Insider Trading, Research on Evading Detection Yields SEC, DOJ Charges

Trying to cover-up illegal conduct can, and usually does, make the situation worse. A research engineer who used material non-public information obtained from his attorney wife to trade in advance of two acquisitions while researching how to evade detection for insider trading recently discovered this point. The SEC charged him. SEC v. Yan, Civil Action No. 1:17-cv-05257 (S.D.N.Y. Filed July 12, 2017). The Manhattan U.S. Attorney’s Office filed parallel criminal charges. Both cases are pending.

Fei Yan is a citizen of China. He resided in Cambridge, Massachusetts where he was an engineering postdoctoral associate at an academic institution. He married Attorney A who was a junior corporate associate in the New York office of an international law firm.

This action centers on two separate transactions. One involved the tender offer for Mattress Firm Holdings Corp. by Steinhoff International Holdings N.V., announced on August 7, 2016. The second is the acquisition of Stillwater Mining Company by Sibanye Gold Limited, announced on December 9, 2016.

The Steinhoff – Mattress Firm discussions began in July 2015. By April 2016, when Attorney A joined the deal team, the firms were moving forward with the transaction. Subsequently, on June 4, 2016 – about two months after Attorney A joined the deal team – Mr. Yan opened a brokerage account in the name of his mother, Rongxia Wu, a citizen and resident of China. While the account documents appear to contain her signature, the email address was that of Mr. Yan. He funded the account with transfers from his bank account.

Later in June Mr. Yan purchased 100 shares of Mattress Firm stock. During the period he spoke with Attorney A virtually every day which was their custom. At the end of the month Attorney A traveled to China where Mr. Yan joined her in mid-July. The couple’s wedding celebration took place during this trip. Mr. Yan continued purchasing stock, eventually accumulating 300 shares.

On Sunday, August 7, 2016 the Mattress Firm – Steinhoff deal was announced. The share price increased the next trading day by about 114%. Mr. Yan sold all of his shares, netting about $9,726 in profits.

The Sibanye – Stillwater deal began while the Mattress Firm transaction was unfolding. In March 2016 the two firms began discussions. Attorney A did not learn about the possible transaction until late August 2016.

As the deal discussions progressed Attorney A worked on the transaction virtually every day. Mr. Yan completed an application to trade options. Between November 4 and 6, 2016 Mr. Yan visited Attorney A in New York. After returning to Cambridge he visited the Yahoo! page for Stillwater. The couple continued to talk on the phone frequently, often multiple times a day.

Mr. Yan traveled to Germany on November 12. During the trip he searched the internet for “stilwater merger.” Nothing was located. On November 22 Attorney A also flew to Europe. The same day Mr. Yan purchased 50 Stillater call options that would expire on December 16, 2016. The next day he purchased more of the same options.

In late November the couple returned to the U.S. with Mr. Yan going to Cambridge and Attorney A to New York. The couple continued to speak daily on the phone. Mr. Yan also continued to purchase Stillwater options, acquiring another 100 on December 1, 2016. More options were purchased on December 6. Later that day Mr. Yan conducted a Google search for “how see detect unusual trade.” He visited several web pages regarding the Commission’s detection and enforcement efforts for insider trading.

On December 9 the Stillwater – Sibanye deal was announced. The day before Mr. Yan purchased additional options, increasing his holdings to 695. Following the deal announcement he sold his options, netting about $109,702.

In obtaining inside information from Attorney A and subsequently trading Mr. Yan either breached his duty of trust and confidence to her or she breached her duty to the law firm in tipping him, according to the complaint. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e).

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