SEC Charges Two Market Professionals With Insider Trading

The SEC brought insider trading charges against two securities professionals. One was an investment adviser who traded for his account and several of his clients. The other was a registered representative. SEC v. Tabor Klein, Civil Action No. 9:13-cv-80954 (S.D. Fla. Filed September 20, 2013).

The action centers on the acquisition of King Pharmaceuticals, Inc. by Pfizer, Inc., announced October 12, 2010 before the opening of the markets. That day King’s stock closed up 39% at $14.14 per share. Trading volume increased 12,000% compared to the prior trading day.

Defendant Tibor Klein is the owner of Klein Financial Services, an investment adviser in Valley Stream, New York. Defendant Michael Schechtman was a registered representative at Ameriprise Financial, Inc. The two men have been friends for years.

Mr. Klein was also a long time friend of attorney Robert M. Schulman. The two men and their families visited periodically and frequently shared personal information. Mr. Schulman had also entrusted his friend with the management of his investment accounts. Mr. Klein knew the names of several of Mr. Schulman’s clients, including King.

Mr. Schulman was not involved in the King merger negotiations. Since he represented the company in litigation, a law firm colleague who also worked with King informed him about the then pending deal discussions.

During the weekend of August 13-15, 2010 Mr. Klein visited Mr. Klein and his family, spending the night at their home. At one dinner Mr. Schulman drank several glasses of wine and became intoxicated. During the conversation he “blurted out to Klein, ‘It would be nice to be King for a day.’” The complaint claims this remark was “intended to imply he [Schulman] was a ‘big shot’ who knew ‘some kind of information’ about King Pharmaceuticals.”

On August 16, 2010, the first trading day after the dinner, Mr. Klein purchased 800 shares of King stock for himself and 59,800 for 46 of his clients. He continued to acquire King shares. Over a two month period the investment adviser accumulated 65,150 shares for himself and 46 of his clients at a total cost of $585,216.66. This was the largest purchase of a single security made by Mr. Klein in 2010.

Mr. Klein also called his long time friend, Michael Shechtman. While the two men spoke periodically on the phone, on August 16 they had six times telephone calls. That same day Mr. Sheehtman opened an options trading account at his firm. He hand wrote at the top of the form “Please expedite ASAP.” Over the course of the month the two men had repeated telephone calls. At the same time Mr. Sheehtman made multiple purchase of call options for King shares. Prior to these purchases, Mr. Sheehtman had never purchased options. To make portions of these purchases, he had to liquidate other holdings.

Following the announcement of the Pfizer-King deal, Mr. Klein sold all of the King shares he had purchased. He realized profits of $8,824 for his account and $319,550 for his clients, including $15,500 for Mr. Schulman. Mr. Shechtman liquidated his October call options on the day of the announcement and sold other King shares he had purchased, realizing profits of $109,040.53. His September options had expired worthless.

The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See Lit. Rel. No. 22803 (September 20, 2013).

Program: Celesq and West Legal Ed present: Financial Fraud: Avoiding the Path of the New SEC Investigative Priority, online on September 25, 2013 at 12:00 p.m. EST (here).