INSIDER TRADING: A FAMILY AFFAIR

First, there were two sisters and their husbands. The couples used inside information transmitted across the globe to trade and profit illegally (here). Then, there were two brothers-in-law who used inside information to trade and reap illegal profits (here). All have been charged and the cases are pending.

Now, there are two brothers, a fraternity brother and an uncle who are alleged to have traded on inside information to obtain illegal trading profits. The brothers have not been charged or even identified, perhaps because they are cooperating witnesses. The fraternity brother and uncle have been named as defendants in an SEC enforcement action alleging insider trading. SEC v. Cohen, Case No. 10 CV 2514L (S.D. Cal. Filed Dec. 8, 2010); see also Litig. Rel. 21767 (Dec. 8, 2010). Both were also named in a one count information alleging conspiracy to violate the securities laws. The information also seeks forfeiture. U.S. v. Myers, Case No. 10 CR 4832 (S.D. Cal. Filed Dec. 8, 2010).

According to the court papers, tipper A (or A.S. in the information) is a patent agent for San Diego based Sequenom, Inc., a company which does diagnostic testing and genetics analysis. He resides in San Diego. Tipper B (or S.S. in the information) is his brother. He resides in Maryland. Defendant Brett Cohen, a consultant residing in Baltimore, is the fraternity brother of tipper B. Defendant David Myers, a resident of Cleveland, is the E.V.P. of a tanning bed sales company. He is the uncle of Mr. Cohen.

The scheme was straight forward. Tipper A appears only to have dealt with Tipper B who in turn communicated with defendant Cohen who then would contact his uncle, defendant Myers. The trading centered on two events. The first is the offer by Sequenom to acquire Exact Sciences Corporation announced in January 2009. This transaction appears to have originated in mid-2008. By late September, due diligence was being conducted. Tipper A participated in the due diligence. On October 22 and 23 there was a series of phone calls involving tippers A and B and defendants Cohen and Myers. There were also what the complaint calls “coded” e-mails between tipper B and Mr. Cohen referencing the movie Wall Street. The complaint interprets those e-mails as referencing the then pending merger transaction.

On October 27, Mr. Myers made his first ever purchase of EXAS securities. It was also his first stock purchase since January 2007. Following more phone calls, Mr. Myers made additional purchases of EXAS securities.

The acquisition of EXAS was announced after the close of the market on January 9, 2009. The next morning the share price rose 50%. On January 12, EXAS rejected the offer. Mr. Myers sold his holdings between January 13 and February 12. Prior to, and during the sales, there were more phone calls involving Tipper B and the two defendants. Mr. Myers made profits of $34,102.99 from the trades. Subsequently, Mr. Myers is alleged to have paid tipper B for the inside information.

The second event involved the April 29, 2009 announcement that previously disclosed test data for a Sequenom product could not be relied on. Tipper A was the patent agent working on this product, which was a Down Syndrome Test. After a series of phone calls and coded e-mails between the two brothers, Mr. Cohen began purchasing Sequenom put options just prior to the close of the market on April 29, 2009. The next morning, the stock dropped 76% on the announcement about the test data. Mr. Myers then sold his options for a profit of $572,540. Defendant Myers later paid tipper B $10,000 in cash.

The SEC complaint alleges violations of Exchange Act Section 10(b). The criminal information charges conspiracy to commit securities fraud in violation of 18 U.S.C. § 371. Both cases are in litigation.