INSIDER TRADING: ANOTHER PILLOW TALK CASE

In recent years there have been a rash of “pillow talk” insider trading cases, that is, actions involving husbands and wives and sometimes other family members. Some involve a husband and wife trading together. See, e.g., SEC v. Wang, Civil Action No. 07-3715 (S.D.N.Y. Filed May 10, 2007). Others involve one spouse misappropriating inside information from another. See, e.g., SEC v. Balkenhol, Civil Action No. 07-2537 (N.D. Cal filed May 14, 2007). Still others involve various family members. See, e.g., SEC v. Aragon Capital Management LLC, Civil Action No. 07-00919 (S.D.N.Y. Filed Feb. 2, 2007) (father and sons); SEC v. Dearmin, Civil Action No. 07-01089 (D.D.C. Filed June 18, 2007) (father and daughter with information from daughter’s husband). These and other pillow talk cases are discussed here.

SEC v. Macdonald, Civil Action No. 09-CV-5352 (S.D.N.Y. Filed June 10, 2009) is the Commission’s latest “pillow talk” insider trading case. There, the husband misappropriated inside information from his wife and provided it to his friends who traded. The husband settled with the Commission. The two friends did not.

The case was brought against Phillip Macdonald, Martin Gollan and Michael Goodman, all residents of Ontario, Canada. Mr. Macdonald is an attorney. Messrs. Gollan and Goodman are in the scrap metal business. Mr. Goodman’s wife was employed at Merrill Lynch Canada in Toronto, Ontario. She held a position as an administrative assistant to certain managing directors of the firm. Those managing directors were involved in advising clients on contemplated mergers, acquisitions and tender offers.

Between January and June 2005 Mrs. Goodman periodically discussed her work with her husband on the understanding that the information would be kept confidential. Periodically, defendant Goodman called his wife during the day and discussed her work.

Contrary to his understanding with his wife, Michael Goodman told defendants Gollan and Macdonald about eight pending deals he learned about from Mrs. Goodman. Those deals involved Merrill clients:

• Creo, Inc., acquired by Eastman Kodak;

• Masonite International Corporation, which announced an agreement to provide for a price increase at which another corporation would acquire its shares;

• Eon Labs, Inc., which was the target of a tender offer by Novartis International, AG;

• Performance Food Group Company, which announced the sale of a business segment to another company;

• Great Lakes Chemical Corporation, which announced a merger with another company;

• Shopko Stores, Inc., which announced it had signed a definitive merger agreement to be acquired by another company;

• Electronics Boutique Holdings Corp., which was acquired by another company; and

• Commercial Federal Corporation which was also acquired by another company.

Defendant’s Macdonald and Gollan both traded in the stock of each Merrill client prior to the deal announcement. Mr. Macdonald made over $900,000 in trading profits, while Mr. Gollan had profits of $90,000. All of the trades were placed on U.S. exchanges except those in the shares of Masonite by defendant Macdonald. Those trades, the complaint alleges, are “probative of his plan, motive, and intent with regard to his trading in other target company securities.”

The complaint goes on to allege that Mr. Macdonald knew defendant Goodman’s wife was the source of the information and that she obtained it from her employment at Merrill. Mr. Gollan, however, “knew that Goodman’s wife worked with a stock broker … Although Goodman may not have conveyed to Gollan that Goodman’s wife was the source of the information, Goodman’s tips to Gollan regarding the target companies came shortly before announcements of business combinations … Thus, by the third or, at a minimum, the fourth time that Goodman tipped Gollan … Gollan knew or should have known that the information conveyed to him had been obtained in breach of a fiduciary duty,” according to the Commission’s complaint.

Mr. Goodman settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Sections 10(b) and 14(e). The judgment also provides that he is liable for disgorgement of the trading profits of Messrs. Macdonald and Gollan totaling $1,023,054 plus prejudgment interest. Payment and a penalty were waived based on his financial condition. Messrs. Macdonald and Gollan are litigating the case. See also Lit. Release No. 21079 (June 10, 2009).

