SEC Charges Eight With Insider Trading
The difficulty with tipping chains is establishing that the key elements of insider trading were passed down the chain to those trading. In the second circuit’s Newman case, for example, the court remarked that it had never seen a criminal case involving fourth tier tippees. And, a review of the evidence by the court illustrates the reason – there was virtually no evidence about the necessary personal benefit and source of the information at the bottom of the chain.
While the SEC’s latest insider trading case does not go as far as Newman, it does trace the information and trading down three tiers. At each level the complaint carefully details the knowledge of the traders about the source of the information; at each level the person doing the tipping obtains a personal benefit in the form of a kickback of a portion of the trading profits. SEC v. Fleming, Civil Action No. 1:17-cv-07049 (N. D. Ill. Filed Sept. 29, 2017).
The action centers on a going private transaction for Life Time Fitness, Inc., announced in a press release on March 16, 2015 following a Wall Street Journal article which broke the story on March 5, 2015. Named as defendants are: Shane Fleming, a vice president of Life Time; his friend, Bret Beshey; three friends of Mr. Beshey, Peter Kourtis, Christopher Bonvissuto and Individual A; and four friends of Mr. Kourtis – Alexander Carlucci, Austin Mansur, Eric Weller and Dimitri Kandalepas.
Mr. Fleming first learned about the negotiations for the going private transaction on or before February 23, 2015 from an in-house lawyer with whom he was working. The same day Mr. Fleming called his friend, Bret Beshey, and told him about the deal. The discussion included information about the possible share price increase. Mr. Fleming understood that his friend would trade and share the profits. The next day Mr. Fleming called a brokerage firm and asked about trading in options and going private transactions.
The same day Mr. Beshey called his friend, Christopher Bonvissuto. Mr. Beshey told his friend about the Life Time deal and that he had learned the information from an insider who was a friend. The two men agreed that Mr. Bonissuto would trade and split the profits. The same day both men called brokerage firms and discussed trading options. The calls were recorded. The next day Mr. Bonvisssuto called the same brokerage firm again and placed an order for 144 call options for Life Time securities at a strike price of $65 per share. The options had an expiration date of March 20, 2015. This pattern repeated with Mr. Boshey tipping Individual A, Peter Kourtis and Christopher Bonvissuto, each of whom traded.
Subsequently, in late February 2015 the pattern essentially repeated with Mr. Kourtis tipped his friends, Alexander Carlucci, Austin Mansur, Eric Weller and Dimitri Kandalepas. Messrs. Carlucci, Mansur and Weller agreed to split the profits in return for the tip.
Following the publication of the Wall Street Journal article about the proposed transaction the share price for Life Time stock increased 11%. The trading defendants sold most of their holdings. The share price increased again when the company later confirmed the transaction in a press release. The trading defendants then sold their remaining shares, realizing a total of about $866,629, except Individual A who had profits of $48,492. Portions of the trading profits were paid to Defendants Beshey and Fleming. The complaint alleges violations of Exchange Act Section 10(b). The case is pending.
The U.S. Attorney’s Office for the Northern District of Illinois filed a parallel criminal case.