The Commission filed its fifth case, and second insider trading action, related to children’s clothing maker Carter’s Inc. This time the case was brought against Dennis S. Rosenberg, an equity analyst who operated his own investment consulting firm, DSR Consulting, from 2005 until 2012. SEC v. Rosenberg, Civil Action No. 1:13-CV-3559 (N.D. Ga. Filed Oct. 29, 2013).
The Commission’s complaint alleges that Mr. Rosenberg was repeatedly furnished with inside information over a five year period beginning in 2005 by Eric Martin who had served at Carter’s first as the Director and later the Vice President of Investor Relations. In each instance Mr. Rosenberg profited or avoided a loss. In some cases he also tipped others.
Carter’s conducted an IPO in 2003. At the time Mr. Rosenberg was assigned to cover it by his then employer. Two years later Mr. Martin began furnishing him with inside information. Prior to the time Mr. Martin was terminated by Carter’s in March 2009 he tipped Mr. Rosenberg nine times, typically about earnings announcements although the first concerned an acquisition. For example:
May 10, 2005 merger announcement: During the discussions which led to the acquisition by Carter’s of OshKosh B’Gosh, Inc., Mr. Martin tipped Robert Rosenberg who sold short 20,500 shares of the target on the belief the stock price would decline. Following the deal announcement the share price dropped $3.66 netting Mr. Rosenberg profits of $28,500.
July 26, 2005 2Q results: Before the announcement of the quarterly financial results Mr. Rosenberg was furnished with inside information and purchased 4,400 shares of Carter’s stock. Following the announcement that the company beat market consensus the share price rose $3.54. Mr. Rosenberg had a profit of $15,500.
October 25, 2005 3Q results: Prior to the announcement that company earnings exceeded market consensus for the quarter Mr. Rosenberg purchased 13,800 shares of Carter’s while in possession of inside information. When the share price increased following the announcement he had profits of about $35,000.
July 22, 2008 2Q results: By the second week of June 2008 Mr. Martin knew that Carter’s earnings would likely exceed expectations. He then tipped Mr. Rosenberg who purchased 6,500 shares of company stock. Later Mr. Rosenberg purchased additional shares and tipped two others who bought Carter’s securities. Following the announcement that Carter’s earnings beat consensus Mr. Rosenberg had a gain from his transactions of $47,720. His tippees had gains of $14,520 and $194,989.
After Mr. Martin was terminated by Carter’s he continued to furnish Mr. Rosenberg with inside information. He obtained the information from company employee Richard Posey. This permitted Mr. Rosenberg to trade on inside information in advance of the release by Carter’s of its fourth quarter and 2008 annual financial results, the second quarter 2009 results and the delayed third quarter financial results. Overall Mr. Rosenberg had ill-gotten gains, losses avoided, and consulting fees from a hedge fund he tipped of about $500,000. His tippees had combined profits of about $2 million. Despite the years long pattern of conduct the complaint says little about the relationship between Messrs. Martin and Rosenberg. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b).
Mr. Rosenberg partially resolved the action by consenting, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction based on the Sections cited in the complaint. The order also directs him to pay disgorgement of $500,000 along with prejudgment interest. The amount of civil monetary penalties to be imposed, if any, will be determined at a later date.
Mr. Martin previously pleaded guilty to one count of an eleven count indictment and is awaiting sentencing. U.S. v. Martin (N.D. Ga.). He also settled an insider trading action with the Commission, consenting to the entry of a permanent injunction and an order barring him from serving as an officer or director. SEC v. Martin, Civil Action No. 1:12-cv-002922 (N.D. Ga. ). Mr. Posey also pleaded guilty to criminal charges. U.S. v. Posey (N.D.Ga.). See also SEC v. Elles, Civil Action No. 1:10-cv-4118 (N.D.Ga.)(financial fraud action against former company executive); SEC v. Johnson, Civil Action No. 1:12-cv-03709 (N.D. Ga.)(action against employee of vendor to Carter’s based on involvement in financial fraud). Carter’s Inc. entered into the Commission’s first non-prosecution agreement tied to the financial fraud at the company.