Yesterday, the SEC settled one of the high profile insider trading cases it brought last year: the New Corp-Dow Jones case, SEC v. Kan King Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007) (the SEC’s Press Release is here). The case centers on trading in advance of the May 1 public announcement of New Corp’s bid for Dow Jones. The Commission’s initial complaint, filed just seven days after the announcement of the bid, was long on allegations and short on facts. The initial complaint named Kan King Wong and wife Charlotte Ka On Wong Leug, both residents of Hong Kong, as defendants. It alleged that the couple purchased 415,000 shares through a Merrill Lynch Hong Kong account between from April 13 to April 30. Funds for a portion of the purchase were wired in from another account. By May 4, when the husband ordered the sale, the account had an $8.1 million profit from the share price increase that followed the public announcement of the takeover bid.
The SEC’s quick action permitted it to freeze the defendants’ account and keep the trading profits from perhaps disappearing. At the same time, that swift action deprived the SEC of one of its best weapons – a through and complete investigation. Careful examination of the initial complaint suggests that at the time of filing, the SEC had little more than the information which was available from Merrill Lynch: the account statements and the account opening documents which would show the trades, cash flows in and out of account and the identity of those who owned and controlled the account. The complaint did not specify how the defendants received any inside information or even suggest a possible source of such information. Indeed, it is likely that the allegations of insider trading in the complaint were little more than inferences drawn from the trading.
Yesterday, however the SEC amended its complaint. The First Amended Complaint identifies the source of the information and lays out in detail how the insider trading scheme took place: News Corp board member David Li, a well respected business man in Hong Kong, told his close friend and business associate Michael Leung, who in turn told his daughter and son-in-law: the defendants in the initial complaint. The amended complaint adds David Li and Michael Leung as defendants and details how Mr. Leung traded through the account of his daughter and son-in-law with their assistance.
Simultaneous with the filing of the amended complaint, each defendant consented to the entry of an order enjoining them from future violations of Section 10(b) and Rule 10b-5. In addition, David Li was ordered to pay an $8.1 million civil penalty, Michael Leung to pay $8.1 million in disgorgement plus pre-judgment interest and an $8.1 million penalty and K. K. Wong to pay $40,000 in disgorgement plus prejudgment interest and a $40,000 civil penalty. This is a significant result for the Commission and the staff in a major insider trading case.