Insider Trading and Liu
Insider trading has long been a staple of the Enforcement Division. Typically, the remedies sought for insider trading cases are the imposition of an injunction, disgorgement, prejudgment interest and a penalty. Under the Supreme Court’s decision in Liu v. SEC, 581 U.S. — (June 22, 2020 disgorgement is limited to the net ill-gotten gains obtained by the wrong-doer. What happens when an insider tips a close friend under this standard? The answer may be suggested by the resolution in SEC v. Calice, Civil Action No. 1:21-cv-05009 (S.D.N.Y. Filed June 7, 2021).
Defendants Chad Calice and Holly Hand live together in a house which is owned by the couple. Chad Calicde is a veterinarian and the principal and owner of Calice Veterinarian Services, Inc. Ms. Hand is a senior project manager for clinical trials at Palisade Bio, Inc.
Palisade Bio focused on developing central nervous system therapies in view of its neutral stem cell technology. In May 2016 the firm began a double-blind Phase 2 clinical study to determine the efficacy of NSI-189, an antidepressant. The drug was one of two lead assets the company had under development.
Industry standards call for the results of the study to be held in confidence, a policy consistent with the internal policies of Palisade Bio. On Thursday, July 20, 2017 the top line results of the study were forwarded to the company Chief Science Officer and an outside biostatistician for validation. The company imposed a “quiet period,” prohibiting disclosure. The firm’s CEO and outside medical consultant were told the results later the same day. The results were negative – the data did not show that the drug was effective.
On Tuesday, July 25, 2017 prior to the market open Palisade Bio announced the result. The share price dropped about 50% from the price at the close the prior day – from $558 to $2.81. Ms. Hand had worked on the project and thus knew the results prior to the announcement.
Ms. Hand frequently discussed work with her live-in partner. Before the firm announcement she told Dr. Calice the news – the drug was not effective. Ms. Hand knew that the Doctor held a block of Palisade Bio shares.
The day before the firm announcement, Monday, July 24, 2017, Dr. Calice liquidated all of his Palisade Bio shares. He also tipped Relative A with whom he had a close relationship. Relative A also sold all of his shares that day. Dr. Calice avoided losses of about $103,875. Relative A avoided losses of about $14,434. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
Each defendant resolved the action. Each consented to the entry of a permanent injunction based on the Sections cited in the complaint. Neither defendant paid disgorgement. Each paid a penalty. Dr. Calice agreed to pay a penalty of $222,184, twice the loss he avoided along with the prejudgment interest. Ms. Hand agreed to pay a penalty of $103,875, the amount of the loss of Dr. Calice avoided. Neither Defendant paid disgorgement.