Attorney, Friend, Snarled in SEC Insider Trading Charges

Insider trading has long been a focal point for the Commission. While the fraud provisions on which the claims are based – Exchange Act Section 10(b) and Rule 10-b-5 primarily – do not mention the claim, even prior to the formation of the Enforcement Division in 1972 the agency brought insider trading charges based on those provisions. The new year is no different. Yesterday the Commission filed yet another insider trading case. SEC v. Sargent, Civil Action No. 22-cv-168 (N.D. Ill. Filed January 11, 2022).

Sargent centers on a May 4, 2020 earnings announcement for Chegg Inc. It names as defendants David Sargent and Christopher Klundt. Mr. Sargent is an attorney at Sargent Law Offices in Chicago, Illinois. He was also the vice president of a privately-held software firm based in Chicago and a member of the faculty of Loyola University School of Environmental Sustainability. In addition, Mr. Sargent was the general counsel of a privately-held business in the Windy City. Mr. Klundt, a resident of San Francisco, was the general manager of a Chegg subscription service, Chegg Prep. He was later promoted to Vice President of Content and Knowledge for Chegg. Messrs. Sargent and Christopher have been close friends since attending the University of Wisconsin-Madison where they founded a study platform for high school and college students.

Chegg, based in Santa Clara, California, is the provider of online textbook rentals, tutoring and other educational services. On May 1, 2020, Mr. Klundt attended an earnings “preview” meeting for his firm. During the meeting senior management discussed the upcoming earnings release for the firm. Earnings, according to the draft, would be good.

Following the meeting Mr. Klundt called his long time friend. Within an hour Mr. Sargent purchased $40,000 worth of stock and options in Chegg. The attorney had never purchased nay interest in the company.

On May 4, 2020, the company issued its earnings release. The announcement stated that revenue for the first quarter had increase by 35% year-over-year to $131.6 million. Market expectations had been exceeded. The stock price soared. Mr. Klundt texted his friend a picture of a happy face with dollar signs for eyes. Attorney Sargent congratulated his friend. Mr. Sargent liquidated his options, netting over $100,000 in profits for his three-day investment, and later his stock for a profit of over $7,000.

Subsequently, during a regulatory investigation, Mr. Klundt was asked if he knew Mr. Sargent. He denied knowing the man. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Norther District of Illinois filed parallel criminal charges against each man. The cases are pending. See Lit. Rel. No. 25305 (January 11, 2022).

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