The SEC’s Carter’s, Inc. Investigation Yields Another Insider Trading Case

Carter’s, Inc. is the investigation that just keeps on generating cases. The investigation has yielded seven SEC actions charging insider trading and financial fraud. Hedge fund manager Stephen Slawson became the eight person charged in the investigation. SEC v. Slawson, Civil Action No. 1:14-cv-3421 (N.D. Ga. Filed October 24, 2014).

Mr. Slawson is the co-founder and manager of hedge fund TCMP3 Partners L.P. In eight instances, beginning in 2006 and continuing through 2010, he is alleged to have traded on inside information which traces back to a Carter’s, Inc. and generated over $500,000 in illicit trading profits or losses avoided. Typically the information came to him from Dennis Rosenberg, a research analyst retained by the hedge fund. Mr. Rosenberg obtained the inside information from Eric Martin, a Carter’s vice president of investor relations before he was terminated in March 2009. Mr. Martin is currently serving a two year prison term after pleading guilty to one of eleven counts in an indictment charging him with securities fraud. Subsequently, the information came from Richard Posey, a Carter’s vice president of operations who furnished the information to Mr. Martin who then tipped Mr. Rosenberg who then tipped Mr. Slawson.

Mr. Martin is alleged to have illegally tipped Mr. Rosenberg on five occasions regarding up-coming earnings announcement for Carters, Inc. During his employment Mr. Martin tipped analysts such as Mr. Rosenberg who covered the company to develop his relationship with them. Mr. Slawson “knew or should have known that Rosenberg’s source at Carter’s was disclosing the information in violation of a fiduciary or similar duty of trust and confidence,” according to the complaint. The five instances where:

3Q 2006 financial results: Initially Mr. Martin informed Mr. Rosenberg that the financial results would not be positive. Mr. Rosenberg informed Mr. Slawson who caused the hedge fund to sell short. After receiving additional firm financial data, Mr. Martin reversed his position, telling Mr. Rosenberg, who tipped Mr. Slawson, that the results would be positive. Mr. Slawson covered the short position. Following the announcement the stock closed up. The hedge fund avoided a loss of about $27,000 by covering the short position.

1Q 2007 financial results: Mr. Martin learned that company earnings would significantly exceed analysts’ expectations. He relayed this information to Mr. Rosenberg who in turn tipped Mr. Rosenberg who caused the hedge fund to purchase shares. Following the earnings announcement the stock price closed up about $1.76 per share compared to the prior day, yielding $42,240 in profits for the hedge fund.

2Q2007 financial results: Mr. Martin again received negative information about the financial results for the quarter. The information was again transmitted down the chain to Mr. Slawson who caused the hedge fund to sell shares and sell short 20,000 shares. Following the earnings announcement the share price of Carter’s closed down about 8.52%. The hedge fund had a profit of about $114,480.

2Q2008 financial results: During the quarter Mr. Martin learned that his company would release earnings that would again exceed market expectations. As in the past he tipped Mr. Rosenberg who in turn tipped Mr. Slawson who caused the hedge fund to buy additional shares of Carter’s, Inc. Following the positive announcement the fund had profits of $17,820.

4Q 2008 financial results: Prior to the announcement of the financial results Mr. Martin learned that the financial results would be “generally positive” for the period. He conveyed that information down what by then had become the usual chain. The hedge fund purchased 10,000 shares of Carter’s stock. Following the announcement of the financial results, the share price closed up over 10% compared to the prior day. The fund had profits of about $15,200.

Following the termination of Mr. Martin, he obtained inside information from Mr. Posey which he then transmitted to Mr. Rosenberg and ultimately to Mr. Slawson in two instances and on another occasion, directly to the hedge fund manager. The first instance involved the second quarter 2009 financial results while the second involved an announcement that the company would delay announcing the third quarter 2009 financial results. In the first Mr. Posey told Mr. Martin that Carter’s would beat the street for the quarter. The information was transmitted to Mr. Rosenberg and then to Mr. Slawson who purchased shares in family accounts and for the hedge fund. Following the announcement of the results the share price closed up slightly, yielding ill-gotten gains in the personal and fund accounts of about $34,604. In the second instance the tipping process was repeated. Mr. Slawson sold shares from his personal account and that of the fund. Following the announcement the share price dropped 23.84% compared to the prior day. Collectively the accounts avoided losses of about $215,916.

Finally, Mr. Martin furnished inside information to Mr. Martin regarding Carter’s second quarter 2010 financial results, including the fact that future guidance would be negative. Mr. Martin furnished this information directly to Mr. Slawson as did Mr. Rosenberg. Based on Mr. Rosenberg’s “statements, the nature of the information provided, and his history of providing similar information, Mr. Slawson knew or should have known that the information was obtained from an insider in violation of a fiduciary or similar duty of trust and confidence,” according to the complaint. Mr. Slawson sold call options and shorted the stock. Following the announcement the share price declined by about $2. The total gains of the fund were about $42,240. Mr. Posey furnished the information to Mr. Martin “by virtue of their close friendship and Posey’s desire to enhance his reputation.”

The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The U.S. Attorney’s Office filed parallel criminal charges. Both cases are pending. See Lit. Rel. No. 23118 (October 24, 2014).