The SEC filed another settled insider trading case on Friday. SEC v. Di Vita, Civil Action No. 1:08-cv-01060 (D.D.C. June 20, 2008).

The basic facts to the case appear to be similar to many others filed by the Commission. Defendant Adrian P. Di Vita was employed by Williams-Sonoma, Inc. (“WSM”) as a manager for Financial Planning and Analysis. On August 22, 2006, Mr. Di Vita attended a monthly operating review meeting held for senior management at WSM. The meeting was held to discuss the prior month’s results and the outlook for each division. At the meeting “a member of WSM senior management again discussed Pottery Barn’s [a unit of WSM] difficulties and, among other things, said the expectation was that those difficulties would not reverse in the near future,” according to the complaint. The factual section of the complaint does not provide any other details about the meeting. The summary at the beginning of the complaint however, claims that Mr. Di Vita received information which “enabled him to know, that when WSM issued a scheduled earnings press release … the company would lower its earnings guidance … .” (emphasis added).

Following the meeting, Mr. Di Vita sold 707 of his WSM Stock Fund units (from his pension fund) and purchased 1,000 WSM put options. After WSM issued an earnings release in which it lowered guidance, Mr. Di Vita sold his put options. Overall, Mr. Di Vita avoided trading losses and made gains totally $67,690, according to the complaint.

To settle the action Mr. Di Vita consented to the entry of a permanent injunction prohibiting future violations of the antifraud provisions. In addition, he consented to the entry of an order requiring him to pay disgorgement and prejudgment interest of $76,932.80 and a civil penalty of $67,690.

While the case seems to be straight forward, it does raise two questions. First, it is unclear why the SEC’s complaint is so vague about the key meeting attended by Mr. Di Vita. The fact section contains virtually no detail about the meeting. There is no claim, however, in the fact section that the managers were told that earnings guidance would be lowered. While apparently the managers were told something about continuing difficulties at the Pottery Barn unit, there is no indication of whether this represented a new trend or simply a continuation of what had previously been disclosed. Likewise, there is no representation that managers were told about earnings projections for the period or that guidance would be lowered.

The allegations in the “Summary” at the beginning of the complaint make a small addition to the allegations about the meeting. That portion of the complaint suggest that, in fact, managers were not told that guidance would be lowered, but were supplied with enough information from which they could figure it out or which “enabled” defendant to know.

While Mr. Di Vita’s trading clearly suggests that he “figured out” something – and the results show he was correct – this is clearly not an adequate basis on which to being an insider trading case. Guesses, right or wrong, are not inside information. If, in fact, WSM managers were told that guidance was being lowered or if they were provided with other details about the financial performance of the company, the SEC should be able to do better than make the vague allegations set forth here.

Second, there is no explanation for the financial penalty imposed here. The penalty equals only the disgorgement. It does not equal the total of disgorgement and prejudgment interest, as in many cases. Nor does it represent a multiple of the disgorgement and prejudgment interest total as in many cases. Overall, this complaint, like one filed earlier last week (discussed here) raises more questions than it answers.

This week, another option backdating derivative case settled with payments made personally by two senior executives. The SEC filed a complaint alleging securities fraud against two former Bear Stearns hedge fund executives based on the collapse of two hedge funds last summer. At the same time, the U.S. Attorney’s Office for the Eastern District of New York reportedly has issued arrest warrants for the same two executives based on sealed indictments.

Finally, the SEC is continuing its war on insider trading. The agency brought an insider trading case against five individuals which, unlike many of its cases, did not settle simultaneous with filing. The Commission also has reportedly opened a number of new insider trading investigations.

Option backdating

The derivative suit against Zoran Corporation, centered on option backdating claims, appears to have settled based in part on personal payments to the company by two senior executives. This is the second time the parties have tried to settle this derivative case. Pfeiffer v. Zoran Corp., Civil Action No. 3:06-cv-05503 (N.D.Ca.).

The first proposed settlement was rejected as inadequate by the court. The first proposed settlement was based on three key elements: 1) certain backdated options were canceled; 2) the company agreed to specific corporate governance chances, some of which had been instituted during the term of the litigation; and 3) plaintiffs’ counsel would receive $1.2 million in fees and expenses.

The revised settlement has been tentatively approved by the district court. Under the new proposal the company would receive $3.4 million, certain options would be canceled or re-priced and lead counsel for the plaintiffs agreed to limit fee requests to no more than $1 million plus actual expenses.

A key provision of the settlement involves out of pocket payments by two senior executives. CEO Levy Gerzberg agreed to pay $296,250 to the company, while CFO Karl Schmeider agreed to pay $98,750. These amounts reflect the value received by each executive from exercising backdated options. Both executives agreed to re-price options with a total value of $256,920 and cancel others valued at $482,310. The other cash amounts paid to the company were from insurance.

Securities fraud

On Thursday, the SEC filed civil fraud charges against two former Bear Stearns hedge funds executives. The action is based on the collapse last summer of two Bear Stearns hedge funds. SEC v. Croffi, Civil Action No. 08-2457 (E.D.N.Y. June 19, 2008).

According to the SEC’s complaint, the two executives, Ralph Croffi and Matthew Tannin, misled fund investors repeatedly about the financial condition of the two hedge funds in an effort to stave off redemptions. Specifically, the complaint alleges that as the financial condition of the funds deteriorated, the defendants misrepresented its financial condition and the level of redemptions. In addition, the defendants misrepresented in periodic reports the level of investment of the funds in sub-prime mortgage backed securities. Those reports represented that exposure to sub-prime loans was only about 6-8% when in fact it was about 60%.

Defendant Croffi also misrepresented his investment activities regarding the funds, claiming he continued to buy shares, when in fact he did not. In addition, by the end of March 2007 Mr. Tannin had redeemed about $2 million worth of shares of the funds.

The Commission thanked the U.S. Attorney’s office and the FBI for assistance. In an unusual step, the Release stated that the matter was investigated by Enforcement’s sub-prime task force which is “aggressively” investigating that market.

The U.S. attorney’s office for the Eastern District of New York has issued arrest warrants for Messrs. Croffi and Tannin based on similar charges in indictments which have not yet been unsealed. The two men were arrested late Thursday.

Insider trading

The SEC filed an insider trading case against five individuals this week. SEC v. Tedder, Civil Action No. 3-08-CV-1013-G (N.D. Tex. June 17, 2008). The complaint is based on trading in advance of a business combination, the acquisition of Aviall, Inc. by The Boeing Company. It names Robert Tedder and Brian Carr, two company employees as defendants. It also names two alleged tippees of Mr. Tedder, his father Joseph, and business associate Philip Gunn, and a claimed tippee of Mr. Gunn, his brother Gregory as defendants.

The Commission’s complaint centers on a claims that defendants Tedder and Carr learned inside information about the merger talks because of an extension of the company trading blackout, an e-mail inadvertently directed to over 160 employees by the CEO which discussed the merger, observations that the general counsel was continually in meetings, a plant tour by Boeing executives and rumors. The SEC alleges that these events constitute material non-public information as discussed in more detail here. The case is in litigation.

Finally, there are reports that the SEC has recently opened a number of new insider trading investigations. These include inquiries into trading around the Microsoft bid for Yahoo. The Commission is also reportedly investigation trading in the securities of Lehman Brothers Holding, H&R Block, Boeing, NYMEX Holdings, Zoltek, Clear Channel Communications, National City Corp., Safeco Corp., Thornbury Mortgage and Nationwide Financial Services.