by T. GormanPosted on Posted in SECActions

After resolving insider trading charges against Diamondback Capital in the Dell insider trading cases, the Commission filed two more settled insider trading actions. SEC v. Shafer, Civ. Action No. 1:12-CV-00062 (S.D. Ohio Filed Jan. 24, 2012); SEC v. Ward, Civ. Action No. 1:12-CV-00061 (S.D. Ohio Filed Jan. 24, 2012).

Each case centers on the acquisition of Oak Hill Financial, Inc. by WesBanco, Inc., announced on July 20, 2007. Each involves a chain of traders initiated by an insider who learned about the transaction.

Shafer names as defendants Dale Schafer, interim CFO of Oak Hill, his cousin, Jason Gonski and the cousin’s friend, Joseph Mroz. On May 14, 2007 the President of Oak Hill advised Mr. Schafer that the company was in merger negotiations with WesBanco, a West Virginia based holding company. Although Mr. Mr. Schafer understood that this was material non-public information that he had an obligation not to disclose, according to the complaint, he called Mr. Gonski the next day and discussed the matter. At the time he confided to his cousin, as he had done in the past. During the conversation Mr. Shafer stated that he was angry over the merger because it might have a negative impact on his career despite all the personal sacrifices he had made for Oak Hill.

The day after his conversation with Mr. Schafer, Mr. Gonski purchased shares of Oak Hill and opened a brokerage account in his girlfriend’s name. In a subsequent telephone conversation Mr. Gonski told Mr. Schafer about the purchase. Mr. Gonski responded “Okay” and later updated him on the merger. Mr. Gonski bought more stock in his account and in the account of his girlfriend. He also told his friend, defendant Mroz, who also traded through an account which contained his funds as well as those of Mr. Gonski. Following the deal announcement Mr. Gonski had trading profits of about $43,000 while Mr. Mroz had over $7,400.

In November 2007 Mr. Shafer coordinated Oak Hill’s response to a FINRA questionnaire related to suspicious trading in the shares of the company. Mr. Shafer indicated that he recognized the names of Messrs. Gonski and his girlfriend but stated that he had no knowledge why they bought Oak Hill stock.

The defendants in Ward are Robert Ward, a loan officer at Oak Hill, Benjamin Lewis, his childhood friend, Jamie Lewis, sister of Benjamin and Stanley Lewis, father of Benjamin and Jamie. Mr. Ward, according to the complaint, initially observed a series of events which lead him to believe that Oak Hill was in merger negotiations. Eventually the Executive Vice President of the bank told him about the merger negotiations and that he had a fiduciary duty not to disclose the information.

Shortly thereafter Mr. Ward saw his friend Benjamin Lewis at a wedding reception and told him about the pending merger. Later Benjamin told his father Stanley who in turn told his daughter Jamie. Each purchased shares. By July 20, 2007 the Lewis family had accumulated 10,330 shares of Oak Hill stock for over $238,000. Following the public announcement Jamie sold her shares at a profit of over $14,995.58. Stanley Lewis transferred about 4,250 shares to his daughter and sold his remaining shares for a profit of $46,842.66. Benjamin also sold his shares for a profit of $44,574.55.

All of the defendants settled with the Commission. Each defendant in each case consented to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, prohibiting future violations of Exchange Act Section 10(b). In addition, each agreed to pay as follows:

  • Mr. Shafer: A civil penalty of $33,484.08 in addition to consenting to being barred from serving as an officer or a director for five years and to an order suspending him from appearing or practicing before the Commission as an accountant with a right to reapply after five years;
  • Mr. Gonski: Disgorgement and prejudgment interest of $59,565.24 and a civil penalty of $50,686.38. Mr. Shafer is jointly and severally liable for $38,957.81 of the disgorgement while Mr. Mroz is jointly and severally liable for $8,766.74 of it;
  • Mr. Mroz: In addition to the amount noted above, a civil penalty of $7,459.95;
  • Mr. Ward: Is jointly and severally liable for the disgorgement and prejudgment interest for which the Lewis defendants are liable but that amount, along with any penalty, has been waived based on his financial condition;
  • Benjamin Lewis: Disgorgement and prejudgment interest of $50,209.77 along with a penalty of $44,574.55;
  • Stanley Lewis: Disgorgement and prejudgment interest totaling $54,715.77 along with a civil penalty of $48,842.66; and
  • Jamie Lewis: Disgorgement and prejudgment interest totaling $17,564.70 along with a civil penalty of $14,995.58.
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by T. GormanPosted on Posted in SECActions

The DOJ and the SEC settled insider trading charges with Diamondback Capital Management, LLC in the Dell insider trading cases. The firm entered into a non-prosecution agreement with the U.S. Attorney’s Office to resolve possible criminal charges. Under the terms of that agreement the firm will forfeit $6 million based on the profits it obtained/losses avoided. Diamondback also provided the U.S. Attorney’s Office with a detailed Statement of Facts relating to the alleged wrongful conduct of two of its employees named as defendants. The firm also represented, based on an investigation by external counsel, that the misconduct under investigation does not extend beyond that described in the Statement of Facts and was not known by the co-founders of the firm. Diamondback agreed to cooperate with the government’s on-going investigation. See also U.S. v. Newman, 12 mag 0124 (S.D.N.Y. Filed Jan. 18, 2012)(insider trading charges filed against the individuals in the Dell insider trading case, including two persons formerly of Diamondback; the firm was not named as a defendant).

The SEC also resolved its charges with Diamondback. SEC v. Addondakis, 12-cv-0409 (S.D.N.Y. Filed Jan. 18, 2012)(naming Diamondback as a defendant along with others). To settle with the SEC the firm consented to the entry of a permanent injunction which precludes future violations of the antifraud provisions of the federal securities laws. The settlement also requires that the firm disgorge its trading profits – a point covered in the settlement of the criminal inquiry – and pay a civil penalty of $3 million. In connection with the settlement the SEC was furnished with a Statement of Facts as in the resolution of the criminal case. The settlement papers do not specify that the firm neither “admits nor denies” the allegations in the complaint as in traditional Commission settlements (here). The SEC acknowledged the cooperation of the firm as did the U.S. Attorney’s Office.

The underlying charges center on trading in the shares of Dell, Inc. and NAVIDIA based on inside information. According to the court papers, Todd Newman a portfolio manager at Diamondback, Jesse Tortora, an analyst at the firm, and others obtained inside information regarding forth-coming earnings releases for each firm and used the information to trade and illegally tip others in 2008 and 2009. Mr. Tortora previously pleaded guilty in the criminal case (here).

In previous criminal insider trading cases stemming from the Galleon and expert network inquiries, criminal charges were not filed against the entities involved. However, Galleon Management, Level Global Investors, Loch Capital Management and Barai Capital ceased operations. In contrast, Diamondback did not.

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