Those who engage in insider trading often try to conceal their activity. Individuals involved in insider trading schemes in some instances, for example, take elaborate steps to separate the tipper from those who trade. Others trade only through accounts of relatives or friends. Some in have even tried studying the way the SEC investigates insider trading cases in an effort to evade the detection.

The most recent example of trying to deflect detection comes from a U.S. Congressmen, well known for being a member of the board of directors of the firm whose stock was at the center of suspected insider trading. The Congressman had his office issue a press release stating that he and his daughter had not sold any shares in the firm. That statement followed denials that had engaged in wrongful conduct to the FBI and trading in the stock by his son and seven others closely connected to the father and son in such volume that their sell orders constituted a significant portion of the market volume in the two trading days before the announcement. U.S. v. Collins, No. 18 crim 567 (S.D.N.Y. August 8, 2018); SEC v. Collins, Civil Action No. 18-cv-7128 (S.D.N.Y. Filed August 8, 2018).

Each action names as a defendant Christopher Collins, a Congressmen from New York, Cameron Collins, his son and Stephen Zarsky, the father of Cameron’s then girlfriend (now fiancée). The action centers around the announcement by Australian Pharmaceutical Company Innate Immunotherapeutics, Ltd. after the close of trading on Monday, June 26, 2017 of negative drug trial results for the firm’s only actual pharmaceutical. The share price plunged 90%.

Congressman Collins has been a member of Innate’s Board of Directors for three years. He was one of the firm’s largest shareholders. Mr. Collins’ involvement with the company was well known — it was the subject of an on-going Congressional ethics probe tied to his stock holdings and promotion of the firm. Just days before the announcement of the drug trials on which this action centers he had been interviewed as part of that investigation. His son Cameron was also a large shareholder, having purchased or received from his father over 5.2 million shares of stock.

By 2014 Innate began developing a drug known as MIS416 which was intended to treat multiple sclerosis. A clinical trial to test the efficacy of the drug began. As the trial continued, in April 2017 the firm announced that the last patient had completed the clinical portion of the study. The final results were expected to be available in August or September 2017. The top line results – the preliminary conclusions – might be released earlier.

In early June the board of directors was informed that they would not be permitted to trade firm shares between June 5 and July 11, 2017 because the drug trial results were expected. A few days later the firm’s CEO told the directors that the top-line data had been delivered to the firm’s consultants and that the “verdict” would be available after the close of business, June 22, 2017.

Many expected the “verdict” to be positive. On June 5, 2017, for example, Christopher Collins discussed the possibility that if the company received a strong “efficacy signal” from the trial the drug would be a candidate for accelerated approval by the FDA. In the period leading up to the announcement Cameron added to his then already large position in the stock. His girlfriend also purchased shares in an account she opened. The girlfriend’s father, Stephen Zarsky, and her mother had purchased shares the year before.

On June 22, 2017 Innate’s CEO sent an email at 6:55 p.m. to the board of directors, including Christopher Collins, with the results. The trial had been a failure: “Top-line 12 month data . . . show no clinically meaningful or statistically significant differences in [outcomes] between MIS416 and placebo.” The Congressman was attending a Congressional Picnic at the White House. He responded immediately, noting that the results made no sense. The Congressman the began trying to call his son. Six missed calls were placed from 7:11 p.m. to 7:15 p.m. At 7:16 p.m. father and son spoke on the phone for over six minutes. Cameron learned what his father already knew – the drug trial failed. While the firm informed the directors it also decided not to announce the results of the drug trial until after the close of business on Monday, June 26, 2017.

The next morning Cameron Collins began placing orders to sell his Innate shares. On Friday and Monday he continued to place orders, at times cancel them, and then place additional orders. By the time of the company announcement on Monday evening he had sold almost 1.4 million, avoiding losses of about $570,000.

Others Cameron Collins or Mr. Zarsky told about the trial failure also sold shares. His girlfriend began selling shares on Thursday evening almost immediately after learning about the drug trial results. Mr. Zarsky, his wife and a friend of Cameron’s also traded as well as Mr. Zarsky’s brother, his sister and a long standing friend. At times their trading represented the bulk of the volume in the stock. All avoided substantial losses.

Subsequently, Congressmen Collins, his son and Mr. Zarsky were interviewed by the FBI. All lied, according to the indictment. The indictment alleges five counts of securities fraud, two counts of conspiracy, one count of wire fraud and three counts of making false statements. The SEC’s complaint alleges violations of Exchange Act section 10(b) and Securities Act section 17(a). The two cases are pending.

