SEC Settles Insider Trading Case With Admissions
A critical question in insider trading cases currently being brought is whether there are sufficient facts to comply with the Newman personal benefit test – at least if the case is in the Second Circuit. While in many instances it is questionable if the allegations can meet that test, there was no issue in the SEC’s most recent case. SEC v. Watson, Civil Action No. 1:15-cv-13868 (D. Mass. Filed November 17, 2015).
The action centers on the proposed acquisition of Cooper Tire and Rubber Company by Apollo Tyres Ltd. which was announced on June 12, 2013. The defendant is Steven Watson, a consultant for SW Associates.
Beginning in late 2012 Apollo began its efforts to acquire Cooper Tire. Several offers were made. Each was rejected. In the Spring of 2013 negotiations became serious. The General Counsel of Apollo was intimately involved in the discussions and negotiations.
Mr. Watson was friends with Amit Kanodia, the husband of Appollo’s General Counsel. By April 2013 Mr. Kanoda had misappropriated inside information regarding the proposed deal from his wife and furnished it to his friend, defendant Watson.
Mr. Watson began trading on April 6, 2013 and continued through early May. He purchased a total of 15,000 shares of Cooper Tire. Subsequently, from June 7 through June 11, 2013 Mr. Watson purchased Cooper Tire call options. Specifically, he purchased $30 July Cooper Tire call options and $30 August Cooper Tire call options.
The deal was announced June 12, 2013. The share price of Cooper Tire increased 41% over the prior closing price to $34.66 following the deal announcement. Mr. Watson liquidated all of his positions, yielding a profit of $170,000. In accord with their agreement, Mr. Watson paid Mr. Kanodia over $22,000, his percentage of the profits. The complaint alleges violations of Exchange Act Section 10(b).
To resolve the action Mr. Watson consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). As part of that settlement Mr. Watson made certain admissions, including the fact that he traded while in possession of inside information and that he knew his conduct violated the federal securities laws. Earlier he pleaded guilty to criminal charges brought by the U.S. Attorney’s Office for the District of Massachusetts based on the same conduct. See Lit. Rel. No. 23408 (November 17, 2015).