Consultant, Long Time Friend Settle SEC Insider Trading Charges
SEC Enforcement is shifting focus to consumers and cyber-security according to the Chairman. Whether that marks the end of “broken windows” and many of the programs the approach spawned is yet to be seen. Regardless, insider trading, long a staple of the Enforcement Division, is here to stay. SEC v. Ellerin, Civil Action No. 1:17-cv-12240 (D. Mass. Filed Nov. 14, 2017).
Susan Ellerin and Edward Blumstein are named as defendants in the SEC’s latest insider trading case. Ms. Ellerin is the founder and president of STAT Resources, Inc., a statistical market research firm. It provides marketing and management consulting services to various public company clients. Edward Blumstein, presently retired, worked in information technology services. He and Ms. Ellerin are close friends. Mr. Blumstein furnished IT services to Ms. Ellerin.
The action centers around the acquisition of ADT Corporation, a firm which provides business and home monitoring services, by certain entities financed by hedge fund giant Apollo in a deal announced prior to the opening of the market on February 16, 2016. An affiliate of the acquisition entity was Protection I Security Solutions.
In July 2015 the chief revenue officer or CRO of Protection 1, a long time friend of Ms. Ellerin, retained her to provide consulting services for the firm. Ms. Ellerin provided background research on companies in potentially adjacent markets prior to the meetings between Apollo and Protection I. The purpose of the work as Ms. Ellerin knew, was to provide a quick read on partnering potential.
On October 29, 2017 the CRO visited with Ms. Ellerin, and spent two days at her home. At the time he was aware that ADT and Protection 1 were engaged in merger discussions and that another meeting between the firms was scheduled for the next month. Indeed, during the visit the potential acquisition of ADT by Apollo and Protection 1 was discussed. Four days later on November 2, 2015 Mr. Blumstein placed limit orders to purchase call options for 1,000 shares of ADT stock. Beginning eight days later on November 10, 2016 Ms. Ellerin started purchasing ADT shares. Over a nine day period she placed four orders for ADT stock, two of which filled.
Following a February 2, 2016 text message from the CRO to Ms. Ellerin noting that big changes were coming, the two friends chatted on the telephone. In that conversation, which took place five days after the text message, the CRO and Ms. Ellerin again discussed a potential ADT Protection 1 deal. The same day Ms. Ellerin and Mr. Blumstein spoke on the phone. In fact, on February 7 and 8 the two spoke four times on the phone.
On the morning of February 8 Mr. Blumstein purchased additional options for ADT. Minutes after those transactions Ms. Ellerin purchased an additional 800 shares of ADT. Following the deal announcement Ms. Ellerin sold her shares for a profit of $15,054. Mr. Blumstein exercised his options, yielding profits of $71,070. The complaint alleges violations of Exchange Act Section 10(b).
To resolve the case, each defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. In addition, Ms. Ellerin will pay disgorgement of $15,054, prejudgment interest and a penalty equal to the amount of her trading profits. Mr. Blumstein will be required to pay disgorgement of $71,070, prejudgment interest and a penalty equal to his trading profits. See Lit. Rel. No. 23986 (Nov. 14, 2017).
Program: The Fourth Annual Dorsey Federal Enforcement Forum will be held on December 6, 2017. There will be panel discussions and presentation on EPA enforcement, SEC enforcement, investment advisers, international sanctions, FinTec, and FBI international corruption investigations, followed by a holiday party. Attend in person, listen on the web or watch a live stream; CLE available. For a detailed program and free register click here.