Sometimes people are lucky. Everything goes just right. Sometimes a mistake but there are few if any real consequences. Other times the mistake has a significant impact. Even in those instances, however, over time the consequences may fade into the past along with many other things that nobody wants remembered. That may turn out to be the situation for the defendant in the Commission’s most recent insider trading case – or maybe not. SEC v. Tsai, Civil Action No 1:19-cv-07501 (S.D.N.Y. Filed August 12, 2019).
At the age of 23 Bill Tsai seemed to have it all. He was a college student moving toward graduation. He had a summer internship at an International Investment Bank in New York City. The position gave him the opportunity to watch and learn first hand about big time financial transactions.
Bill took the firm’s employee training course. The young intern learned that he was subject to the Bank’s confidentiality policies. The information that was part of his job was non-public, material and highly confidential he was instructed. It was imperative that the intern carefully follow the firm’s policies and procedures regarding the information – a failure would not just violate the Bank’s rules, but possibly the federal securities laws. Bill was working on mergers and acquisitions.
As the summer drew to a close the internship ended. It was almost mid-August 2017. The day after it terminated Bill was handed an offer letter for a full-time position as an analyst at the Investment Bank. The position would start after his anticipated graduation from college in May 2018. The offer letter reiterated what he had learned earlier – confidentiality was essential and trading on inside information prohibited. The eager intern accepted the offer.
Following graduation Bill Tsai began his new career. It was July 2018. The Bank had him execute a copy of its confidentiality and insider trading policy. Over the next year he would be schooled in the policies no less than five times.
A second part of the firm’s compliance procedures focused on securities accounts. From the outset it was made clear that he was required to disclose any existing brokerage accounts, trade only through two specific, authorized broker-dealers and preclear all trades through the compliance department. Although Mr. Tsai had a brokerage account at a firm that was not authorized, when he was filling out all the new employee firms he checked the box representing that he did not have such an account. In another section of the documents which also called for disclosure of the unauthorized account he again failed to disclose it as required.
During his work at Investment Bank Bill Tsai was essentially in a stream of material non-public deal information. On March 11, 2019 he received an email inviting him to participate in the tech team’s portfolio review meeting. The transaction list attached to the email list listed a pending leveraged buyout by Firm A, by a Client of the Bank. The target date was only a couple of weeks away.
Although the target date for the LBO passed, Mr. Tsai continued to see Client on the “pipeline” report – a listing of pending deals. A key internal report available to Mr. Tsai showed that the LBO deal was up for committee approval in late March with closing for the financing set for April 30, 2019.
On March 29 Bill Tsai began buying options of Client. He continued to build his position through the first part of April. All purchases were in the unauthorized account.
On April 15, 2019 Firm A announced the deal prior to the market open. It was an all cash transaction for $1.7 billion. Trading volume spiked up. Mr. Tsai liquidated his position, reaping profits of over $98,000. The complaint alleges violations of Exchange Act Section 10(b). That case is pending. The U.S. Attorney’s Office for the Southern District of New York announced a parallel criminal case. That case is also pending.