Tippee of Broker Resolves Insider Trading Charges with SEC

The SEC filed its second action tied to illegal tipping by brokerage firm registered representative Kevin Dowd. The first was SEC v. Dowd, Civil Action No. 3:13-cv-00494 (D. N.J. ) filed in January 2013. The second, filed yesterday, is SEC v. Fung, D.N.J. Filed March 9, 2016). As with the first action, a parallel criminal action was filed by the U.S. Attorney’s Office for the District of New Jersey. The defendant in the two new actions is Jay Fung, a long time friend and former co-worker of Mr. Dowd.

The actions center on the announcement of a tender offer for Pharmasset, Inc., by Gilead Sciences, Inc. made before the market opened on Monday, November 21, 2011. The announcement followed a non-public auction process which transpired over several weeks. The cash tender offer was for $137 per share, an 89% premium over the closing price on the prior trading day. Following the announcement the share price rose 84.6%.

Kevin Dowd had been employed for a number of years as a registered representative in the Florida office of a broker-dealer. One of the long time clients of the firm was a Director of Pharmasset. During the auction process for the company, the Director informed his Financial Adviser at the brokerage firm that his company would soon be sold. The Director updated the Adviser as the transaction progressed. The conversations was in confidence.

The Financial Adviser informed Mr. Dowd about the transaction, then a registered representative at the brokerage firm. At a meeting involving Mr. Dowd and various officials from the brokerage firm including the Financial Adviser, the transaction in which Pharmasset would be acquired was discussed. Specifically, at the meeting the Financial Adviser instructed the group that they were prohibited from recommending or trading Pharmasset securities because they were in possession of inside information. Later the Financial Adviser instructed Mr. Dowd to ensure that the Managing Director did not trade. Mr. Dowd was responsible for entering securities trades for the Managing Director in his personal accounts. The broker also had procedures in place which prohibited trading by its representatives on the basis of inside information.

On the last trading day before the deal announcement Mr. Dowd is alleged to have informed Mr. Fung about the proposed transaction. The information came from a firm client who was a director of Pharmasset, Mr. Dowd is alleged to have told his friend. Mr. Fung purchased 2,700 shares of Pharmasset on the same day of the call, Friday, November 18, 2011. Mr. Fung also told his Business Partner who purchased options. There is no allegation that Business Partner was told the source of the information. Following the announcement of the deal Mr. Fung liquidated his position, realizing trading profits of $163,621. Business Partner also liquidated his position, realizing about $544,706.

Subsequently, Mr. Fung delivered $65,000 to Mr. Dowd in installments. Mr. Dowd saw the payments as a thank you. There is no allegation of any prior arrangements regarding the payments. The Commission’s complaint alleges violations of Exchange Act Sections 10(b) and 14(e). Mr. Fung resolve the charges with the SEC. He agreed to disgorge his trading profits and pay prejudgment interest.

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