A FATHER AND SON INSIDER TRADING CASE INVOLVING ETFs
Keeping it in the family is a recurring theme in SEC insider trading cases. Recently the Commission has brought insider trading cases against a father and son, SEC v. Perterson, Civil Action No. 11-CV-5448 (S.D.N.Y. Filed Aug. 5, 2011), a father and daughter, SEC v. Goetz, Case No. 11 CV 1220 (S.D. Cal. June 3, 2011), two brothers-in-law, SEC v. Temple, Case No. 10-cv-1058 (D.De. Filed Dec. 7, 2010), a husband and wife, SEC v. Jantzan, Case no. 1:10-cv-00740 (W.D.Tx. Oct. 5, 2010) and two families, SEC v. McCellan, Case No. CV 10 5412 (N.D. Cal. Filed Nov. 30, 2010).
With In the Matter of Spencer Mindlin, Adm. Proc. File No. 3-14557 (Sept. 21, 2011) the Commission has added to its string of family cases, brining insider trading charges against a father, Alfred Mindlin, and his son, Spencer Mindlin. This case has a bit of a twist however since it is the first insider trading action to involve exchange traded funds or ETFs. And, while SEC insider trading cases are generally developed beginning with the trading and then investigating back in time which precludes the kind of tape recordings found in the Galleon and expert network cases, this one actually features the father and son on tape discussing a trade and is supported with e-mails the son obtained from Goldman that contained inside information used to trade.
Son Spencer was employed at Goldman Sachs Execution & Clearing, L.P. and its predecessor as an analyst from June 2001 through September 2007. From September 2007 through August 2009 he was an employee on the ETF Desk. His father is a CPA who conducted his own practice.
Goldman maintained large net long positions in the SPDR S7P retail ETF or XRT. That ETF is designed to replicate the S&P Retail Select Industry Index. The XRT rebalances each quarter adding or deleting securities to mirror the S&P Retail Index. To hedge its long positions Goldman shorted the securities underlying the XRT. To maintain these positions Goldman had to rebalance its short positions each quarter.
From his position on the ETF desk Spencer knew about Goldman’s net long XRT positions. He also understood the rebalance process. Since the positions taken by Goldman in the underlying securities were substantial, when they were altered in the rebalance process it significantly impacted the market in those shares. On four occasions in December 2007 and March 2008 Spencer and his father Alfred traded the XRT underlies with knowledge of Goldman’s trading intentions.
Spencer obtained the information regarding the rebalancing process from other employees. For example, in December 2007 when the firm was rebalancing Spencer obtained a spread sheet from a colleague showing the positions Goldman would have to take to rebalance. This permitted Spencer and his father to anticipate Goldman’s transactions and benefit. For other trades Spencer was able to obtain sufficient internal Goldman information to anticipate the firm’s transactions.
Spencer and his father placed the trades through the account of a relative at TD Ameritrade. The father and son telephoned repeatedly about the trades. In once instance Alfred phoned TD Ameritrade regarding the account. While on hold with the TD Ameritrade representative, Spencer called Alfred on another line. The TD Ameritrade tape system recorded the conversation, capturing the father and son discussing a trade. Overall the traders netter over $57,000 in illicit profits.
The Order alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is proceeding to litigation.
Program: ABA Seminar: Is the DOJ and SEC War On Insider Trading Rewriting the Rules? ABA program, live in New York City, webcast nationally. Friday September 23, 2011 from 12 – 1:30 p.m. at Dorsey & Whitney, 51 West 52 St. New York, New York 10019.
Co-Chairs: Thomas O. Gorman, Dorsey & Whitney LLP and Frank C. Razzano, Pepper Hamilton LLP.
Panelists: Christopher L. Garcia, Chief, Securities and Commodities fraud Task Force, Assistant U.S. Attorney, Southern District of New York; Daniel Hawke, Chief, Market Abuse Unit, Securities and Exchange Commission; Stuart Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association; Tammy Eisenberg, Chief Compliance Officer, General Counsel and Senior Vice President, DIAM U.S.A., Inc.
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