The SEC’s investigation relating to children’s clothing manufacturer Carter’s Inc. is the inquiry which keeps on giving. At a time when the pipeline of enforcement actions seems to have all but dried up, the Carter’s investigation keeps generating cases. To date there have been six actions. Now the Commission and the U.S. Attorney have new insider trading cases tied to the company. SEC v. Megalli, Civil Action No. 1:13-CV-03783 (N.D. Ga. Filed Nov. 14, 2013); U.S. v. Magalli, Case No. 1:13-cr-00442 (N.D. Ga. Filed Nov. 14, 2013).
Mark Megalli was an executive at now defunct investment adviser Level Global Investors, L.P. from August 2009 through the fall of 2011. During that period he is alleged to have traded on inside information in Carter’s shares in four instances, yielding profits or losses avoided of about $3 million.
The inside information came from then former Carter’s executive Eric Martin who at one time with the vice president of Investor Relations for the firm. By the time of the transactions here Mr. Martin had departed from the company after having engaged in insider trading. Indeed, Mr. Martin eventually pleaded guilty to one of eleven counts in an indictment charging him with insider trading. He has also consented to the entry of a permanent injunction and an officer/director bar in the Commission’s parallel case.
In late 2009, however, Mr. Martin continued to obtain material non-public information about Carter’s. His source was Richard Posey, then the firm’s vice president of operations. The information was furnished “in exchange for reputational benefit, i.e. to show that Posey was a source of valuable information, to further their friendship, and in expectation of future business contacts and benefits,” according to the SEC complaint.
Mr. Megalli entered into a consulting agreement with a firm owned by Eric Martin on September 14, 2009. The agreement was executed on behalf of Level Global, a firm Mr. Megalli had recently joined as head of its consumer section. Under the terms of the six month agreement, Level paid $50,000 to the Martin owned company.
Subsequently, Mr. Martin provided Mr. Megalli with inside information in four instances:
October 27, 2009 accounting practices announcement: In mid-September 2009 Mr. Megalli directed Level to purchase 350,000 shares of Carter’s stock at a total cost of $9 million. The acquisition was based on positive information about the company from Mr. Martin. In late October, however, Mr. Martin advised the hedge fund executive that Carter’s had incurred an unexpected accounting issue. The information came from Mr. Posey. Level, at the direction of Mr. Megalli, liquidated its position. The firm avoided a loss of $2,110,910.
November 9, 2009 restatement announcement: In early November Mr. Megalli learned in a telephone call with Mr. Martin that Carter’s would announce a restatement of its financial statements as a result of an accounting fraud. Mr. Megalli directed Level to “lighten up” on Carter’s without “killing the stock.” The firm sold 150,000 of a 600,000 share stake the same day as the announcement. This avoided a loss of $268,500.
December 23, 2009 restatement announcement: On November 10, 2009 Level purchased 50,000 shares of Carter’s stock at the direction of Mr. Megalli. During the balance of the month, and the first part of December, Mr. Martin continued to give Mr. Megalli positive information on Carter’s. Following the announcement in December regarding the restatement the share price increased. Global had a profit of $205,000.
July 29, 2010 earnings release: In early July 2010 Megalli learned from Eric Martin, who had been tipped by Mr. Posey, that Carter’s quarterly earnings would be below expectations. Level then built a short position in the stock which grew to 300,000 at the direction of Mr. Megalli. Following the announcement the share price dropped and Level covered its position, yielding profits of $648,655.
The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 22870 (Nov. 14, 2013).