Insider trading has long been a staple of the Enforcement Division. Since the earliest days of the Division, and even prior to its formation in the early 1970s, the Commission has brought a series of cases that the courts used to etch the elements of the violation beginning with the a breach of duty tied to the broad language of Exchange Act Section 10(b). The most recent example of this evolution may be the first insider trading case based on crypto assets, SEC v. Wahi, Civil Action No. 2:22-cv-01009 (W.D. Wash. Filed July 31, 2022).
While the Commission’s most recent insider trading action is more straight forward, than Wahi, it is significant. SEC v. Mendwa, Civil Action No. 4:22-cv-05340 (N.D. Ca. Filed September 20, 2022).
Named as defendants are John P. Mendes and Andre Dabbaghian. Mr. Mendes was employed as a registered representative and investment adviser representative with a dually registered broker-dealer and investment adviser. Andre Dabbaghian was employed by Granite Construction Inc. during the period 2015 through mid 2018. He was the Senior Manager of Corporate Development. Mr. Dabbaghian had formerly been registered with FINRA and employed as an investment banking analyst.
The case centers on the acquisition of Layne Christensen Company by Granite in a deal announced on February 14, 2018. Prior to the deal announcement Defendant Dabbaghian learned of the potential deal regarding Layne and Granite through his employment. At the time he acquired the material, non-public information, Mr. Dabbaghian owned a duty of confidentiality to his employer. Stated differently, he owed a duty not to disclose the information – it belonged to Granite, not Defendant Dabbaghian.
Nevertheless, Defendant Dabbaghian disclose information about the potential merger to his friend John Mendes on or before November 3, 2017. Following the disclosure Mr. Mendes purchased shares of Layne securities for his wife and at least 18 other customers, including his parents, beginning on November 3, 2017 and through November 13, 2017.
On November 14, 2017, the day after the deal announcement, the share price of Layne shares closed at $14.89. That represented a price increase of $2.27 per share – up 18% from the close the prior day. Collectively, the persons for whom Mr. Mendes purchased shares had profits of about $170,000. The complaint alleges violations of Exchange Act Section 10(b).
Each Defendant resolved the charges with the Commission. Mr. Mendes consented to the entry of a permanent injunction based on the Section cited in the compliant. He also agreed to pay disgorgement of $41,985, prejudgment interest and a civil penalty of $51,579. Defendant Dabbaghian consented to the entry of a permanent injunction based on the Section cited in the complaint and agreed to the entry of an officer/director bar. The Court will consider the amount of the penalty, if any, at a later date. See, Lit Rel. No,. 25512 (September 20, 2022).