SEC Files Suspicious Trading Case

The SEC filed another “suspicious trading” insider trading action, naming as defendants two Chinese nationals. The action was brought just days after the second deal closed, permitting a freeze order to be entered over the trading profits. SEC v. Zhou, Civil Action No. 15-cv-8796 (S.D.N.Y. Filed November 10, 2015).

Defendants Zhichen Zhou and Yannan Liu reside, respectively, in Beijing and Hong Kong. Mr. Zhou is employed by, an online shopping company and is a webpage administrator for, a web-based peer-to-peer lending platform founded by his cousin, defendant Liu. Mr. Liu was employed as a venture capital and private equity associate at TPG Capital, LP a global private equity firm for a time. He continues to maintain a personal relationship with at least one professional of the firm, employed in the Beijing office.

This action centers on two takeover transactions. The first involved the acquisition of MedAssets, Inc., a healthcare performance improvement company based in Georgia, by Pamplona Capital Management, LLC, a London and New York based investment manager. The deal was announced on November 2, 2015. Pamplona acquired MedAssets for $2.7 billion or $31.35 per share, a 32% premium to the prior closing price.

The transaction traces to at least September 29, 2015 when potential buyers executed confidentiality agreements. Pamplona Capital and TPG Capital were the only two bidders to continue past the first round. Shortly after receiving bids from each firm on October 26, 2015, MedAssets decided to proceed with Pamplona.

On September 30, 2015, the day after the confidentiality agreements were executed, Mr. Zhou opened a brokerage account with DriveWealth, LLC. Previously he had an account at Scottrade, Inc. Six days after opening the DriveWealth account Mr. Zhou purchased six shares of MedAssets.

Subsequently, between October 9 and 26, 2015, Mr. Zhou purchased a total of 38,479 shares of the company at a cost of $885,377.94. The day after the deal announcement he sold the shares resulting in profits of $299,425.21.

The second deal centered on the announcement on February 17, 2014 by Chindex International, Inc., a provider of healthcare services in China and Mongolia, that it had entered into a definitive merger agreement with Healthy Holdings, an affiliate of a private equity consortium composed of TPG Capital, Shanghai Fosun Pharmaceutical Group Co. and Roberta Lipson, the CEO of Chindex. The consortium agreed to pay $369 million or $19.50 per share in cash – a 14% premium over the prior closing price for the shares of Chindex. That firm had been based in Bethesda, Maryland and its shares were traded on NASDAQ.

Mr. Zhou had opened his Scottrade account on September 1, 2013. Between December 24, 2013 and January 13, 2014 he purchased 3,350 shares of Chindex. On February 25, 2014, one week after the deal announcement, he sold all the shares yielding profits of $7,504.38.

Mr. Zhou’s trades in both stocks are highly suspicious, according to the complaint. “Upon information and belief . . .” it claims that Mr. Zhou had acquired inside information from his cousin Liu regarding both transactions. On the same basis the complaint alleges that the inside information was “tipped by a person with the expectation of receiving a benefit, such person did in fact receive a benefit, and Defendants knew or should have known of such benefit.” The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 23403 (November 10, 2015).

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