SEC Settles Insider Trading Case Based on Father’s Misappropriation
The SEC filed a settled insider trading case in which a father is alleged to have misappropriated inside information obtained from his Son who obtained the information from his Girlfriend. The disgorgement he paid included the trading profits of his four tippees. SEC v. Epstein, Civil Action No. 15-cv-0506 (E.D. Pa. Filed February 3, 2015).
The action centers on the acquisition of Harleysville Group, Inc., an insurer of small and midsized businesses and individual in Harleysville, Pennsylvania, by Nationwide Mutual Insurance Company. The deal was announced on September 29, 2011.
The negotiations which led to the merger began in January 2011. Law Firm began advising Harleysville the next month. By mid-August 2011 the two firms entered into an exclusivity agreement. Due diligence began. A price of $60 per share was agreed.
During this period personnel at Law Firm worked long hours, including nights and weekends. Girlfriend, a legal assistant at the firm, was on the team working on the transaction. She had been living with Son for about eight years and had a relationship of trust and confidence. During the work on the merger Son handled child care for her. Girlfriend discussed the transaction with Son as it progressed.
Although Son did not purchase stock, he discussed the then pending transaction with his father, defendant Joel Epstein. The two men had a close personal relationship and worked at the Epstein tire store together. When Son told his father about the deal, Mr. Epstein instructed him not to mention the information again and said “we never talked.”
Mr. Epstein was an avid stock trader. He was thus aware of the value of the information, according to the complaint. On September 2, 2011 he began purchasing shares of Harleysville stock, building a position of 3,000 shares, 1,000 of which he had a friend acquire for him. He also told four friends about the deal, instructing each to purchase 1,000 shares. Each did as instructed. After the deal announcement the share price rose, closing up 87% compare to the prior day’s close. Mr. Epstein had trading profits of $113,501. The four tippees had trading profits of $123,511. The complaint alleges violations of Section 10(b).
To resolve the action Mr. Epstein consented to the entry of a final judgment of permanent injunction based on the Section cited in the complaint. In addition, he agreed to pay disgorgement of $237,014 which includes the profits of the four individuals he tipped, prejudgment interest and a civil penalty of $237,014. See Lit. Rel. No. 23187 (Feb. 3, 2015).