THE RENEWED CAMPAIGN ON INSIDER TRADING: Part V: The Family That Trades Together
A variation of the pillow talk cases is the family trading ring. These cases involve various family members coming together in a new family activity: insider trading.
SEC v. Aragon Capital Management, Case No. 1: 07-cv-00919-FM (S.D.N.Y. Feb 13, 2007) is typical of this group of cases, although the trading ring here is more expansive. Trading in this case is alleged to have centered on a family group and the family hedge fund. In this case, which is currently being litigated, the SEC claims that a father and his sons engaged in an insider trading scheme which to date has yielded about $4 million in illegal profits.
The scheme involves the following family members who, according to the complaint, all have successful careers aside from the claimed family trading ring:
• the father, a senior manager at Taro Pharmaceuticals;
• a son who is an attorney at a large NYC law firm;
• a son who formerly was with PWC; and
• a son who is currently an attorney with an LA law firm.
In addition, the scheme is alleged to have expanded to include other relatives and friends.
In the basic scheme, the father is alleged to have obtained material non-public information from his employment at Taro. The sons were then tipped and they in turn tipped others. The basic scheme is thus similar to those involved in the pillow talk cases. Here, however the scheme kept expanding as various family members tipped others. To date, one friend of the family has settled while the other defendants are litigating the claims.
A second case involving fathers and sons is SEC v. Smith, Civil Action No. 07-CV-8394 (S.D.N.Y. Filed September 27, 2007). This case, which is perhaps a less expansive version of Aargon Capital, where trading proliferated outside the family circle, involved a father and son who were both securities professionals. Here, however it is the son who is alleged to have obtained inside information from his employment at Bank of America Securities, rather than the father. According to the SEC, the son obtained material non-public information about three transactions and furnished it to his father. The father, in turn, traded while in possession of the inside information.
Both the father and son agreed to settle, consenting to the entry of statutory injunctions and the entry of an order making each jointly and severally liable for the disgorgement of all illegal profits along with prejudgment interest. In addition, the father agreed to the entry of an order requiring him to pay a penalty equal to twice the amount of the disgorgement, while the son agreed to pay a penalty equal to that amount.
Another variation of this theme is a daughter-father team through the daughter’s husband. In SEC v. Dearmin, Civil Action No. 1:07-CV-01089 (D.D.C. Filed June 18, 2007), the SEC alleged that the husband, a former CEO of Ionatron, learned that the company was about to be acquired by U.S. Home & Garden. After the husband told his wife about the pending deal, she tipped her business partner father, who purchased Ionatron shares prior to the announcement. The father sold the shares post-announcement at a substantial profit.
The daughter-father insider trading team both agreed to settle with the SEC, consenting to entries of statutory injunctions. The father also consented to the entry of an order requiring the payment of $9,123 in disgorgement, $1,714 in prejudgment interest and a penalty of $9,323. The daughter consented to the entry of an order requiring that she pay $13,178 in disgorgement, $2,390 in prejudgment interest and $13,178 as a penalty. The husband, in similar fashion to several of the spouse cases, was not charged.
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