by T. GormanPosted on Posted in SECActions

As 2019 drew to a close a father and son resolved an insider trading case with the Manhattan U.S. Attorney’s Office. The action centered on trading while in possession of inside information about a pharmaceutical company. Congressman Christopher Collins, who sat on the board of the company, tipped his son who, avoiding losses. U.S. v. Collins, No. 18 Crim 567 (S.D.N.Y.); SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y.).

Yesterday another father and son insider trading case centered on events at a pharmaceutical company was at least partially resolved. Telemaque Lavidas was found guilty by a jury in Manhattan of having repeatedly tipped his friend Georgios Nikas with inside information supplied by Mr. Lavidas’ father, a director at Ariad Pharmaceuticals, Inc. U.S. v. Lavidas, No. 1:19-cr-00716 (S.D.N.Y. Verdict Jan. 15, 2020).

Mr. Lavidas is the son of a prominent Greek business man who serves as a director of Ariad. The firm, based in Cambridge, Massachusetts, developed and marketed leukemia medication Iclusig. In three instances over a two-year period Mr. Lavidas transmitted inside information about the company to friend Nikas. The first occurred in October 2013. There Mr. Lavidas learned from his father that the FDA was concerned about potential adverse health effects from the leukemia drug. The information was transmitted to Mr. Nikas who had a large position in the stock. The shares were sold and Mr. Nikas established a substantial short position. When the firm released the information about the FDA’s concerns, the share price dropped 62%. Mr. Nikas closed the short position, realizing profits of over $3.2 million. He also avoided a loss of about $800,000.

The second occurred later in the same year. In the last two months of 2013 Mr. Nikas was told by his friend, Telemaque Lavidas, that the pharmaceutical company was making good progress on returning Iclusig to market. The information had been given to Mr. Lavidas by his father. Mr. Nikas established a long position in the stock. When the company announced the drug was returning to market the share price increased. Mr. Nikas had profits of over $1.3 million.

The third happened during the summer of 2015. At that time Ariad learned that an unsolicited takeover offer from another drug firm would be made. Mr. Lavidas obtained the information from his father. He passed it on to Mr. Nikas who purchased shares. When the bid was announced Araid’s stock price rose. Mr. Nikas had profits of over $2 million.

Mr. Nikas received other tips from Mr. Lavidas. In each instance he traded. Overall, he had trading profits of over $15 million.

Mr. Lavidas was found guilty by the jury following a one-week trial. Specifically, the jury returned guilty verdicts on one count of conspiracy to commit wire and securities fraud and three counts of securities fraud. Sentencing is scheduled for April 17, 2020.

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by T. GormanPosted on Posted in SECActions

Market manipulation has long been the focus of the SEC, the CFTC and other regulators. Spoofing, a particular form of market manipulation, is now a focus of the CFTC and DOJ following amendments to the CEA under Dodd-Frank. There Congress added a specific statutory provision prohibiting the trading technique. Prior that statutory amendment few spoofing cases were brought.

While it seems clear that spoofing is prohibited by the kind of general antifraud provisions contained in the CEA – a point well illustrated by the SEC’s use of Section 10(b) in recent spoofing cases – one reason for not bringing spoofing actions prior to Dodd-Frank may have been the difficulty of proof. Complex market manipulations can be difficult to prove, particularly for regulators with limited budgets. While Dodd-Frank simplified the proof issue for the CFTC, the true driver of its most recent case in this area appears to have been cooperation. In the Matter of Mirae Asset Davwoo Co., Ltd., CFYC Docket No. 30-11 (Jan. 13, 2020).

The case

Respondent Mirae Asset acquired Daewoo Securities after the trading involved here. Daewoo was a brokerage and investment firm based in the Republic of Kora which engaged in proprietary futures contract trading in the U.S.

During the period December 2014 to April 2016 Trader A, based in the Daewoo office in Seoul, Korea office, traded futures contract, including the E-Mini contract on the CME. The trader used a number of strategies; at least one involved spoofing. To employ this strategy the trader used three steps:

1) Disproportionally large orders were entered on one side of the market. These orders were intended to give a misleading impression of market liquidity. The trader intended from the beginning to cancel these orders.

2) A small order was subsequently entered on the opposite side of the market. This order benefitted from the increased activity on the opposite side of the market created by the initial order.

3) Immediately after the second order was executed the trader cancelled the initial orders.

In this case by the time Enforcement’s inquiry began Daewoo had been acquired by Mirae Asset. That firm immediately began cooperating with the enforcement investigation. The firm retained U.S. counsel to conduct an internal investigation. Mirae also retained an expert to analyze the trading activity. The results from the expedited investigation were given to the CFTC’s Division of Enforcement.

This action against the firm followed. The Order alleges violations of Section 4c(a)(5)(C) of the Act. That section makes it unlawful to engage in any trading or conduct that is known as spoofing. Since the trader engaged in that conduct Mirae, as the subsequent acquirer of Daewoo Securities, is liable for that activity, according to the Order.

To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the Section cited in the Order. The firm agreed to pay a civil monetary penalty of $700,000. The amount of the penalty was reduced by an unspecified amount based on the cooperation of Respondent.

Comment

Cooperation resulted in a reduced penalty, according to the CFTC. That is because the cooperation expedited the proceeding. That is key for agencies with scarce resources.

For the company, the question of cooperation is not so much one of resources but of value – what is the cooperation worth? That point is not addressed here. Indeed, U.S. regulators typically do not address the point. That contrasts sharply with the practice in other parts of the world the amount of the discount is disclosed. At a time when many U.S. regulators are seeking cooperation to facilitate their investigations, it may be time to at least try the approach used by regulators abroad.

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