Insider Trading – “Pillow Talk” Cases

Yesterday, the SEC settled one of its leading “pillow talk” insider trading cases, SEC v. Rockledge, Civil Action No. 05-10074 (D. Mass. Filed Jan. 12, 2005).  In this case, the SEC’s complaint alleged that Scott M. Rockledge, Chairman and CEO of Cubist told his wife Patricia about negative clinical trial results on a key product.  Mr. Rockledge did not know at the time of the conversation that his wife had an agreement with her brother, William Beaver, to provide him with information about the company which might impact his stock.  Despite requests by Mr. Rockledge to keep the information confidential, his wife gave a “wink and a nod” to her brother, thus informing him of the negative news.  The brother traded the next day, prior to the news announcement by the company.  Mr. Beaver thereby avoided a potential loss when the stock price dropped after the company announcement. 

After losing a motion to dismiss and unsuccessfully appealing that ruling to the First Circuit, the defendants settled with the SEC.  Both defendants consented to the entry of statutory injunctions and orders requiring them to pay disgorgement, prejudgment interest and civil penalties.  The SEC’s Litigation Release appears here.     

While the settlement ended the litigation for Mrs. Rockledge and her brother, no doubt it has had a substantial impact on the family relationships.  Mr. Rockledge, of course, was not prosecuted and undoubtedly gave testimony that at a minimum was not helpful to his wife and her brother.  No doubt that many corporate executives talk about confidential information with their spouse at home (despite the fact that most compliance officers would counsel otherwise) at the same time most preserve the confidentiality of the information. 

At the same time, there seems to be a growing number of “pillow talk” cases.  Just this year the SEC has brought two cases alleging that one spouse traded on information furnished by another.  SEC v. Melton, Civil Action No. cv 07-2655 GHK (JCX) (C.D. Cal. Filed April 23, 2007); and SEC v. Balkenhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007). 

In four other cases brought this year the SEC has alleged that the spouses traded together.  SEC v. Daniel Fongnien Chiang, Civil Action No. 1:07CV00285 (D.D.C. Filed February 8, 2007); SEC v. Kan King Wong, Civil Action No. 07 CIV. 3628 (SAS) (S.D.N.Y Filed May 8, 2007); SEC v. Wang, Civil Action No. 07-3715 (S.D. N.Y. Filed May 10, 2007); (and related criminal case, U. S. v. Wang, Case No. 1:07-cr-00730-CM (S.D.N.Y. May 9, 2007)); and SEC v. Shane Bashir Suman and Monie Rahman, Civil Action No. 07-CV 6625 (S.D.N.Y. Filed July 24, 2007).

Finally, in four cases this year the SEC has alleged that various family members traded together on inside information.  SEC v. Arrgon Capital Management LLC, Case No. 1:07-cv-00919-FM (S.D.N.Y. Feb. 2, 2007); SEC v. Matthew E. Kopsky, Civil Action No. 4:07-CV-00379 (E.D. Mo. Filed February 26, 2007); SEC v. Terese Dearmin, Civil Action No. 1:07-CV-01089 (D.D.C. Filed June 18, 2007); and SEC v. Joseph A Frohna, Civil Action No. 07-C-0702 (E.D. Wis. Filed August 1, 2007).

Once can only wonder what the impact is on all of these family relations.