In the typical insider trading case a person entrusted with confidential, material non-public information breaches their duty for personal gain and trades for a profit or to avoid a loss or furnishes the information to someone who seeks to profit from its use through trading. Many insider trading cases are thus centered on the misuse of information about a pending corporate transaction or earnings announcement.
A variation of the typical insider trading scheme was employed by a market professional at a stock trading firm to profit. Rather than trade in advance of corporate events to profit from the price increase, the professional shorted the stock in advance of an offering, relying on the standard market economics to generate profits. U.S. v. Fishoff, No. 3:15-cr-0586 (D. N.J.).
Steven Fishoff was the owner and operator of a stock trading operation. He and his confederates cultivated contacts with firms in the securities business. Frequently they were brought “over the wall” with regard to various secondary offerings. Over a period of about three years beginning in May 2010 Mr. Fishoff repeatedly breach his obligations by crossing the wall that was designed to preclude the use of the information before the offering and traded. Specifically, in advance of a number of secondary offerings he sold the shares involved in the offering short before the offering announcement, betting that the stock would drop when the secondary sale of shares was disclosed – an economically predictable event on which SEC Rule 105 is based which precludes such activity. In addition, he repeatedly furnished the information to defendants Ronald Chernin, Steven Costantin, Paul Petrello and Joseph Spera.
Mr. Fishoff repeatedly shorted the shares of firms such as Synergy Pharmaceuticals, Inc. based on the inside information that an offering would be conducted. In shorting the stock Mr. Fishoff and his confederates anticipated the drop in the price of the stock. After the offering was announced and the share price dropped, shares could be purchased at a lower price to cover the short position. The price differences created a profit. Trades were typically placed through entities owned and/or controlled by the defendants.
Over the period, defendants reaped trading profits of about $3.9 million. Mr. Fishoff generally shared in the profits of the other traders since he furnished the information.
Mr. Fishoff pleaded guilty to a four count indictment that charged him with securities fraud. On Monday he was sentenced to serve thirty months in prison. Each of the other defendants also pleaded guilty. Each is awaiting sentencing.