SEC Obtains a Freeze Order For Insider Trading in Dow Jones Shares, But Key Questions Remain
The SEC acted swiftly yesterday in the wake of news stories reporting unusual trading activity in the securities of Dow Jones in advance of the May 1, 2007 announcement by News Corp of its $60 per share take over bid. (see blog post 5/4/07) Immediately after the announcement of that bid, the shares of Dow Jones increased in value by about 58%, from about $37 to over $57 per share. In advance of the announcement there was heavy trading in Dow Jones’ options. According to a report in the New York Times on Tuesday, Dow Jones officials knew about the impending bid prior to May 1 but chose not to announce what is clearly one of the leading business stories of the year. Eric Dash and Andrew Ross Sorkin, “Scrutiny Seen of Trading in Dow Jones,” NYT, May 9, 2007. That same article suggested that many people knew about the proposed bid prior to its announcement in addition to the usual cadre of business executives, lawyers, accountants, bankers and other professionals involved with the deal.
According to the SEC, two individuals who had advance knowledge of the deal are Kan Ling Wong and Charlotte Ka On Wong Leung, a husband and wife residing in Hong Kong. http://sec.gov/litigation/litreleases/2007/lr20106.htm The SEC’s complaint claims that the couple is the part owner of a Merrill Lynch account in Hong Kong that purchased 415,000 shares of Dow Jones stock in the two weeks prior to the announcement. The cost of the shares was just over $15 million, paid for in part from funds in the account and with money wired to the Merrill Lynch account by the wife’s father, other funds the couple wired in from a their JP Morgan account in Brussels, Belgium and margin loans. Three days after the announcement when the couple directed that the shares be sold, their value had increased by over $8 million. The court imposed a temporary freeze over the defendants’ assets and directed them to show cause why their assets should not remain frozen until the conclusion of the litigation.
The SEC moved extraordinarily quickly in this case. In the days to come there will no doubt be more developments in this case. Those developments may explain why this case lacks some of the hallmarks of typical insider trading cases. For example, the trades were in stock, not options where must larger profits can be realized for a much small investment – particularly here, where there was significant activity in Dow Jones options. There may also be an explanation for the lack of deception in this case, such as the frequently used technique of using multiple accounts to conceal the size of the trades and keep them off the radar screen of brokerage house compliance departments and other market monitors. Although the defendants apparently had multiple accounts – the complaint references accounts at Merrill Lynch and JPMorgan – all shares were purchased in one account.
Further developments may also reveal what we do not know about this case. What we do not know is who else has an interest in the frozen Merrill Lynch account, although presumably the SEC knows from the account opening records. What we cannot know yet is what information the defendants had about the potential New Corp deal – the complaint simply uses the stylized legalese “material non-public information.” Also, what we are not yet privy to is how the defendants supposedly received inside information – the complaint simply says that they had inside information. The SEC offers no basis for its claim defendants had such information, other than its “belief.” The initial crux of any insider trading case is, however, whether or not defendants have information that is material and non-public.