Most of the discussion about insider trading these days is dominated by debates about whether there is a personal benefit, a gift, the application of the Supreme Court’s opinion in Salman last term or the split opinion in Martoma by the second circuit. The common denominator to all these discussions is, of course, the Dirks-Salman principle that tipping is supposed to resemble the insider trading for his or her own account, using company information to secure a personal profit. In the Commission’s latest insider trading case the company founder and CEO did just that – he traded for his account. SEC v. Chang, Civil Action No. 5:17-cv-05438 (N.D. Cal. Filed Sept. 20, 2017).
Defendant Peter Chang is the CEO of Alliance Fiber Optic Products, Inc. which designed and manufactured high performance fiber optic components and integrated modules. Founded in 1995, the company went public in 2000. Through his leadership positions as chairman of the board and CEO Mr. Chang had access to confidential, inside information which belonged to the company.
During his tenure at the firm Mr. Chang had two nominee brokerage accounts – he controlled them but one was in his wife’s name and the other that of his brother. The first was opened at T. Rowe Price under the name of his broker, Daniel Chang. Defendant Chang provided the vast majority of the funds that flowed through the account. From 2003 through October 2015 Mr. Change continually funded the account. During the same period he continuously bought and sold company stock through the account.
On February 3, 2011 Mr. Chang opened a second account. This account was at Scottrade Taiwan under his wife’s name. Funds were later wired to the account. From 2011 through 2015 the account had nominal holdings in firm stock.
In early 2015 the firm began merger talks with Corning Inc. The discussions went-on for several months. During the period Defendant Chang sold company shares in advance of the earnings announcements for the third quarter of 2015 and the fourth quarter of that year, avoiding losses. He acquired shares in advance of the announcement of the tender offer by Corning for the firm on April 7, 2016.
During the same period Mr. Chang’s brother also traded in company shares. His trades closely tracked those in the nominee accounts in timing, size and direction (purchase or sale) of Defendant Chang. Indeed, from the time the brother opened an account in November 2010, the two brothers only traded in Alliance Fiber shares. In total Defendant Chang had trading profits of over $1.5 million while his brother had over $600,000.
Mr. Chang did not report the trades in the two accounts he controlled as required. Likewise, he mislead T. Rowe Price about the account there, suggesting that Peter Chang was not related to the account holder. When FINRA sent inquiries to the company about the identity of traders, the list included the two nominee accounts. Mr. Chang identified the one name as that of his brother but failed to identify the account in the name of his wife.
The complaint alleges violations of Exchange Act Sections 10(b), 14(e) and 16(a). The case is pending. The U.S. Attorney’s Office for the Northern District of California filed a parallel criminal case. See Lit. Rel. No. 23937 (Sept. 20, 2017).
Seminar: Annual Private Funds Symposium, September 27, 2017, New York City, here
Webcast: Securities Issues & the Supreme Court: A Look Back and Ahead, by Tom Gorman; Celesq Legal Ed, September 28, 2017, here