Another Insider Trading Case, More Questions

The SEC filed another settled insider trading case on Friday. SEC v. Di Vita, Civil Action No. 1:08-cv-01060 (D.D.C. June 20, 2008).

The basic facts to the case appear to be similar to many others filed by the Commission. Defendant Adrian P. Di Vita was employed by Williams-Sonoma, Inc. (“WSM”) as a manager for Financial Planning and Analysis. On August 22, 2006, Mr. Di Vita attended a monthly operating review meeting held for senior management at WSM. The meeting was held to discuss the prior month’s results and the outlook for each division. At the meeting “a member of WSM senior management again discussed Pottery Barn’s [a unit of WSM] difficulties and, among other things, said the expectation was that those difficulties would not reverse in the near future,” according to the complaint. The factual section of the complaint does not provide any other details about the meeting. The summary at the beginning of the complaint however, claims that Mr. Di Vita received information which “enabled him to know, that when WSM issued a scheduled earnings press release … the company would lower its earnings guidance … .” (emphasis added).

Following the meeting, Mr. Di Vita sold 707 of his WSM Stock Fund units (from his pension fund) and purchased 1,000 WSM put options. After WSM issued an earnings release in which it lowered guidance, Mr. Di Vita sold his put options. Overall, Mr. Di Vita avoided trading losses and made gains totally $67,690, according to the complaint.

To settle the action Mr. Di Vita consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he consented to the entry of an order requiring him to pay disgorgement and prejudgment interest of $76,932.80 and a civil penalty of $67,690.

While the case seems to be straight forward, it does raise two questions. First, it is unclear why the SEC’s complaint is so vague about the key meeting attended by Mr. Di Vita. The fact section contains virtually no detail about the meeting. There is no claim, however, in the fact section that the managers were told that earnings guidance would be lowered. While apparently the managers were told something about continuing difficulties at the Pottery Barn unit, there is no indication of whether this represented a new trend or simply a continuation of what had previously been disclosed. Likewise, there is no representation that managers were told about earnings projections for the period or that guidance would be lowered.

The allegations in the “Summary” at the beginning of the complaint make a small addition to the allegations about the meeting. That portion of the complaint suggest that, in fact, managers were not told that guidance would be lowered, but were supplied with enough information from which they could figure it out or which “enabled” defendant to know.

While Mr. Di Vita’s trading clearly suggests that he “figured out” something – and the results show he was correct – this is clearly not an adequate basis on which to being an insider trading case. Guesses, right or wrong, are not inside information. If, in fact, WSM managers were told that guidance was being lowered or if they were provided with other details about the financial performance of the company, the SEC should be able to do better than make the vague allegations set forth here.

Second, there is no explanation for the financial penalty imposed here. The penalty equals only the disgorgement. It does not equal the total of disgorgement and prejudgment interest, as in many cases. Nor does it represent a multiple of the disgorgement and prejudgment interest total as in many cases. Overall, this complaint, like one filed earlier last week (discussed here) raises more questions than it answers.