SEC Charges Two Friends With Insider Trading
Two friends decided to trade on inside information one obtained from his work. The plan was to conceal the connection to the information and the insider by having all the trading done by the man not employed by the take-over target. Additional steps were taken to conceal the distribution of profits back to the insider. In the end both were indicted on criminal changes; both settled with the SEC. SEC v. Brown, Civil Action No. 2:16-cv-04630 (D. Ariz. Filed Dec. 14, 2017).
The action centers on the acquisition of International Rectifier Corporation by Infineon, announced on August 20, 2014. Defendant Lanny Brown was employed at International Rectifier, a power management technology and semi-conductor company. He held the position of director of Epi/Silicon Sourcing and Foundry Service Procurement. His friend of about nine year, Sean Fox, also a defendant, was interviewing for jobs.
Prior to the deal announcement the executives at International Rectifier sought to maintain the confidentiality of the deal information. The project was code named and only six executives were on the team with which information was shared. Mr. Brown was not a member of the deal team. Nevertheless, he learned about the transaction through the course of his employment. For example, on August 6, 2014 a member of the deal team called Mr. Brown to request copies of contracts need for the project’s due diligence.
After learning about the proposed transaction Mr. Brown told his friend. On several occasions when he heard about the transaction Mr. Brown again called Mr. Fox. While the two men had a joint securities trading account, they agreed to use Mr. Fox’s account to purchase the necessary securities. To facilitate the trading Mr. Brown furnished money from a personal bank account to his friend who combined it with his funds to trade. During the period leading up to the deal announcement Mr. Fox purchased International Rectifier options.
Despite not being on the deal team Mr. Brown was aware that he was not permitted to trade in the firm’s shares. He had, for example, received the firm’s code of ethics and insider trading policy; he also received trading on multiple occasions on insider trading.
When the deal was announced the share price increased over 47%. The two men had trading profits of $369,720. The next day Mr. Fox liquidated the options. Over a period of months Mr. Fox wrote nineteen checks totaling $148,160.48 to Mr. Brown’s minor stepchildren, minor and adult children, former son-in-law, contractors who were renovating Brown’s house and to pay other entities for services provided to his friend. In a number of instances Mr. Brown or his wife cashed the checks made out to the children. The complaint alleges violations of Exchange Act Section 10(b).
To resolve the action each defendant consented to the entry of a permanent injunction based on the Section cited in the complaint. The Defendants also agreed to pay disgorgement in the amount of $369,720 along with prejudgment interest on a joint and several basis with a credit for amounts paid in the parallel criminal case. See Lit. Rel. No. 24015 (Dec. 14, 2017).