MOTIVE AND THE TREADWAY INSIDER TRADING CASE
The motive in most insider trading cases is usually straight forward. For example, if Raja Rajaratnam whose insider trading trial started Tuesday is found guilty nobody will question why he did it – millions of dollars in trading profits. In some cases however there may be a question. The recently filed insider trading case against former Goldman Sachs director Rajat Gupta is an example. Reading the SEC’s papers, it is anything but clear why a man of Mr. Gupta’s obvious accomplishments and means would engage in such conduct. He did not trade. There is no allegation that he shared directly in the trading profits although there is a weak attempt to claim that somehow he may have profited through his investment in the Galleon funds.
Then there is the case of Todd Treadway, an associate with a promising career before him at a prominent New York City law firm. He had a fiancé. Yet he traded in a fashion which almost asked to be caught. His profits were less than he earned for a few weeks work at the law firm. And, in the end he made an ill conceived effort to evade detection which only made matters worse. SEC v. Treadway, 11 Civ 1534 (S.D.N.Y. Filed March 7, 2011).
Defendant Todd Treadway was an associate in the New York office of Dewey & LeBoeuf, LLP. There he was a member of the employee benefits and employment practice group. The claims center on two deals. Once involves the acquisition of Accredited Home Lending Holding Company. The other concerned the take over of CNET. Both were firm clients. Mr. Treadway is alleged to have traded in the shares of each company.
Firm client Lone Star Fund V began considering the acquisition of a non-prime mortgage lender in late 2006. By March 2007 the company had executed a confidentiality agreement with Accredited Home. The complaint alleges that on “May 19, 2007 and June 1, 2007, Treadway reviewed a draft of the Lone Star and Accredited merger agreement.” He knew that Accredited was a firm client.
On June 1, 2007 Mr. Treadway purchased 290 shares of Accredited common stock at $13.76. The total purchase prices was $3,990.40. The purchase was made on-line through a firm computer. Three days after the trades the deal was announced. The tender price was $15.10 per share. Mr. Treadway sold on the day of the announcement for a profit of $388.53.
The second deal began moving forward early the next year. By March 2008 CBS Corporation contacted CNET about a deal. On May 7, 2008 a confidentiality agreement was executed. The evening before the execution of that contract Mr. Treadway was given an assignment by two partners. He was asked to review and analyze the change in control provisions in the employment agreements of CNET’s CEO and CFO base on the pending merger. Later that same evening Mr. Treadway received at least thirteen emails related to the deal. One attached the merger agreement.
On May 7, 2008 Mr. Treadway purchased 7,079 shares of CNET common stock. Again he made the purchases from his firm computer. He used four accounts. Three were his and one was in the name of his fiancé.
Eight days later on May 15, 2008 the deal was announced. The share price rose 45% over the prior day close. Mr. Treadway sold the next day. This time he realized profits of $27,019.01.
Subsequently, FINRA began an inquiry into the CBS deal. As part of the investigation Dewey attorneys were asked if they knew anyone on a list of persons circulated by the regulator. Mr. Treadway stated he did not. The name of his fiancé appeared on the list. Subsequently, he was terminated by the firm. The SEC alleges that Mr. Treadway violated Exchange Act Sections 10(b) and 14(e). The case is in litigation.
Mr. Rajaratnam could be viewed as being on one end of the insider trading motive spectrum, assuming the government can prove its case. Mr. Gupta could be viewed as being on the opposite end, at least based on the papers filed. Where however does Mr. Treadway fit in?