PILLOW TALK ENDS IN SUMMARY JUDGMENT AND HUGE PENALTIES
The SEC has brought a number of “pillow talk” cases as part of their campaign against insider trading. There are a number of variations to these cases. Some involve the husband and wife trading together. Others involve one spouse misappropriating the information from the other. Still others involve additional family members. Most of these cases settle. Few litigate. Infrequently, one of these cases is resolved on summary judgment.
SEC v. Suman, Case No. 07 Civ. 6625 (S.D.N.Y. Filed July 24, 2007) is a pillow talk insider trading case where the Commission prevailed on a motion for summary judgment. The case was brought against Shane Bashir Suman and Monie Rahman, husband and wife. The couple maintained separate residences, with the husband located in Ontario, Canada and the wife in North Logan, Utah.
In 2004, Mr. Suman began working as an information technology specialist for Ontario-based MDS Sciex, a scientific equipment manufacturer and division of MDS, Inc. Two years later, MDS sought to acquire Molecular Devices Corporation whose shares were traded on the NASDAQ National Market system. Subsequently, on January 29, 2007, MDS announced a friendly tender offer for Molecular Devices at $35 per share. Following the announcement, the share price increased by 45%.
Prior to the announcement, discussions between the companies were highly confidential. The transaction was code named. In December 2006, the head of the deal’s due diligence team discussed with Mr. Suman the prospect for doubling the capacity of the internal e-mail system. Shortly thereafter, another due diligence team member asked Mr. Suman for assistance with her malfunctioning Blackberry. After obtaining her password, defendant Suman gained access to all of her e-mails including those from a secure on-line site known as “e-data room.” Some of the secure emails identified the then-under negotiation deal, specifying that it involved Molecular Devices. Mr. Suman worked on the Blackberry for several hours alone.
A few weeks later, an MDS communications specialist asked Mr. Suman to help retrieve a document she had been preparing for MDS President Andy Boon announcing the deal. Mr. Suman was told the document was very important. Several attempts were made to retrieve the document on January 23.
That evening, Mr. Suman called his wife in Utah. The phone call lasted for 100 minutes. The next morning, January 24, the couple began purchasing shares and options through the wife’s E-trade Canada account. By Friday January 26, the couple had purchased options for $103,516 and 12,000 equity shares for $287,758.54. Following the deal announcement the following Monday, the couple had profits of $1,039,440. Previously the account had been used for small amounts of day trading.
Subsequently, the Ontario Securities Commission interviewed Mr. Suman. He denied having any inside information about the deal. Prior to furnishing the agency with his computer, however, he ran a program which deleted files. After the SEC filed suit, the couple declined to respond to discovery, invoking their Fifth Amendment privilege.
At the conclusion of discovery the court granted summary judgment in favor of the SEC. The ruling, in an opinion which contains an overview of basic insider trading law, is based on four key points. First, the court drew an adverse inference against the two defendants based on the invocation of the Fifth Amendment. In drawing this inference, the court noted that there were no parallel criminal proceedings. The inference, however, is not sufficient to support a grant of summary judgment.
Second, the court focused on the access to information by the husband. Here, the court cited the conversations regarding expanding the e-mail system and the access to the Blackberry with the inside information. An inference that the husband had such information was bolstered, the court found, from the unexplained 100 minute phone call by the couple the night before trading began and the deletion of the computer files before producing the computer to the Ontario authorities.
Third, the trading of the couple was telling. It varied significantly from the trading pattern in the account over the prior year. That trading pattern, coupled with the adverse inference and access to information, is sufficient to warrant summary judgment, the court ruled.
The court went on to enter a permanent injunction prohibiting each defendant from engaging in future violations of the antifraud Section 10(b). The court also imposed joint and several liability on the defendants for the payment of disgorgement amounting to the trading profits and prejudgment interest in view of “their close relationship” as husband and wife. The court rejected an SEC suggestion that the money be paid to the treasury. Rather, the court directed that the SEC show cause why the money should not be distributed to the victims.
Finally, the court also rejected an SEC suggestion that a three times penalty be imposed, noting that “such a blunt punishment fails to calibrate the egregiousness of Suman’s conduct when compared to his wife’s.” Accordingly the court imposed a civil penalty of $2 million on Mr. Suman and $1 million on Ms. Rahman. Apparently “calibration” is the same in the end.