by T. GormanPosted on Posted in SECActions

The former CEO and COO of one of the primary manufacturers of body armor for the U.S. military were convicted of fraud, insider trading and obstruction of justice following an eight-month jury trial. U.S. v. Brooks (E.D.N.Y.). David H. Brooks and Sandra Hatfield were, respectively, the former CEO and COO of DHB Industries, Inc., now known as Point Blank Solutions, Inc.

The indictment charged Mr. Brooks and Ms. Hatfield with essentially looting the body armor manufacturer for their personal benefit. According to the government, the defendants enriched themselves and their families, using corporate funds to finance a lavish lifestyle, including the purchase of travel, personal jewelry, cosmetic surgery, country club bills and other items.

Fraudulent actions by Mr. Brooks and Ms. Hatfield included:

• Related party transaction: A concealed related party scheme in which a company supposedly independent of DHB and with which it did business was actually owed by defendant Brooks’ wife and financed with corporate money. Profits from the venture were used to pay for more than $16 million in Mr. Brooks’ personal horse racing business and for other personal items.

• Accounting fraud: The defendants used a variety of fraudulent accounting methods to boost the net income and profits of DHB. These included adding non-existent inventory to the company’s books and records and reclassifying expenses.

• Obstruction of SEC: Both defendants attempted to cover up their schemes by obstructing an SEC investigation of DHB’s executive compensation and related party transactions. Mr. Brooks also lied to the outside auditors.

• Insider trading: In November 2004, after false filings were made with the SEC, the defendants sold more than $72 million of their DHB stock. The next month they sold about $118 million of company stock. The sales, made when the share price was over $20 per share, netted Mr. Brooks about $185 million and Ms. Hatfield over $5 million. Later, the stock price fell to a few cents per share and was delisted.

The SEC also filed actions against Mr. Brooks and Ms. Hatfield. SEC v. Brooks, Civil Action No. 07-61526 (S.D. Fla. Filed Oct. 25, 2007); SEC v. Schlegel & Hatfield, Civil Action No. 06-61251 (S.D. Fla. Filed Aug. 17, 2006). The Commission’s complaints are based on essentially the same conduct as the criminal charges.

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by T. GormanPosted on Posted in SECActions

Many of the Commission’s insider trading cases settle are settled on filing. Last Friday however, the SEC filed a case in which an insider is alleged to have tipped his long-time friend and business associate which did not follow the typical pattern – it did not settle. SEC v. Khan, Civil Case No. 1:10-cv-2865 (N.D. Ga. Filed Sept. 10, 2010).

The complaint names as a defendant Dr. Bobby Khan, a cardiologist and the founder of InVasc Therapeutic, Inc. It claims that the Dr. Khan violated Exchange Act Sections 10(b) and 14(e) by trading in the securities of Sciele, an Atlanta based company which specializes in the sale, marketing and development of products related to cardiovascular and other medical conditions.

The complaint is based on claims that Dr. Khan was illegally tipped and traded on inside information about a tender offer obtained from a person identified as the “Sciele Officer,” his long time business associate and friend. In 2003, according to the SEC, Dr. Khan met the “Sciele Officer” through a professional association. Over the years they became business and social friends. When Dr. Khan founded InVasc in 2006 as a pharmaceutical development company, he asked the Sciele Officer to join him on the Advisory Board. Later, in 2009, the Sciele Officer joined Dr. Khan on the board of directors.

Events leading to the tender offer began on April 28, 2008 when the management of Shionogi targeted Sciele for acquisition. Shionogi is a Japanese pharmaceutical company. The company retained a financial advisor. The next day, a Managing Director of firm’s financial advisor contacted a member of Sciele’s Board of Directors and expressed a strong interest in acquiring the company. Sciele’s CEO was informed on April 30.

On May 13, 2008, Shiogogi’s financial advisor sent confidential financial information about the company to Sciele. By May 14, 2008, according the complaint, the Sciele Officer became aware of Shionogi’s interest. He was told he would participate in meetings with Shionogi officers scheduled for early June.

Subsequently, on Sunday, May 16, 2008 Dr. Khan had dinner with the Sciele Officer. Two days later Dr. Khan sent his friend an e-mail wishing him the best with the buyout negotiations and promising to keep the information confidential.

Shionogi transmitted to Sciele’s Board its tender offer to acquire all of Sciele’s outstanding shares for $31 per share on August 28, 2008. Due diligence had been conducted from the end of May through mid-August. The Sciele Officer participated in that process as well as a series of interviews with the Shionogi team between August 11 and 15, 2008. Sciele’s board accepted the offer at a meeting on August 29, 2008. The company’s share price closed at $19.27.

On August 16, 2008 Dr Khan spoke with his friend on the telephone. Two days later Dr. Khan opened a brokerage account at Vanguard. He had not traded in securities since 2003. The two men then had diner on August 20 and 27. According to the complaint, the Sciele Officer provided Dr. Khan updates on the negotiations. Between August 19 and 28, 2008, Dr. Kahn transferred $84,000 to his new brokerage account and purchased 4,000 shares of Sciele.

The tender offer was announced on September 1, 2008. The share price spiked 59%. The next month Dr. Khan sold his shares of Sciele for a profit of $45,000. The case is in litigation. See also Litig. Rel. 21644 (Sept. 10, 2010).

Note: Each year Lexis recognizes the top twenty five corporate and securities blogs. This blog has been nominated for this honor. To vote please click here.