SEC Settles Insider Trading Case With Corporate Insider
Some corporate insiders make the mistake of trading while in possession of material non-public information. Others compound the error by lying to the SEC staff during an ensuing investigation. Yang Xie, formerly an employee at a pharmaceutical company, traded minutes after receiving a coded communication about the deal from the firm’s legal department but then claimed not to know about the deal until the day before closing.. SEC v. Xie, Civil Action No. 2:18-cv-02779 (Feb. 27, 2018).
Mr. Xie was an expert in health outcomes research at Merck & Co. Part of his job was to assess the value and cost effectiveness of drugs under development or that the company might acquire. Prior to 2015 one of Merck’s main competitors in the area of developing infectious disease drugs was Cubist Pharmaceuticals, Inc. In 2014 Merck considered acquiring Cubist. While the firm was evaluating the question, Mr. Xie analyzed certain Cubist products. The analysis was marked confidential as was consideration of the possible deal – it was referred to by a code name. Merck decided not to proceed.
Nevertheless, in early October 2014 Merck’s CEO approached Cubist’s CEO regarding a deal. Confidential discussions ensured. By early November Merck’s CEO confirmed that the firm was prepared to make a non-binding, all cash offer at $102 per share, a significant premium to market.
On November 20, 2014 Merck’s Office of General Counsel sent a group email message to about 60 firm employees, including Mr. Xie, notifying them of the deal. The materials transmitted by e-mail included a “No Trading Memo” for the code named project. The e-mail referenced the deal with a code name. It also asked recipients to identify “other people not already included on the distribution ‘who are aware of the deal.'” One of the two attached memos told the recipients the information about the deal, that it was confidential and that they could not trade. An acknowledgement was required. Mr. Xie responded six minutes after receiving the email, acknowledging the email but noting that the word document about the transaction was not attached but he thought, based on the distribution list, that he should have received it.
Eight minutes after receiving the email Mr. Xie placed an order for 80 shares of Cubist stock. The order filled at $73.39 per share. Nineteen days later, on December 8, 2014, the deal closed. According to the deal announcement the two firms entered into a definitive agreement under which Merck would engage in a tender offer priced at $102 per share for cash. In January 2015 the deal closed. Mr. Xie sold his shares for proceeds of $8,158.40. Later, during the staff’s investigation, he denied learning about the proposed acquisition until the night before it was announced. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e).
To resolve the action, Mr. Xie consented to the entry of a permanent inunction based on the sections cited in the Order. He also agreed to pay disgorgement of 42,287, prejudgment interest and a penalty of $6,681, three times his trading profits. See Lit. Rel. No. 24056 (Feb. 28, 2018).