by T. GormanPosted on Posted in SECActions

The SEC closed out the government fiscal year by continuing its emphasis on insider trading cases. On Friday, the SEC filed two additional insider trading cases.

In SEC v. McKay, Civil Action No. 5:07-CV-00378-H (E.D.N.C. Filed Sept. 28, 2007), the Commission filed a settled enforcement action against the spouse of a former Triangle Pharmaceutical, Inc. executive. According to the complaint, defendant Daniel McKay misappropriated inside information from his wife, who is a former Triangle executive. Mr. McKay traded for his own account after obtaining the information and, in addition, tipped two siblings. Mr. McKay is alleged to have made $11,416 from his trades. To resolve the action, Mr. McKay consented to the entry of a statutory injunction and an order directing that he pay disgorgement and prejudgment interest of $12,458.98 and a civil penalty of $11,416. The Commission’s Litigation Release on this matter can be seen here. 

The second action, SEC v. Chavarria, Civil Action No. 1:07-CV-820-LY (W.D. Tex. Filed Sept. 28, 2007), named three Dell, Inc. accountants as defendants. According to the complaint, the three accountants traded in Dell securities and options in advance of earnings announcements. Two of the defendants agreed to settle the case by consenting to the entry of a statutory injunction and an order requiring that they disgorge the profits, along with prejudgment interest, and pay a penalty equal to the profits disgorged. The Litigation Release is here. 

These two cases are part of a renewed emphasis by the SEC and regulators around the globe on insider trading. The McKay case is one of several “pillow talk” cases brought this year. In some of those cases, the SEC has alleged that spouses traded together. In others it has been claims that one spouse traded on information misappropriated, as in the McKay case.

The Chavarria case is just one of several brought by the SEC against corporate executives. Many of those cases have focused on trading prior to the announcement of a significant corporate event such as a merger. Others, like Chavarria, have alleged that the executives traded prior to earnings announcements.

While these two cases are, for the most part, settled, the SEC is still litigating other significant insider trading cases it filed earlier this year as part of its new emphasis in the area. That emphasis stems at least in part from congressional hearing held last fall on insider trading and a congressional report on an SEC investigation that directed more resources be expended on such investigations.

To date, the SEC has brought not only a significant number of insider trading cases but some which it claims are the most significant since the late 1980’s. Unlike many of its cases however, a significant number of high profile insider trading cases have not settled. Some of those cases appear to be based on little more than the basic trading data that can be obtained from the brokers. While the SEC has been very aggressive in many of these cases, the key will be whether it can successfully litigate the case. Given the difficulty of detecting and proving insider trading cases, the SEC may find it difficult to prevail in at least some of these cases.

 

by T. GormanPosted on Posted in SECActions

This week the SEC continued its renewed emphasis on insider trading cases by filing four new actions.

In SEC v. Keeney, Case No. 1:07CV0103 (D.C.C.), a former consultant to Frederick’s of Hollywood, Inc, a privately held company, was charged with trading in the securities of Movie Star, Inc. prior to the announcement of a merger between the two companies.  According to the complaint, Mr. Keeney served as a board consultant and participated in the merger negotiations.  During one period, he made over a dozen purchases of Movie Star, acquiring 157,000 shares which were sold after the announcement.  The cases was settled with a consent decree, the entry of a statutory injunction, and an order directing Mr. Keeney to disgorge his profits of $77,540.50, pay prejudgment interest and pay a penalty equal to his trading gains.  The SEC’s Litigation Release is available here.  

In SEC v. Gad, Civil Action No. 07-cv-8385 (S.D.N.Y. Filed Sept. 27, 2007), the Commission brought an action against Nathan Rosenblatt, a board and audit committee member of NBTY, Inc. and his friend, Morris Gad.  According to the SEC’s complaint, Mr. Rosenblatt learned at a board meeting that NBTY’s earnings would fall substantially short of projections.  Subsequently, he informed Mr. Gad, who sold the stock short, purchased put contracts and sold call contracts through the custodial accounts of his children.  After the announcement by the company, Mr. Gad liquidated his position, making about $900,000.  This case is in litigation and the Commission’s Litigation Release can be viewed here.  This is one of a number of insider trading cases brought against market professionals this year.

