading transactions was put in evidence by the FBI to whom he had given statements.

Mr. Robert’s claim about rumors regarding the transaction appears to draw support from the other insider trading cases that swirled around the Shaw transaction. For example, SEC v. Trahan, Civil Action No. 17-cv-731 (W.D. LA. Filed June 6, 2017), is another action based on the deal. It named as defendants Michael Trahan, the owner of engineering consulting company Petra Consultants, Inc. Mr. Trahan was a consultant to Shaw. During his engagement, and before the July 30, 2012 announcement date, an employee of the firm told him about the merger. Mr. Trahan purchased 5,600 shares of Shaw common stock which he sold after the deal announcement for a profit of $69,735.00. The complaint alleged violations of Exchange Act Section 10(b). To resolve the case Mr. Trahan consented to the entry of a permanent injunction prohibiting future violations of Section 10(b). In addition, he agreed to pay disgorgement of $69,735.00, prejudgment interest and a penalty equal to his trading profits.

SEC v. Ho, Civil Action No. 6:17-cv-00895 (W.D. La. Filed July 11, 2017) is another action based on the Shaw deal. In this action Victory Ho, a self-employed convenience store operator, was named as a defendant. On July 27, 2012, the last trading day before the deal announcement, Mr. Ho used all the cash in his brokerage account to purchase 296 out of the money Shaw call options. On July 17, 2012, the day before opening two brokerage accounts at different firms, Mr. Ho’s sister had what the complaint called a significant number of calls and texts with a friend employed at Shaw who had inside information. In the hour prior to opening the account, Mr. Ho had seven texts or calls with his sister. On July 26 Mr. Ho’s sister and the Shaw employee exchanged additional calls and texts. Those were interspersed with texts and calls by Mr. Ho’s sister to him. During the staff investigation Mr. Ho invoked his Fifth Amendment privilege. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.

Yet another case is SEC v. Wagner, Civil Action No. 8:14-cv-01036(W.D. Md. Filed April 3, 2014). This action named as defendants Walter Wagner and Alexander Osborn. Prior to the deal date John Femenia, a personal friend of Mr. Wanger, was employed in the investment banking division of Wells Fargo Securities, LLC. Through that position he learned about the transaction and gifted the information to his friend who had lost his job. Mr. Wagner shared the information with his friend, Alexander Osborn. Both traded in the securities of the Shaw Companies and, following the deal announcement, had profits of, respectively, $517,784 and $439,830. The Commission’s complaint alleged violations of Exchange Act Section 10(b). Mr. Wagner resolved the action, consenting to the entry of a permanent injunction based on the Section cited in the complaint. He also agreed to pay disgorgement and prejudgment interest. The Court will determine any financial penalty. A parallel criminal action against Mr. Wagner brought by the U.S. Attorney’s Office for the Western District of North Carolina.

Finally, Mr. Femenia, the tipper in the Wagner case above, was a source of inside information not just on the Shaw deal, but others, according to the Commission. SEC v. Femenia, Civil Action No. 3:12 cv 803 (W.D. N.C. Filed Dec. 5, 2012) is an action against the Wells Fargo investment banking associate. The complaint alleged that Mr. Femenia headed a 10 person insider trading ring. It included: Shawn Hegedus, a registered representative and long time friend of Mr. Femenia who is alleged to have been tipped by him; Aaron Wens and Matthew Musante, two other friends alleged to have been tipped by Mr. Femena; Anthony Musante, father of Matthew, also alleged to have been tipped by Mr. Femena; Danielle Laurenti, the girlfriend of Mr. Hegedus who is alleged to have tipped her along with four of his business colleagues, Roger Williams, James Hayes IV, and Kenneth Raby. The case centered on four take-over transactions: 1) The acquisition by GENCO Distribution Systems of ATC Technology Corporation, announced on July 19, 2010; 2) the purchase by Rock-Tenn Company of Smurfit-Stone Containers Corporation, announced on January 23, 2011; 3) the acquisition of K-Sea Transportation Partners by Kirby Corporation, announced on March 13, 2011; and 4) the purchase of The Shaw Group by Chicago Bridge & Iron Company, announced on July 30, 2012. The ring participants netted about $11 million in illegal profits, according to the complaint. The complaint alleged violations of Exchange Act Section 10(b).

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What Is The Value of Cooperation With the SEC?

