by T. GormanPosted on Posted in SECActions

Perhaps the SEC is developing a sense of ironic timing. The day after the Super Bowl the Commission filed an insider trading action. The conversations which are the predicate for the alleged illegal securities trades began in 2011 at the Super Bowl. SEC v. Munakash, Civil Action No. 2:16-cv-00833 (C.D. Cal. Filed Feb. 5, 2016).

The action centers on the acquisition of GSI Commerce Inc., an e-commerce company, by eBay, Inc., announced on March 28, 2011. Defendant Robert Munakash is the owner of a small business which employed Carlos Rodriguez, also a defendant. Mr. Munakash is a long time personal friend of Executive A. The two men had a long history of sharing confidential information. Several months before the February 2011 Super Bowl, he became the Executive Vice President of Strategic Business Development at GSI. He was tasked with working on the sale of the firm, initially to possibly private equity firms and later to eBay.

In February 2011 Executive A and Mr. Munakash traveled to the Dallas Super Bowl together. Mr. Munakash was a guest of the firm. Prior to the trip Executive A met with representatives of private equity funds. Over the New Year’s holiday Executive A confided to his friend and another that he had met with funds he believed may be interested in the company.

During the Super Bowl trip Executive A told his friend that there were several groups interested in pursuing an acquisition or deal with GSIC. In addition, there were other potential deals.

After returning from the Super Bowl Mr. Munakash furnished the information about the potential transaction, including the fact that a possible offer may be forthcoming, to his broker, defendant Marc Winters. The two men had a long and mutually beneficial business relationship. Mr. Munakash also recommended that his mentee, defendant Rodrigues, purchase shares of GSIC stock, gifting him the information. Mr. Rodriguez knew that his mentor and Executive A were friends, that the executive was a GSI insider and had invited Mr. Munakash to the Super Bowl.

Messrs. Munakash, Winters and Rodriguez purchased shares of GSI stock. Mr. Winters also purchased shares for two discretionary accounts he managed while Mr. Rodriguez tipped a close relative who traded. The transactions were all based on the inside information misappropriated by Mr. Munakash. None of the traders had purchased GSI shares previously.

No transaction moved forward. At a dinner in late February, Mr. Munakash probed Executive A for information about the transaction. Executive A confided in his friend that the GSIC Board was going to lead the negotiations with another company that was interested in investing in GSIC. Subsequently, Messrs. Munakash and Rodriguez exchanged text messages. The next day both purchased additional shares of GSIC stock.

On the morning of March 28, eBay and GSIC announced the acquisition. All of the defendants immediately sold their shares. Mr. Munakash sold his position for profits of $86,000; he also sold shares he had purchased in the account of his parents, yielding $92,000 in profits; Mr. Rodriguez had profits of $17,000 while his relative had $26,000; and Mr. Winters had profits of $13,000 while his clients had profits in the same amount. The complaint alleges violations of Exchange Act Section 10(b). It is pending. See Lit. Rel. No. 23460 (February 8, 2016).

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by T. GormanPosted on Posted in SECActions

When anyone discusses insider trading these days Newman invariably becomes a key topic. Prosecutors decry the decision and its tipping standard. Little doubt why. It has been offered as a defense in innumerable cases. A number of insider trading convictions have been undone by the Second Circuit’s decision. Newman, however, is is not likely to serve as a defense for the latest insider trading case brought by the SEC and the USAO, SEC v. Hamilton, Civil Action No. 3: 16-cv-00192 (D. Conn. Filed February 5, 2016).

Dennis Hamilton, a CPA, has served as the vice president of tax since 2009 at Harman International Industries, Inc. Harmon, headquartered in Stamford, Connecticut, designs, manufactures and markets high fidelity audio products and electronic systems. Its shares are listed on the New York Stock Exchange. Mr. Hamilton has always reported directly to the CFO.

Mr. Hamilton has been deeply involved in the preparation of Harman’s earnings announcements throughout his years at the firm. He is typically among the first to view the firm’s quarterly and annual earnings. He also has been responsible for preparing the CEO and CFO for conference calls with investors after earnings releases.

Harmon has an insider trading policy which includes provisions for the pre-clearance of trades. It also has an employee code of conduct. Mr. Hamilton was aware of these policies.

On October 18, 2013 Mr. Hamilton received a draft of Harman’s Form 10-Q for the first quarter of fiscal 2014. Sales were up 17% according to the draft. Indeed, each of its business segments had significant increases. Six days later Mr. Hamilton received the draft earnings release announcing the quarterly results. It stated in part that net sales were “up 17% to 1.172 billion.”

Two days after receiving the draft earnings release Mr. Hamilton purchased 17,000 shares of Harman stock at a purchase price of $1.2 million in a joint account he had with his wife. The date was October 30, 2013. The share closing price was $72.02.

Before the market open the next day Harmon announced its earnings. The share price jumped, closing at $81.02 – up 12% increase. Throughout the day Mr. Hamilton used a series of trades to liquidate his position. By the end of the day he had trading profits of $131,958.62. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of Connecticut brought a parallel criminal action. Both cases are pending.

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