One of the key elements of insider trading is a breach of duty. In the classic form of insider trading where the firm executive is the trader, the breach is by the executive of his duty to the company. In other instances, the breach is by the person receiving the information. In that situation an insider typically shares information with a long time confident. The confident then secretly betrays his or her friend, breaching the confidence in pursuit of insider trading profits. While the breach of duty may seem less personal in the classic model, the quest for ill-gotten gains is the same in both situations. The more personal model is the predicate for the Commission’s most recent insider trading case. In the Matter of James W. Holden, Adm. Proc. File No. 3-19293 (July 31, 2019).
Mr. Holden is a 75 year old psychologist who resides in Lakeport, California. He is a long-time friend of a member of the board of directors of Real Goods Solar Inc. That firm, based in Denver, focuses on solar energy. Its shares are listed on NASDAQ.
Mr. Holden had a close personal relationship with a Board Member of Real Goods Solar. The two regularly communicated in-person as well as on the telephone. Over time the psychologist and Board Member regularly shared what the Order calls “intimate and confidential details about their personal and professional lives.” The relied on each other for support. This relationship permitted Board Member and Mr. Holden to confide with each other about sensitive matters that typically are private such as those involving family, marriage, health and relationships.
The confidential, intimate type of relation between Board Member and Mr. Holden permitted Board Member to confide to his long time confident in May 2017 that Real Goods Solar had entered into a joint venture with the subsidiary of a large and well-known public Chemical Company. The venture focused on a solar shingle system that had been developed.
The transaction continued to progress. The next month the Board of Real Goods Solar received a memorandum of understanding from Chemical Company. At an August 30, 2017 meeting the board of Real Goods Solar, the firm agreed to enter into the deal with Chemical Company. Due diligence was finalized.
The next day Mr. Holden and Board Member had lunch, a practice they had followed for years. Board Member discussed the potential transaction with his long-time confidant, expressing optimism about it. The next trading day following a holiday weekend Mr. Holden sold about one third of the investments in his account. The proceeds were used to purchase 12,500 shares of Real Goods Solar. The transaction did not fit the profile of Mr. Holden’s account which centered on conservative investments that included mutual funds. Indeed, Mr. Holden had never purchased Real Goods Solar stock.
After the close of the markets on October 3, 2017, Real Goods Solar announced an exclusive licensing deal with Chemical Company. The announcement highlighted the global market for the products and included revenue projections. The share price of Real Goods rose over 194% compared to the prior day close. Mr. Holden liquidated his holdings, realizing profits of $18,527.18. The Order alleges violations of Exchange Act Section 10(b).
To resolve the proceedings Mr. Holden consented to the entry of a cease and desist order based on the section cited in the Order. He also agreed to pay disgorgement of $18,527.18, prejudgment interest of $1,348.32 and a penalty of $18,527.18.