In SEC v. Smith, Civil Action No. 07-CV-8394 (S.D.N.Y. Filed Sept. 27, 2007), the Commission brought an insider trading action against a father and son, both of whom are securities professionals.  The SEC alleged in its complaint that the son, a former investment banker with Banc of America Securities, obtained inside information about three companies, which he gave his father.  The father, an employee of Broadband Capital, was furnished inside information by his son about three deals.  The father traded while in possession of the information and prior to the public announcements.  To settle the action, each defendant consented to the entry of a permanent statutory injunction, an order holding each jointly and severally liable for disgorgement in the amount of $204,476 plus prejudgment.  The father also agreed to a two-time penalty, while the son agreed to pay a penalty equal to the amount of the disgorgement.  The Litigation Release from the SEC appears here.  

The complaint in SEC v. Hershey, Civil Action No. 3:07-cv-409 (W.D.N.C. Sept. 27, 2007) alleged that Mr. Hershey was tipped by his friend Brian Paquette, then a Lending Tree VP, about the takeover of Lending Tree by U.S. Interactive.  Mr. Hershey then traded while in possession of the inside information and also tipped three of this friends, who also traded.  Mr. Hershey consented to the entry of a statutory injunction enjoining him from future violation of the securities laws and the entry of an order requiring the payment of disgorgement of over $14,000 in trading profits, prejudgment interest, and a civil penalty of over $88,000, an amount equal to his trading profits and those of his tippees.  The Commission’s Litigation Release may be viewed here.  Earlier this year the SEC lost an insider trading case based on this transaction, when the District Court in Colorado dismissed insider trading charges against a Fidelity National director who traded after learning about the proposed transaction.  Fidelity owned a stake in Lending Tree at the time.  The court held there was no duty of confidentiality.  That case, SEC. v. Talbot, was discussed in this blog on February 23, 2007 (here).  

These actions are just the latest in a series of insider trading cases that the SEC has brought this year.  As reported earlier, the SEC has undertaken a series of initiatives in this area including new agreements with other regulators, a Wall Street sweep and sending questionnaires to hedge funds.  The new focus seems to be yielding results if the number of cases filed is any measure.  At the same time, while three of the four cases filed this week are settled, many of the most significant inside trading cases filed this year are being litigated.  It remains to be seen if the SEC can prevail in those actions. 

The SEC also continued its renewed emphasis on Foreign Corrupt Practices Act cases.  In SEC v. Chandramowli Srinivasan, Civil Action No. 1:07-cv-01699 (D.D.C. Filed Sept. 25, 2007) the Commission filed a settled civil injunctive action against the former president of A.T. Kearney India, a subsidiary of EDS at the time.  According to the complaint, defendant paid at least $720,000 in illicit payments to senior employees of India state-owned enterprises to retain business.  To resolve the action, defendant consented to the entry of a statutory injunction and an order requiring him to pay a $70,000 penalty.  In a related administrative proceeding, EDS consented to the entry of a cease-and-desist order relating to records violations and an order requiring the payment of over $358,000 in disgorgement, along with prejudgment interest.  The proceeding was based on allegations that EDS failed to disclose the cost of certain derivatives, failed to disclose an extraordinary transaction that represented a significant part of its revenue, and maintained inaccurate books and records.  The Commission’s Litigation Release is here.  

Finally, the SEC brought another accounting fraud case against a quasi government corporation claiming that it improperly smoothed earnings.  This time the company was Freddie Mac.  In SEC v. Federal Home Loan Mortgage Corp., Case No. 07-CV-1728 (D.D.C. Filed Sept. 27, 2007) the Commission filed a settled civil injunction action against Freddie Mac and four of its former executives.  The complaint alleged that from 2000 to 2002 the company improperly smoothed its earning trends by misreporting net income.  The improper actions resulted from a corporate culture which placed great emphasis on steady earnings, rather than compliance.  To settle the case, the company agreed to the entry of a statutory injunction and the payment of a $50 million civil penalty.  Each of the officers also consented to the entry of statutory injunctions and the payment of civil penalties.  This latest case appears in the SEC’s Litigation Release here.  Earlier this year the SEC settled an accounting fraud case with Federal National Mortgage which paid a $400 million penalty. (discussed here and here).