PREVAILING IN INSIDER TRADING CASES: THE TRADING CAN BE ENOUGH

Insider trading cases are notoriously difficult to prove. If everyone denies tipping or being tipped the proof problems become obvious. The current wave of cases using “blue collar” tactics have tried to overcome this with wire taps and wired informants. Sometimes the blue collar tactics are not necessary however, the trading is enough.

The Commission’s recently concluded insider trading case proves the point. SEC v. Di Nardo, Civil Action No. 08-cv-6609 (S.D.N.Y. Filed July 25, 2008). The action centered on trading in call options for the common stock of DRS Technologies, Inc. and American Power Conversion Corp. The Commission’s complaint alleged that twice in two years unknown purchasers made “well-timed” purchases of call options in the days prior to the public disclosures which ultimately lead to acquisitions.

The first centered on the October 30, 2006 announcement by Schneider Electric SA that it would acquire American Power Conversion. Between late September 2006 and October 20, 2006 the purchasers bought 2,830 American Power options. Following the deal announcement the share price rose 26% giving the trader a $1.7 million profit.

The second focused on the May 8, 2008 public report that Finmeccanica SpA which was in advanced talks to purchase DRS Technologies. Between April 29, 2008 and May 7, 2008 the unknown purchaser bought 1,820 DRS call options. The day after the announcement the trader liquidated his holds for a profit of $1.6 million, although the actual deal announcement was not made until May 12, 2008. The Commission filed its action about two months later and obtained an emergency freeze order. SEC v. One or More Unknown Purchasers of Call Options, Case No. 08 CV 6609 (S.D.N.Y. Filed July 25, 2008). See also SEC v. De Colli, Civil Action No. 08 Civ 4520 (S.D.N.Y. May 15, 2008)(action against Italian citizen for insider trading in DRS securities prior to the May 8 disclosure). The complaint is based solely on the trading.

Over two years later the Commission filed an amended complaint which named as defendants Gianiuca Di Nardo and his investment vehicle Corralero Holdings, Inc., along with Oscar Ronzoni, an Italian citizen who worked for a company that provides business consulting services, Paolo Busardo, also an Italian citizen who is a professor of economics at a university, Tatus Corporation, an investment vehicle affiliated with Messrs. Ronzoni and Busardo, and A-Round Investment SA, a consulting firm controlled by Mr. Busardo. The amended complaint clamed that defendants Di Nardo and Carralero Holdings traded in American Power options through an omnibus account at UBS AG, Zurich, Switzerland. It also alleged that each of the defendants traded in DRS options through the same omnibus account at UBS Zurich. The only facts added to the amended complaint are the identities of the traders.

Mr. Di Nardo and Corralero Holdings settled at the time the amended complaint was filed. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The order also made them jointly and severally liable for the payment of $2,110,6000 in disgorgement along with prejudgment interest and a civil penalty of $700,000.

The Commission has now concluded the litigation, settling with the remaining defendants. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). The order specifies that they are jointly and severally liable for the payment of $967,699.97 in disgorgement along with prejudgment interest and a civil penalty of $483,849.99. The source of the information still has not been identified. The trading profits and more however went to the Commission. This time the trading was enough.