The SEC, Insider Trading and Cooperation
Insider trading has long been a staple of the Commission’s Enforcement program. Cooperation credit, while frequently touted and often discussed is not, at least in the form of a deferred prosecution agreement. Rather, the awarding of cooperation credit is typically reserved to the discretion of the agency and most often seen in the form of a reduced or no penalty for a settling defendant or respondent. In resolving its most recent insider trading case, however, the Commission took the unusual step of settling with the tipper and entering into a deferred prosecution agreement with the tippee who significantly facilitated the resolution of the investigation and case. SEC v. Lozuk, Civil Action No. 18 cv 1765 (S.D. Ca. Filed July 31, 2018).
The action centers around the acquisition of Sequenom, Inc., a San Diego life sciences firm, by Laboratory Corporation of America or LabCorp, in a transaction announced on July 27, 2016. Defendant Robert Lozuk was the Senior Vice President of Commercial Operations at Sequenom.
The transaction traces to June 8, 2016 when Sequenom’s board of directors instructed an investment bank to contact LabCorp and other companies to assess their interest in acquiring the firm. Sequenom subsequently conducted due diligence and entered into discussions with LabCorp. Mr. Lozuk became aware of the discussions by at least June 8, 2016. On July 20, 2016 representatives of the firm agreed on a deal price of $2.40 per share – the stock traded at under $1.00 per share.
The day after the deal price was set Mr. Lozuk attended a concert with long time friend Individual A. He had signed a confidentiality agreement about one year earlier. Nevertheless, at the concert he told his friend about the proposed deal and too purchase 10,000 shares of the firm’s stock.
When the deal announcement was made six days later, the share price increased 176% to $2.35 per share. Trading volume increased 11,214.5% in one trading day. Individual A sold his shares, reaping profits of $26,643.80.
In March 2017 the staff issued an administrative subpoena to Individual A. He immediately contacted the staff and fully disclosed the facts and circumstances regarding his stock transaction. At the time the staff was not aware of Mr. Lozuk’s involvement. Individual A entered into a deferred prosecution agreement on June 18, 2018, agreeing to disgorge his trading profits and fully cooperate with the staff’s investigation.
The complaint alleges violations of Exchange Act sections 10(b) and 14(e). To resolve the action Mr. Lozuk consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, he agreed to the entry of a five year officer and director bar and will pay a penalty equal to the amount of Individual A’s trading profits.
When the Enforcement Division adopted non-prosecution agreements and deferred prosecution agreements several years ago the goal was straight forward – to speed enforcement investigations, conserve resources and encourage cooperation. Despite these laudable goals the agreements are not frequently used.
The facts here, however, seem tailor made for the use of such an arrangement. Here the Division was unaware of Mr. Lozuk’s involvement, according to the facts set-forth in the agreement. No doubt once Individual A stepped forward, the investigation move forward swiftly. Perhaps now, in the age of Kokesh and the statute of limitations their use will increase, encouraging others to step forward while speeding Enforcement investigations — a win win for everyone.