INSIDER TRADING, SUSPICOUS TRADING AND SETTLEMENT

Earlier this month the SEC settled an insider trading case which was based on little more than a suspicious trading pattern. In SEC v. Di Nardo (here) the Commission obtained a settlement were the complaint was based on trading in significant option positions in two take over stocks shortly before the announcements. Mr. Di Nardo and his trading vehicle settled by consenting to an injunction and agreeing to pay disgorgement and a penalty equal to about half of the trading profits. The source of the inside information on each deal was not determined.

If Di Nardo, which was based on trading in advance of two deals, was suspicious the trading of Juan Jose Fernandez Garcia in options prior to one deal might be viewed as less suspicious. Nevertheless, it yielded the same result – almost. SEC v. Garcia, Civil Action No. 10C 5268 (N.D. Ill. Filed Aug. 20, 2010).

Mr. Garcia is one of two defendants in the case. The other is Martin Carlo Sanchez. The complaint alleges insider trading in advance of the announcement of the bid by Potash Corporation for BHP Billton Plc. Both men took large positions in the options market shortly prior to the deal announcement. Both traded through Interative Brokers. Both profited following the deal announcement.

The Garcia complaint calls the trading “suspicious.” As in Di Nardo, little more is known about the Garcia defendants than the actual trades placed and profits almost collected. While it is known that Mr. Garcia is the Head of European Equity Derivatives at Banco Santander, S.A. which advised Potash on the bid, there it is no evidence that Mr. Garcia accessed any inside information at the bank. While it is known that both defendants live in Madrid, there is no evidence that Mr. Garcia tipped Mr. Sanchez or even if the men knew each other. Indeed, the complaint admits that its key trader trading claim is based on “information and belief.”

Nevertheless, the Commission settled with Mr. Garcia. He consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). He also agreed to disgorge his trading profits of $576,033. Unlike Mr. Di Nardo however, Mr. Garcia only agreed to pay a civil penalty of $50,000, which is less than 10% of the trading profits. Apparently suspicious trading in take over stocks may result in an enforcement action as in Di Nardo and Garcia. At the same time less suspicious trading clearly yields a lesser penalty.

THE SEC’S VERSION OF BLUE COLLAR TACTICS: LOOKING FOR THE “POP”

Blue collar tactics, such as wire taps and wired informants, coupled with coconspirators who pleaded guilty and then testified for the government have been on display over the last few weeks during insider trading trial of Raji Rajaratnam. Similar tactics have been on display in the expert network cases. Through it all the SEC has worked with DOJ but the tactics belong to the criminal prosecutors.

Now however the SEC has its own cases. Not quite “blue collar” but similar. The Commission filed two market manipulation cases built not on wire taps or wired informants but on taped conversations, e-mails, recorded telephone conversations and the testimony of a co-manipulator. In the Matter of Huntleigh Securities Corporation, Adm. Proc. File No. 3-14354 (April 25, 2011); In the Matter of Donald L. Koch, Adm. Proc. File No. 3-14355 (April 25, 2011). The former is settled while the latter will be set for hearing.

Huntleigh Securities names as Respondents the St. Louis based broker dealer and Jeffrey Christanell, formerly employed at the firm as Head of Institutional Trading. Donald L. Koch names as Respondents Mr. Koch who is the founder, President and Chief Compliance Officer of Respondent Koch Asset Management LLC. The firm is a registered investment adviser that provides advisory services to about 40 discretionary accounts containing approximately $40 million in assets.

The Koch Order recounts the explicit trades alleged to be manipulative. On September 30, 2009 for example, Mr. Koch instructed “Trader A,” identified as Mr. Christanell in the Huntleigh Order, to purchase 2,000 shares of High country Bancorp, Inc. or HCBC just before the market close. The shares were quoted in the Pink Sheets. According to the instructions in the e-mail the price was to be “as near to $25 [per share] as possible without appearing manipulative.” At 3:56 p.m. EST, the order was placed. It was partially filed for 1,400 shares at prices up to $23.99 per share. This was the only trade at the end of the day. HCBC shares closed for the day up $5.50 or 30.5%.

Similar trades were placed in HCBC shares on October 30 and November 30. Similar results were obtained. For these trades no e-mails are quoted. However, Trader A testified about the instructions from Mr. Koch.

In December Mr. Koch sent Trader A more e-mails. In one dated December 23, 2009 Trader A was told that Mr. Koch “want[ed] to move up HCBC the last day of the year.” In another e-mail dated December 28, 2009 Mr. Koch instructed “[p]lease put on your calendar to buy HCBC 30 minutes to an hour before the close of the market for the year. I would like to get a closing price in the 20-25 range, but certainly above 20.” These instructions were supplemented in a recorded telephone conversation in which Mr. Kotch reiterated the price range. On December 31 a trade of 3,000 HCBC which constituted almost 89% of the trading volume of the stock was placed. The share price closed up $4.50.

On December 31 the Koch – Trader A team also marked the close in two other stocks according to the Orders. One was Cheviot Financial Corp. which trades on the NASDAQ Capital Market. In this instance four orders were routed just prior to the close which constituted over 70% of the market volume in the stock for the day. Nevertheless, the effort failed. The stock closed slightly down.

Trades in Carver Bankcorp, Inc. shares on the same date were slightly more successful. For this stock, in a recorded telephone conversation Mr. Koch told Trader A to “pop” the share price “at the end of the day.” Although the trades constituted 100% of the market volume there was not much “pop.” The share price close up at $9.05 from $9.02.

The Hunderleigh Order alleges violations of Exchange Act Sections 10(b) for fraud and 15(b)(4)(E), failure to supervise. Respondent Christanell was ordered to cease and desist from committing or causing violations, and any future violations, of Section 10(b). In addition, he was barred from the securities business with a right to reapply after one year and directed to pay a civil penalty of $15,000. The firm was censured and directed to comply with a series of undertakings.

The Order regarding Mr. Koch and his firm alleges violations of Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2), 206(4) and 204. The case is proceeding to hearing.