SEC OBTAINS A SPLIT VERDICT IN AN INSIDER TRADING CASE
The jury gave the SEC a split verdict in an insider trading case earlier this week. On November 20, 2009, following a week long trial, the jury returned a verdict finding former Fidelity trader David Donovan, Jr. liable of insider trading. The jury rejected Commission claims that Mr. Donovan had illegally tipped co-defendant David Hinkle, formerly a registered representative at Capital Institutional Services. The jury found Mr. Hinkle not liable for insider trading. SEC v. Donovan, Case No. 08 CA 10649 (D. Mass. Filed April 16, 2008).
Mr. Donovan, as an equity trader, had access to the internal orders at Fidelity. Between July and September 2003, he accessed that data base approximately 107 times. As a result of those contacts he learned that Fidelity intended to and was making a series of large purchases of Covad Communications Group, Inc. (“Covad”) stock, a company based in San Jose, California. Over a three day period from August 5, 2003 to August 7, 2003, 55,000 shares of Covad stock were purchased in the Fidelity Investments brokerage account in the name of Mr. Donovan’s mother.
During this same time, period telephone records establish that Mr. Donovan called the Fidelity trading desk. Other records demonstrate that Mr. Donovan and one of his friends accessed the Fidelity trading records which showed the firm had pending purchase orders for millions of shares of Covad. Subsequently, the shares in the account of Mr. Donovan’s mother were sold at a profit of over $89,000.
Mr. Hinkle, according to the SEC, received millions of dollars in brokerage orders from Mr. Donovan. In return, he provided defendant Donovan thousands of dollars in travel and entertainment. The two men developed a close working and social relationship.
From July 8 through July 31, 2003, the SEC claimed Mr. Hinkle was tipped by Mr. Donovan. During this period the two men spoke on the phone. Mr. Donovan also accessed the Fidelity data base which had the information about the firm’s securities purchases. On four separate occasions during this period Mr. Hinkle purchased a total of about 150,000 shares. He also e-mailed two friends and recommended the stock. Subsequently he sold the stock for a profit of about $141,000. The jury deliberated over night before reaching its conclusions. See also Litig. Rels. 21312 (Nov. 23, 2009) & 20528 (April 16, 2008).