by T. GormanPosted on Posted in SECActions

Many insider trading cases turn out to be “all in the family,” involving various family members who have access to, and trade on, inside information. Sometimes spouses trade together. Other times one spouse betrays the trust of another by using information revealed in confidence to illegally trade. Some of the cases involve brothers, sisters and friends.

The Commission’s latest family insider trading ring is built on the close relationship between a daughter and her father. Daughter Angela Milliard was a paralegal in the three person law department of Kalispell, Montana based Semitool, Inc., a semiconductor corporation. Father Kenneth Milliard is a retired business executive in Columbia Falls, Montana. Daughter and father spoke on the telephone frequently. Those phone calls, and stock trading done at times during the calls and in other instances shortly after the call concluded are the predicate for the SEC’s insider trading action against them. SEC v. Milliard, Case No. CV 12-73 (D. Mon. Filed May 7, 2012).

The case centers on the announcement of a tender offer for the shares of Semitool by Applied Materials, Inc. prior to the opening of the market on November 17, 2009. In October 2009 Ms. Milliard became a key member of the deal team. She managed the due diligence process and reviewed draft merger documents, SEC filings and board minutes. The documents contained the terms of the deal including the announcement date and the fact that the tender offer would be at $11 per share, a premium to the then market price of $7.83.

From the end of October through Mid-November as Ms. Milliard worked on key aspects of the pending deal she repeatedly telephoned her father. The two purchased company shares as did other family members at the behest of Mr. Milliard. For example:

  • October 27: Ms. Milliard was placed in charge of the due diligence. Over the course of 50 phone calls over a three day period beginning on October 27 between daughter and father, Mr. Milliard purchased 500 Semitool shares while his daughter purchased 400.
  • November 9: Outside counsel e-mailed Ms. Milliard a draft merger agreement to review. She called her father two hours later and again the next morning. Father purchased 5,000 shares as the conversation continued.
  • November 12: Outside counsel gave Ms. Milliard draft board minutes dated for November 16 which approved the deal with handwritten edits. At the same time the board was meeting to give preliminary approval. A phone call was placed by daughter to father. She also wired $38,000 to her boyfriend’s brokerage account. The same day an additional 5,000 shares was purchased in that account from a Semitool computer.
  • November 12/13: Prior to the November 16 date for the approval of the merger, Ms. Milliard and her father spoke three more times. Within minutes of the calls Mr. Milliard purchased 5,000 shares while Ms. Milliard bought another 300 in her account.

When the market opened on November 17 following the announcement of the tender offer, the share price rose. By the end of the day Semitol’s shares closed up 30% at $11.05. The family sold its shares. Ms. Milliard had profits of $20,355. Her father had profits of $33,667.11. Other family members had profits of $14,138. Collectively, the family had illegal trading profits of $47,805.11. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e).

Daughter and father settled with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. Ms. Milliard also agreed to pay disgorgement of $20,355 along with prejudgment interest and a civil penalty of $54,022.11. Mr. Milliard agreed to disgorge his trading profits and those of his sons, totaling $47,805 along with prejudgment interest and a penalty equal to the amount of the disgorgement.

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by T. GormanPosted on Posted in SECActions

Wire tap tapes proved the undoing of jailed hedge fund mogul Raja Rajaratnam who is serving eleven years for insider trading. Audio tapes from the FBI also helped convict and send to prison for former brokerage CEO Ross Mandell and one of his key assistants, Adam Harrington. U.S. v. Mandell, 09-cr-00662 (S.D.N.Y.).

Mr. Mandell is the former CEO of brokerage firm Sky Capital, LLC, and its related companies. He also controlled The Thornwater Company, L.P. Mr. Harrington was an important assistant, having managed the Sky New York office. From 1998 through 2006 Mr. Mandell and others participated in a scheme to induce investors to purchase Thornwater and Sky Capital related private placement interests. Mr. Harrington worked for Sky from 2000 through 2005. The scheme is alleged to have defrauded investors out of about $140 million.

Investors were induced to purchase the shares through claims that they were being acquired at a discount to the market price. What investors were not told is that the market price was manipulated by Mr. Mandell and others. Brokers at Sky were directed by Mr. Mandell to manipulate the share price. As part of the scheme the brokers were told not to permit investors to sell the shares unless they had a matched order. Through this mechanism they were able to maintain the share price which was critical to the scheme.

Brokers at Sky were paid excessive, undisclosed commissions to implement the scheme. In some instances those commissions were as much as 400% of the normal compensation. To raise portions of the money for those commissions, Mr. Mandell used the spread obtained from transactions involving the purchase and sale of certain large blocks of Sky Capital stock. Specifically, as part of the scheme brokers induced certain investors who held large blocks of Sky stock to sell them at a discount. Those blocks were then resold at a higher price to other investors. The spread on the transactions was used in part to pay the commissions to the broker executing the manipulation. Other potions of the money went to Sky.

During the trial jurors heard recordings made by the FBI. On one Mr. Mandell instructed brokers that “[y]ou have to lie, you have to paint a rosy picture. That’s your choice.” He also told the salesmen that “If Sky goes belly up, were’ all going to be embroiled in a big scandal . . . There will be no one, no one that’s safe,” according to a Bloomberg report.

Portions of the investor funds were channeled to Mr. Mandell. Other portions were used to pay part of the excessive broker commissions. Still other portions of the investor funds were used to repay other investors as the scheme continued.

Following a five week trial in July 2011 Messrs. Mandell and Harrington were found guilty by a jury of conspiracy, securities fraud, wire fraud and mail fraud. Both were sentenced last week. Mr. Mandell received a twelve year prison term and ordered to forfeit $50 million. Mr. Harrington was sentenced to serve five years in prison.

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