Insider Trading: Aggressive International Enforcement
SEC v. Kohler, Case No. 06-4550 (E.D. Pa. June 8, 2009) is another example of the Commission’s aggressive enforcement in international insider trading cases. In Kohler, the SEC amended its complaint on Monday, adding as defendants a Swiss national and his company in an insider trading case initially brought against unknown purchasers of a take over stock.
The Commission’s initial complaint, centered on the acquisition of CNS, Inc. by GlaxoSmithKline plc, announced on October 9, 2006 was based on inferences from option trading by unknown purchasers in two accounts. It was filed just three days after the announcement of the deal. SEC v. One or More Unknown Purchasers of Call Options for the common stock of CNS, Inc., Case No. 06-4540 (E.D. Pa. Filed Oct. 12, 2006). Following the deal announcement, the CNS share price increased over 28%.
Prior to the deal announcement unknown purchasers bought CNS options through Swiss American Securities, a New York City based broker dealer and National Financial Services LLC, a Boston based broker dealer. Between September 28 and October 2, unknown purchasers acquired 905 call options for CNS through Swiss American in an omnibus account affiliated with Credit Suisse, Zurich. During approximately the same time period, 281 CNS call options were purchased through National Financial Services. These purchases were made through an account in the name of Zurich Cantonal Bank in Switzerland. The records for each account did not identify the beneficial owner.
The options in both accounts were sold shortly after the October 9 deal announcement. There were over $500,000 in profits in the Swiss American account. Sale of the options in the National Financial account yielded a profit of over $146,000. According to the complaint, the “timing, prices, and pattern of the Unknown Purchasers’ purchases of CNS call options in the days leading up to the announcement of the Glaxo-CNS acquisition indicate that the purchases were based on material inside information.” See also Lit. Release No. 19867 (Oct. 13, 2006).
The amended complaint against Mr. Kohler, who has held management roles at Swiss banks for about 25 years, and Swiss Real Estate International, claims that he and his group purchased options through the omnibus account with Credit Suisse in Zurich that were executed through Swiss American Securities. Mr. Kohler also told his wife and brother-in-law about the purchases, according to the Commission, knowing that they typically mirror his trading transactions as they did here.
While the complaint does not identify a source for the inside information, Mr. Kohler is alleged to have possessed, it does claim that he engaged in similar trading patterns using inside information in five other instances. No source for the inside information is identified for those transactions. The complaint does state however that “[i]nformation and evidence identifying the material non-public information possessed by Kohler on September 28 and 29 and October 2, 2006 [the trade dates] is particularly within Kohler’s knowledge and control. Similarly, information and evidence identifying the source of that material non-public information is particularly within Kohler’s knowledge and control.”
This is not the first international insider trading case in which the SEC has been aggressive in filing a complaint based largely on trading. The Commission has been aggressive in these actions in recent years. This posture has had mixed results. For instance, in SEC v. Kan King Wong, No 07-3628 (S.D.N.Y. Filed May 8 2007), a case based on the News Corp. bid for Dow Jones, the Commission filed its complaint against unknown traders just seven days after the transaction announcement. Subsequently, it amended the complaint, identified the traders and settled the case as discussed here. See also Lit. Release No. 20447 (Feb. 5, 2008).
In other instances the Commission has not been as successful. In SEC v. Boutraille Corp., Case No. 05-9300 (S.D.N.Y. Filed Nov. 4, 2005), an action based on the take over of Canadian mining company Placer Dome, Inc. by Barrick Gold Corp. announced on October 31, 2005, the Commission quickly brought an insider trading case, filing its complaint on November 2, 2005. Subsequently, the agency amended its complaint, naming three defendants. After years of litigation however the Commission dismissed the case as discussed here.
Whether the Commission will be successful here remains to be seen. There should be little doubt however, that the agency is being aggressive in bringing international insider trading cases.