SEC Settles Insider Trading Case Tied to Secondary Offering

Insider trading cases frequently involve trading in advance of a significant corporate event such as an acquisition. A number of insider trading cases also involve trading in advance of an earnings release were the financial results are expected to materially move the share price either up or down.

The Commission’s most recent insider trading case did not involve either type of event. Rather, it centered on trading in advance of a secondary offering. It is well established that such an offering will dilute the float and cause the share price to drop. Indeed, this is the predicate for the Commission’s rule which precludes selling short within a defined window before such an offering. Here the trader simply sold his shares, avoiding a large loss. SEC v. Starker, Civil Action No. 3:19-cv-13030 (D.N.J. Filed June 18, 2019).

Defendant Raymond Starker is a long-time shareholder of Energy Focus, Inc., a firm based in Solon, Ohio. The firm’s shares are listed on NASDAQ. It designs and manufactures energy efficient lighting systems.

For over thirty years Mr. Starker has been a friend of Energy Focus Director A. He is also a long-time friend of Executive A who served as CEO and COB at the firm during the period involved here. Mr. Starker also owned, or had an interest in, a large number of firm shares. For example, in 2012 he joined a partnership formed by Director A that held a significant block of Energy Focus shares.

In June 2015 Energy Focus began exploring the possibility of conducting a secondary offering of securities. In mid-July of that year Executive A contacted large shareholders to determine if they wanted to join the offering. Mr. Starker was contacted and declined. He did, however, participate in meetings with firm executives and the investment bank involved with the proposed offering. For example, in late July he described one dinner where the offering was discussed in an e-mail to an individual at the Investment Bank where he also knew executives.

In early August 2015 Energy Focus continued moving forward with the preparations for the secondary offering. On Monday August 17, 2015 Mr. Starker called his broker and placed a sell order for Energy Focus shares held in his personal brokerage account. Over the next four days 4,000 shares were sold for a total of $67,220. 50.

In early September the Board of Energy Focus considered a resolution approving the secondary offering. An individual at the investment bank e-mailed Executive A about the deal. The e-mail was forwarded to Mr. Starker the same day, September 2. He sold 5,400 more shares the same day, generating revenue of $138,939. By July 27, 2015 Mr. Starker had sold 9.6% of his Energy Focus shares.

On September 10, 2015 Energy Focus stock closed at $23 per share. Prior to the market open the next day the secondary offering was announced. By the close the share price had tumbled 22%. By selling prior to the transaction announcement Mr. Starker had avoided losses of $46,342. The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a).

To resolve the case Mr. Stalker consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, he agreed to pay disgorgement of $46,342, prejudgment interest of $7,047 and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 24503 (June 18, 2019).

FCPA Institute: On June 20 and 21, 2019, Professor Mike Koehler will conduct the FCPA Institute at the Offices of Dorsey & Whitney LLP in Minneapolis, Minnesota. The Institute provides a unique learning experience for those seeking to elevate their knowledge of the Foreign Corrupt Practices Act. Professor Koehler is one of the foremost scholars on the FCPA and conducts an interesting and most informative program. The program is live in Minneapolis and also webcast. You can obtain more information about the program and register here.

Tagged with: ,