INSIDER TRADING: ANOTHER PILLOW TALK CASE
In recent years there have been a rash of “pillow talk” insider trading cases, that is, actions involving husbands and wives and sometimes other family members. Some involve a husband and wife trading together. See, e.g., SEC v. Wang, Civil Action No. 07-3715 (S.D.N.Y. Filed May 10, 2007). Others involve one spouse misappropriating inside information from another. See, e.g., SEC v. Balkenhol, Civil Action No. 07-2537 (N.D. Cal filed May 14, 2007). Still others involve various family members. See, e.g., SEC v. Aragon Capital Management LLC, Civil Action No. 07-00919 (S.D.N.Y. Filed Feb. 2, 2007) (father and sons); SEC v. Dearmin, Civil Action No. 07-01089 (D.D.C. Filed June 18, 2007) (father and daughter with information from daughter’s husband). These and other pillow talk cases are discussed here.
SEC v. Macdonald, Civil Action No. 09-CV-5352 (S.D.N.Y. Filed June 10, 2009) is the Commission’s latest “pillow talk” insider trading case. There, the husband misappropriated inside information from his wife and provided it to his friends who traded. The husband settled with the Commission. The two friends did not.
The case was brought against Phillip Macdonald, Martin Gollan and Michael Goodman, all residents of Ontario, Canada. Mr. Macdonald is an attorney. Messrs. Gollan and Goodman are in the scrap metal business. Mr. Goodman’s wife was employed at Merrill Lynch Canada in Toronto, Ontario. She held a position as an administrative assistant to certain managing directors of the firm. Those managing directors were involved in advising clients on contemplated mergers, acquisitions and tender offers.
Between January and June 2005 Mrs. Goodman periodically discussed her work with her husband on the understanding that the information would be kept confidential. Periodically, defendant Goodman called his wife during the day and discussed her work.
Contrary to his understanding with his wife, Michael Goodman told defendants Gollan and Macdonald about eight pending deals he learned about from Mrs. Goodman. Those deals involved Merrill clients:
• Creo, Inc., acquired by Eastman Kodak;
• Masonite International Corporation, which announced an agreement to provide for a price increase at which another corporation would acquire its shares;
• Eon Labs, Inc., which was the target of a tender offer by Novartis International, AG;
• Performance Food Group Company, which announced the sale of a business segment to another company;
• Great Lakes Chemical Corporation, which announced a merger with another company;
• Shopko Stores, Inc., which announced it had signed a definitive merger agreement to be acquired by another company;
• Electronics Boutique Holdings Corp., which was acquired by another company; and
• Commercial Federal Corporation which was also acquired by another company.
Defendant’s Macdonald and Gollan both traded in the stock of each Merrill client prior to the deal announcement. Mr. Macdonald made over $900,000 in trading profits, while Mr. Gollan had profits of $90,000. All of the trades were placed on U.S. exchanges except those in the shares of Masonite by defendant Macdonald. Those trades, the complaint alleges, are “probative of his plan, motive, and intent with regard to his trading in other target company securities.”
The complaint goes on to allege that Mr. Macdonald knew defendant Goodman’s wife was the source of the information and that she obtained it from her employment at Merrill. Mr. Gollan, however, “knew that Goodman’s wife worked with a stock broker … Although Goodman may not have conveyed to Gollan that Goodman’s wife was the source of the information, Goodman’s tips to Gollan regarding the target companies came shortly before announcements of business combinations … Thus, by the third or, at a minimum, the fourth time that Goodman tipped Gollan … Gollan knew or should have known that the information conveyed to him had been obtained in breach of a fiduciary duty,” according to the Commission’s complaint.
Mr. Goodman settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Sections 10(b) and 14(e). The judgment also provides that he is liable for disgorgement of the trading profits of Messrs. Macdonald and Gollan totaling $1,023,054 plus prejudgment interest. Payment and a penalty were waived based on his financial condition. Messrs. Macdonald and Gollan are litigating the case. See also Lit. Release No. 21079 (June 10, 2009).