SEC-USAO Bring Insider Trading Case That is “Newman-Proof”

When anyone discusses insider trading these days Newman invariably becomes a key topic. Prosecutors decry the decision and its tipping standard. Little doubt why. It has been offered as a defense in innumerable cases. A number of insider trading convictions have been undone by the Second Circuit’s decision. Newman, however, is is not likely to serve as a defense for the latest insider trading case brought by the SEC and the USAO, SEC v. Hamilton, Civil Action No. 3: 16-cv-00192 (D. Conn. Filed February 5, 2016).

Dennis Hamilton, a CPA, has served as the vice president of tax since 2009 at Harman International Industries, Inc. Harmon, headquartered in Stamford, Connecticut, designs, manufactures and markets high fidelity audio products and electronic systems. Its shares are listed on the New York Stock Exchange. Mr. Hamilton has always reported directly to the CFO.

Mr. Hamilton has been deeply involved in the preparation of Harman’s earnings announcements throughout his years at the firm. He is typically among the first to view the firm’s quarterly and annual earnings. He also has been responsible for preparing the CEO and CFO for conference calls with investors after earnings releases.

Harmon has an insider trading policy which includes provisions for the pre-clearance of trades. It also has an employee code of conduct. Mr. Hamilton was aware of these policies.

On October 18, 2013 Mr. Hamilton received a draft of Harman’s Form 10-Q for the first quarter of fiscal 2014. Sales were up 17% according to the draft. Indeed, each of its business segments had significant increases. Six days later Mr. Hamilton received the draft earnings release announcing the quarterly results. It stated in part that net sales were “up 17% to 1.172 billion.”

Two days after receiving the draft earnings release Mr. Hamilton purchased 17,000 shares of Harman stock at a purchase price of $1.2 million in a joint account he had with his wife. The date was October 30, 2013. The share closing price was $72.02.

Before the market open the next day Harmon announced its earnings. The share price jumped, closing at $81.02 – up 12% increase. Throughout the day Mr. Hamilton used a series of trades to liquidate his position. By the end of the day he had trading profits of $131,958.62. The Commission’s complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the District of Connecticut brought a parallel criminal action. Both cases are pending.

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