The Commission has brought a series of aggressive insider trading actions which are pushing the edges of, and may redefine, insider trading theory. In one case has been based in part on the observation of matters such as tours of a company facility by individuals in business suits which lead to speculation by employees who later traded that investment bankers were sizing up the company for sale. SEC v. Steffes, Case No. 1:10-cv-06266 (N.D. Ill. Filed Sept. 30, 2010)(in litigation). In another a brother decided to trade based on fragments of a telephone conversation he overheard while in the office of his sister, a company executive. SEC v. Ni, Case No. CV 11 0708 (N.D. Cal. Filed Feb. 16, 2010)(settled). Another was based on inferences that employee family members were tipped by other insiders who were not named in the action. SEC v. Carroll, Case No. 3:11-cv-00165 (W.D. Ky. Filed March 17, 2010)(in litigation).

The case against Frank L. Bystone, former CEO of Tri-Vallley Corporation or TIV, is another in this series of cases. SEC v. Blystone, Case No. 1;12-cv-00774 (E.D. Cal. Filed May 10, 2012). Mr. Bystone retired from his position as CEO of the company on March 5, 2010. The Bakersfield, California headquartered company engaged in petroleum and mineral exploration and development. Its shares are listed on the NYSE and the AMEX.

In December 2009 TIV retained an investment banking firm to serve as a financial advisor in connection with a contemplated $10 to $15 million underwritten of securities. In early February the firm altered its plan, deciding to proceed with a registered direct offering of common stock. By the end of the month the company again altered the plan, concluding that it would break the offering into three $5 million tranches. This change was based on the advise of the investment banking firm which had concluded the market for thinly traded small cap stock had dwindled significantly and pricing was more difficult. This is reflected by the fact that the firm only had commitments for $3.5 million from two of six prospective institutional investors who were contacted. The investment bankers were looking for another partner to complete the first tranche.

Mr. Blystone was informed about these events through internal e-mails. Based on this information he concluded that the terms of the offering would be “onerous.” He also thought that the securities would either be priced at a discount or additional stock would have to be sold which could dilute the outstanding shares. During this period he continued to hold shares of the company.

In March the retired former CEO received additional information about the proposed offering. A friend informed him that TIV hoped to close the first tranche of the offering soon. Mr. Blystone responded to this e-mail by noting that in his view the company needed more than $5 million. He also “speculated,” according to the complaint, that the company would sell assets as a “fire sale” price. There is no indication in the complaint that Mr. Blystone was able to confirm his speculation about the possible offering or when it might proceed.

Based on his conclusions from all of the information available to him Mr. Blystone sold shares of his former company on two occasions. First, on March 23, 2010 he sold 5,000 from a trust account. Second, on April 5, 2010 he sold the remaining 45,100 shares of company stock held in that account. The sales were made at prices ranging from $2.00 to $2.099 per share. These were Mr. Blystone’s first sales of company stock. The complaint does not indicate if he continued to hold shares of company stock.

The next month, on April 6, 2010, TIV announced that it had entered into an agreement to sell shares to six institutional investors in a registered direct offering. The company raised $5 million, selling 3,846,154 shares at $1.30. The deal included warrants to purchase an additional 2,307,692 shares at prices ranging from $1.50 to $1.95. Following the announcement the share price dropped 38.6%, closing at $1.32. By selling prior to the announcement Mr. Blystone avoided losses of $36,267, according to the complaint which alleges violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b).

According to the Commission, Mr. Blystone agreed to settle the case, paying $75,000 without admitting or denying the allegations. Lit. Rel. No. 22367 (May 11, 2012).

Tagged with: ,