Outsized trades continue to draw SEC scrutiny and enforcement actions – even where the agency does not have the evidence to fully plead a claim. Despite the difficulties of these so-called “suspicious” trading cases, in many instances the Commission is able to develop the evidence to support its allegations. In the meantime the trading profits are typically held in a frozen account.
SEC v. Luo, (S.D.N.Y. Filed June 23, 2014) is a “suspicious” trading case. The action centers on the buy-out announcement for Qihoo 360 Technology Co, Ltd, by its Chairman and CEO and a consortium of other affiliates, announced on June 17, 2015. Defendant Hijian Luo is a resident of Guangzhou, China. He is the CEO of 4399 Co., Ltd., an online game company that provides single, multiplayer and children’s games along with animation through the internet.
Qihoo 360 is a Cayman Islands entity with its principal executive offices in Beijing, China. The firm, which conducts business through a number of subsidiaries and affiliates, is a leading internet company in China. The firm listed its ADSs on the NYSE in March 2011. The next month it conducted an IPO and trades under the symbol QIHU.
Mr. Luo opened an account with the San Francisco office of Credit Suisse Securities (USA) LLC on March 6, 2015. The account was not funded until May 18, 2015 when Mr. Luo wired in $720,000. The next day he purchased 2,250 QIHU out of the money call options at a total price of $711,778. The strike prices ranged from $60.50 to $65.00. The options were short term.
The options purchased by Mr. Luo became in the money as of June 11 when the stock traded at a high of $67 and closed at $65.95. Mr. Luo did not sell.
Following the buy-out announcement, which was for all of the outstanding shares and the ADSs, the share price of the company rose to $66.05 at the close on June 16, 2015. The next day the share price increased again, closing at $70.15.
All of Mr. Luo’s options were sold following the deal announcement. This resulted in a realized profit of about $1,019,537. On June 22 Mr. Luo transmitted wire instructions for the transfer of $600,000 to a bank in Singapore.
The complaint alleges, on “information and believe,” that at the time Mr. Luo purchased the call options he was in possession of material non-public information regarding the proposed transaction. The inside information was “tipped by such person with the expectation of receiving a benefit, such person did in fact receive a benefit, and Defendant knew of such benefit,” also alleged on information and belief.
The complaint alleges violations of Exchange Act Section 10(b). The Commission obtained a freeze order. The case is pending.