The Value of Cooperation
Frequently there are questions regarding the value of cooperation with law enforcement. In many instances the promised “cooperation credit” may not be defined until after the cooperation sought is obtained and the defendant has resolved the matter. In other instances, the reward for assisting law enforcement may be established prior to that time. One recent criminal stock manipulation case highlights the value cooperation may have in the ultimate resolution of the matter. U.S. v. Herod (D. Conn. Sentencing Feb. 20, 2020).
Jay Herod implemented a scheme to manipulate the shares of Boston based PixarBio Corp. in 2016. In December he engaged in a series of trades that were designed to mimic trading activity in the market. The trades – usually called matched orders – create the appearance of activity in the market for the particular shares of stock. That type of activity can draw the attention of other traders and market participants to the stock. The result is an increase in trading volume and price.
Mr. Herod also utilized another fraudulent technique designed to push up the price called marking-the-close. This approach is implemented by making a series of small buys and sells in the waning minutes of the trading day prior to the market close. Overall the impact is to typically create artificial market activity which pushes up the price by the time the market closes for the day.
Two years after implementing the scheme the SEC investigated the trading. Mr. Herod made materially false statements to the investigators during the course of their investigation. He also submitted a back-dated document to the Commission staff with the intent of obstructing the inquiry. Mr. Herod was charged, along with the President of PixarBio, with counts that included stock manipulation.
Mr. Herod pleaded guilty to one count of securities fraud and one count of obstruction of an agency proceeding. He then elected to cooperate with the Government. President elected to proceed to trial. He was convicted by a jury.
On February 20, 2020 Mr. Herod was sentenced to serve six months in prison followed by three years of supervised release. He was also directed to pay forfeiture/restitution of $120,000. President was previously sentenced to serve seven years in prison.