Lauren Zarsky, Cameron’s girlfriend, and her mother Dorothy settled with the Commission, consenting to the entry of permanent injunctions based on the sections cited in the complaint. Lauren Zarsky agreed to pay disgorgement of $19,440, prejudgment interest of $839 and a penalty equal to the amount of the disgorgement. Dorothy Zarsky agreed to pay disgorgement of $22,600, prejudgment interest of $975 and a penalty equal to the amount of the disgorgement. Lauren Zarsky, a CPA, also agreed to be suspended from appearing or practicing before the Commission as an accountant with the right to apply for reinstatement after five years. See SEC v. Lauren Zarsky, Civil Action No. 18-cv-7129 (S.D.N.Y. filed August 8, 2018); SEC v. Dorothy Zarsky, Civil Action No. 18-cv-7130 (S.D.N.Y. Filed August 8, 2018).

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The Commission has long encouraged firms and their executives to furnish forward looking information to investors and the markets. The MD&A section of company filings, for example, focuses in part on putting the investor in the seat of the executive with forward information. The Dodd-Frank Wall Street Reform Act contains a safe harbor for certain projections. These provisions recognize the fact that executives routinely use projections when managing the firm. When furnishing projections to investors, however, it is critical that they have a sound basis. When that basis is lacking, or the foundation facts suggest the projection is materially inaccurate, it can result in violation of the federal securities laws as in In the Matter of Ribbon Communications, Inc., Adm. Proc. File No. 83791 (August 7, 2018).

Ribbon Communications, formed in October 2017, is a holding company for the combination of GENBRAND LLC and Sonus Networks, Inc. The firm’s shares are traded on NASDAQ. Sonus provides products and services for Cloud communications. Respondent Mark Greenquist was the CFO of Sonus. Respondent Michael Swade was the senior vice president of sales, Americas at Sonus.

The Order centers on a revenue estimate for Q1 2015 made on January 8, 2015 and reiterated on February 18, 2015. On January 8, Sonus issued a press release quoting Mr. Greenquist as stating that he was “comfortable” with the consensus analysts revenue estimate for the first quarter of $74 million. The statement reaffirmed guidance given in December 2014.

At the time the estimate was given, the CFO was aware of information which undermined the projection. First, to achieve it revenue guidance for Q4 2014 Sonus “pulled forward” deals initially projected to close in 2015. Over 38% of the product revenue for the last quarter of 2014 was from deals that had been projected to close in 2015 but were “pulled forward” into the end of the year. By doing this Mr. Greenquist recognized that the firm was creating a risk that it would not have sufficient deals closing in the first quarter of 2015 to meet its revenue projection – that is, by “pulling forward” deals to meet one revenue target it would undercut the ability of the firm to meet the next target.

Second, and equally problematic, was the low backlog of deals. The backlog for the first quarter of 2015 was much lower than it had been for similar periods in earlier years. By November 2014 Sonus’ Vice President of Global Operations drafted a plan to achieve the Q1 2015 revenue target. The plan called for increasing the back log in the first quarter of 2015 significantly by “overdriving” bookings in the last quarter of 2014. This would permit the revenue to be recognized in the first quarter of 2015. Not only did the plan fail, the backlog for Q1 2015 decreased. Absent the planned increase from “overdriving” bookings, revenue for Q1 2015 would more reasonably be projected at $66 million rather than the announced $74 million.

Finally, the sale force forecasts did not support the first quarter 2015 projection. Generally the firm used a tracking tool to follow potential sales opportunities. The sales force populated the tool. Historically the firm relied on the revenue the sales force classified as “committed pipeline” meaning it will be booked, rather than that in two other classifications for transactions that were less sure to close. In early January there was a gap between those deals booked and those needed to make the projected revenue target. Mr. Greenquist chose not to rely on the data in the tracking tool. He was, nonetheless, concerned over the data and the ability of the firm to meet guidance. Concluding that he was “in a box,” the executive reaffirmed the guidance of $74 million despite the contrary data.

Prior to the February 18th statement on Q1 2015 guidance Sonus held its Global Sales Conference. During the Conference Mr. Swade directed that the team building exercise be canceled. Rather, the sale force was directed to figure out how the gap for committed pipeline deals to those needed to make guidance would be closed. Internal e-mails confirm that the sales force was instructed to improperly reclassify enough deals for the first quarter to close the gap. Millions of dollars worth of deals were reclassified. On February 18, 2015 during the firm’s fourth quarter and full year 2014 financial results conference call Mr. Greenquist provided Sonus’ formal guidance for Q1 2015, reaffirming the $74 million projection.

By March 24, 2015 the firm was forced to issue a press release correcting guidance in the wake of sale force updates to the revenue number. Guidance was revised down to a range of $47 to $50 million. The share price dropped over 33%. Ultimately the firm reported revenue of $50.1 million for the first quarter.

The Order alleges violations of Securities Act section 17(a)(2) and Exchange Act section 13(a). To resolve the proceedings each Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. In addition, Ribbon agreed to pay a penalty of $1.9 million while Mr. Greenquist will pay $30,000 and Mr. Swade $40,000.

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