THE RENEWED CAMPAIGN ON INSIDER TRADING: Part V: The Family That Trades Together

A variation of the pillow talk cases is the family trading ring. These cases involve various family members coming together in a new family activity: insider trading.

SEC v. Aragon Capital Management, Case No. 1: 07-cv-00919-FM (S.D.N.Y. Feb 13, 2007) is typical of this group of cases, although the trading ring here is more expansive. Trading in this case is alleged to have centered on a family group and the family hedge fund. In this case, which is currently being litigated, the SEC claims that a father and his sons engaged in an insider trading scheme which to date has yielded about $4 million in illegal profits.

The scheme involves the following family members who, according to the complaint, all have successful careers aside from the claimed family trading ring:

• the father, a senior manager at Taro Pharmaceuticals;
• a son who is an attorney at a large NYC law firm;
• a son who formerly was with PWC; and
• a son who is currently an attorney with an LA law firm.

In addition, the scheme is alleged to have expanded to include other relatives and friends.

In the basic scheme, the father is alleged to have obtained material non-public information from his employment at Taro. The sons were then tipped and they in turn tipped others. The basic scheme is thus similar to those involved in the pillow talk cases. Here, however the scheme kept expanding as various family members tipped others. To date, one friend of the family has settled while the other defendants are litigating the claims.

A second case involving fathers and sons is SEC v. Smith, Civil Action No. 07-CV-8394 (S.D.N.Y. Filed September 27, 2007). This case, which is perhaps a less expansive version of Aargon Capital, where trading proliferated outside the family circle, involved a father and son who were both securities professionals. Here, however it is the son who is alleged to have obtained inside information from his employment at Bank of America Securities, rather than the father. According to the SEC, the son obtained material non-public information about three transactions and furnished it to his father. The father, in turn, traded while in possession of the inside information.

Both the father and son agreed to settle, consenting to the entry of statutory injunctions and the entry of an order making each jointly and severally liable for the disgorgement of all illegal profits along with prejudgment interest. In addition, the father agreed to the entry of an order requiring him to pay a penalty equal to twice the amount of the disgorgement, while the son agreed to pay a penalty equal to that amount.

Another variation of this theme is a daughter-father team through the daughter’s husband. In SEC v. Dearmin, Civil Action No. 1:07-CV-01089 (D.D.C. Filed June 18, 2007), the SEC alleged that the husband, a former CEO of Ionatron, learned that the company was about to be acquired by U.S. Home & Garden. After the husband told his wife about the pending deal, she tipped her business partner father, who purchased Ionatron shares prior to the announcement. The father sold the shares post-announcement at a substantial profit.

The daughter-father insider trading team both agreed to settle with the SEC, consenting to entries of statutory injunctions. The father also consented to the entry of an order requiring the payment of $9,123 in disgorgement, $1,714 in prejudgment interest and a penalty of $9,323. The daughter consented to the entry of an order requiring that she pay $13,178 in disgorgement, $2,390 in prejudgment interest and $13,178 as a penalty. The husband, in similar fashion to several of the spouse cases, was not charged.

Next: Corporate executives

THE RENEWED CAMPAIGN ON INSIDER TRADING – Part IV: Pillow Talk Cases

A rising phenomena appears to be “pillow talk” cases, those involving spouses. In some instances, a husband and wife are alleged to have traded together on inside information. In others, one spouse is claimed to act contrary to the wishes of the other. A variation involves various family members trading. In all of these cases, there seems to be a new family dynamic at work.

The first group involves spouses trading together. In a prior installment of this series (here), we discussed SEC v. Kan King Wong, the case based on the News Corp. – Dow Jones transaction in which a husband and wife are alleged to have traded together.

A similar patter is evident in SEC v. Wang, Civil Action No. 07-3715 (S.D.N.Y. Filed May 10, 2007) and the related case U.S. v. Wang, Case No. 1:07:-cr-00730-CM (S.D.N.Y. May 9, 2007). According to the court papers in these cases, the couple traded on inside information obtained from the wife’s employment at Morgan Stanley. On three occasions the wife obtained M& A information from her employer and she, along with her husband, traded in advance of the public announcement of the deal. The trades were placed through an account in Beijing in the name of the wife’s mother. Computer records demonstrate that the brokerage account was accessed at ING where the husband was employed and from the couple’s New Jersey home. Both of these cases are pending.

A third case involving spouses is SEC v. Chaing, Civil Action No. 1: 07CV00285 (D.D.C. Filed Feb. 8, 2007). This is the only case in the group to settle. Here, the husband obtained the inside information from his position as former co-chairman of SINA. After learning that the company would have lower-than-expected earnings, the husband placed eight orders to sell short, as a result of which the couple avoided losses. After trading together, the couple settled together. Both consented to the entry of a statutory injunctions. The husband also agreed to the entry of an order requiring him to pay disgorgement of $257,833 and a penalty in the same amount. The wife agreed to the entry of an order requiring the payment of a civil penalty in the amount of $128, 916.

In other cases, only one spouse traded and, in some instances, contrary to the wishes of the other spouse. Consider for example, SEC v. Blakenhol, Civil Action No. C-07-2537 JCS (N.D. Cal. Filed May 14, 2007). In this case, both spouses worked at Oracle. The husband was a vice president while the wife was an executive assistant to the CEO and two other vice presidents. From her position, the wife had access to inside information apparently not available to the husband. In 2004 and 2005, according to the complaint, the husband, who previously was an active stock trader, only traded in Oracle targets. In one instance he invested about $450,000, far more than he had in any other single investment. The case was brought against the husband, but not the wife. The husband settled, consenting to the entry of a statutory injunction and an order requiring him to pay disgorgement, a civil penalty equal to the disgorgement and prejudgment interest.

A similar but perhaps more striking case is SEC v. Melton, Civil Action No. cv-7-2655 GHK (C.D. Cal. Filed April 23, 2007). There, the husband is alleged to have traded on inside information obtained from the wife, who is a vice president at Amgen. According to the complaint, the wife learned that Amgen was about to acquire Abgenix. Although the couple discussed the pending transaction, the wife specifically instructed the husband that he could not use the information to trade, according to the court papers. Nevertheless, the husband liquidated two other accounts and purchased over two thousand shares of Abgenix. After the transaction was announced, he liquidated the shares, yielding a profit of about $15,000. As in Blakenhol, the husband and not the wife was charged. The husband agreed to settle by consenting to the entry of a statutory injunction and an order requiring him to disgorge the trading profits and pay prejudgment interest along with a civil penalty equal to the amount of the trading profits.

Overall, one can only wonder about the impact of these cases on the spouses. In Wang and Chaing the couples are alleged to have traded together and apparently will go to trial together. A different dynamic appears to be at work in Blankenhol and Melton. In those cases the husband traded on information from the wife and settled without the wife being charged. Some may wonder if these cases are just a variation of Wang and Chaing with the couples acting together – but saving the wife by settling, rather than having a joint defense at trial. Only the couples know for sure.

Next: variations, family members and friends trading.