The Commission has long encouraged firms and individuals to cooperate with its investigations based on the promise of consideration when the action is resolved. When the resolution is reached the agency may acknowledge the cooperation of the individual. In making such an acknowledgement the SEC does not in the usual course identify what actions the person took or identify the “cooperation credit” earned – that is, how did the cooperation impact the charging decision, the resolution of the charges against the person or both. This contrasts sharply with actions resolved by others. For example the Department of Justice when resolving FCPA cases frequently cited examples of what the person or company did to cooperate and then identifies how it impacted the matter. The U.K. Serious Frauds office will specify that the cooperator received a discount on the penalty of a specific percentage as will the Hong Kong Securities and Futures Commission.

The resolution of potential charges against Jordan Fogel, a defendant in the Commission’s most recent political intelligence insider trading case, however, gives a glimpse into the undisclosed world of SEC cooperation credit. SEC v. Blaszczak, Civil Action No. 1:17-cv-03919 (S.D.N.Y. Filed May 24, 2017). Named as defendants in the underlying case were: David Blaszczak, formerly an employee of Medicare & Medicade Services or CMS who has worked for a series of consulting firms since 2005; Christopher Worrall, an employee of CMS since 1999 and long time friend of Mr. Blaszczak; Theodore Huber, a health care analyst for Adviser A; and Mr. Fogel, also a health care analyst for Adviser A.

The action centers on alleged tips of inside information by Mr. Worrall to Mr. Balaszczak about three significant rate changes at CMS between May 2012 and November 2013. CMS issues proposed and final rules that set the Medicare reimbursement rates for the following calendar year. The releases often impact the share price of firms that offer products and services covered by the impacted fee changes. Accordingly, the rate changes are made after the close of the market.

Mr. Worrall had access to material non-public CMS decisions concerning reimbursement amounts. Through his position at CMS Mr. Worrall monitored price changes. That position imposed a duty of confidentiality on Mr. Worrall. As a CMS employee he was subject to Section 21A(h) of the Exchange Act which imposes a duty of trust and confidence on executive branch employees to the U.S. Government and the citizens of the United States with respect to material, non-public information. The Section was added to the Exchange Act by the STOCK Act of 2012. CMS, in addition, has an Employee Nondisclosure Policy that imposed similar duties regarding “market sensitive” information. The Standards of Ethical Conduct for Employees of the Executive Branch fortified those duties.

Despite his obligations, in three instances over a period of about one and one half years, Mr. Worrall furnished inside information on CMS rate changes that lowered reimbursement rates to his friend and former co-worked, Defendant Blaszczak. The information on each occasion was transmitted in personal meetings, on the telephone, in emails and through text messages. In each instance the information was transmitted by Mr. Blaszczak to Mr. Huber and/or Mr. Forel who in turn caused Adviser A to enter into securities transactions on behalf of certain hedge funds. Mr. Worrall knew, or should have known, the information would be used for securities trading. Those transactions yielded over $3.9 million in trading profits.

Mr. Blaszczak knew or should have known that the information he obtained from his long time friend was material, non-public information, according to the complaint. He knew the position of his friend at CMS and the access he had to such information. He also touted his connection to CMS and those with information about the future actions of the agency. Mr. Worrall furnished the information to his former colleague in view of the long-standing friendship of the two men. He was also aware that the relationship furnished him with certain business opportunities such as the prospect of leaving CMS and entering the consulting business. While he had considered potential opportunities he did not, during the period here, accept them. Mr. Worrall did, however, use one job offer he rejected to secure a significant pay increase at CMS.

Defendants Huber and Forell knew, or should have known that the information furnished to them by Mr. Blaszczak traced to CMS. Both men knew that Mr. Blaszczak had once been employed by the agency and that he maintained contacts with the CMS staff. They were also aware that the information he provided differed from that put out by other analysis and proved to be accurate. Indeed, they sought out Mr. Blaszczak to verify information for them.

Each of the men down the tipping chain also benefitted from the illegal trading as did Christopher Worrall. Adviser A paid Mr. Blaszczak’s firm just under $200,000 during the period for the information. Messrs. Huber and Forell are believed to have been compensated for the information resulting in the profitable trades, according to the complaint. That complaint alleges violations of Securities Act Section 17(a)(1) and Exchange Act Section 10(b). The Manhattan U.S. Attorney’s Office brought a parallel criminal case.

Mr. Fogel agreed to cooperate with the SEC in its ongoing litigation. As part of that agreement he consented to the entry of a permanent injunction based on each of the Sections cited in the complaint – Securities Act Section 17(a) and Exchange Act Section 10(b). The Court will determine what amount, if any, of disgorgement and prejudgment interest Mr. Fogel should pay as well as the amount of any civil penalty. See Lit. Rel. No. 23899 (August 8, 2017).

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