Insider Trading: Aggressive International Enforcement

SEC v. Kohler, Case No. 06-4550 (E.D. Pa. June 8, 2009) is another example of the Commission’s aggressive enforcement in international insider trading cases. In Kohler, the SEC amended its complaint on Monday, adding as defendants a Swiss national and his company in an insider trading case initially brought against unknown purchasers of a take over stock.

The Commission’s initial complaint, centered on the acquisition of CNS, Inc. by GlaxoSmithKline plc, announced on October 9, 2006 was based on inferences from option trading by unknown purchasers in two accounts. It was filed just three days after the announcement of the deal. SEC v. One or More Unknown Purchasers of Call Options for the common stock of CNS, Inc., Case No. 06-4540 (E.D. Pa. Filed Oct. 12, 2006). Following the deal announcement, the CNS share price increased over 28%.

Prior to the deal announcement unknown purchasers bought CNS options through Swiss American Securities, a New York City based broker dealer and National Financial Services LLC, a Boston based broker dealer. Between September 28 and October 2, unknown purchasers acquired 905 call options for CNS through Swiss American in an omnibus account affiliated with Credit Suisse, Zurich. During approximately the same time period, 281 CNS call options were purchased through National Financial Services. These purchases were made through an account in the name of Zurich Cantonal Bank in Switzerland. The records for each account did not identify the beneficial owner.

The options in both accounts were sold shortly after the October 9 deal announcement. There were over $500,000 in profits in the Swiss American account. Sale of the options in the National Financial account yielded a profit of over $146,000. According to the complaint, the “timing, prices, and pattern of the Unknown Purchasers’ purchases of CNS call options in the days leading up to the announcement of the Glaxo-CNS acquisition indicate that the purchases were based on material inside information.” See also Lit. Release No. 19867 (Oct. 13, 2006).

The amended complaint against Mr. Kohler, who has held management roles at Swiss banks for about 25 years, and Swiss Real Estate International, claims that he and his group purchased options through the omnibus account with Credit Suisse in Zurich that were executed through Swiss American Securities. Mr. Kohler also told his wife and brother-in-law about the purchases, according to the Commission, knowing that they typically mirror his trading transactions as they did here.

While the complaint does not identify a source for the inside information, Mr. Kohler is alleged to have possessed, it does claim that he engaged in similar trading patterns using inside information in five other instances. No source for the inside information is identified for those transactions. The complaint does state however that “[i]nformation and evidence identifying the material non-public information possessed by Kohler on September 28 and 29 and October 2, 2006 [the trade dates] is particularly within Kohler’s knowledge and control. Similarly, information and evidence identifying the source of that material non-public information is particularly within Kohler’s knowledge and control.”

This is not the first international insider trading case in which the SEC has been aggressive in filing a complaint based largely on trading. The Commission has been aggressive in these actions in recent years. This posture has had mixed results. For instance, in SEC v. Kan King Wong, No 07-3628 (S.D.N.Y. Filed May 8 2007), a case based on the News Corp. bid for Dow Jones, the Commission filed its complaint against unknown traders just seven days after the transaction announcement. Subsequently, it amended the complaint, identified the traders and settled the case as discussed here. See also Lit. Release No. 20447 (Feb. 5, 2008).

In other instances the Commission has not been as successful. In SEC v. Boutraille Corp., Case No. 05-9300 (S.D.N.Y. Filed Nov. 4, 2005), an action based on the take over of Canadian mining company Placer Dome, Inc. by Barrick Gold Corp. announced on October 31, 2005, the Commission quickly brought an insider trading case, filing its complaint on November 2, 2005. Subsequently, the agency amended its complaint, naming three defendants. After years of litigation however the Commission dismissed the case as discussed here.

Whether the Commission will be successful here remains to be seen. There should be little doubt however, that the agency is being aggressive in bringing international insider trading cases.