Insider trading continues to be a key focus of the SEC. In recent months the Commission has revamped the way it investigates insider trading. Those efforts have put the SEC a new edge in this key enforcement area. At the same time the Commission has aggressively pursued actions which in many instances are pushing the edge of what constitutes insider trading.

Yesterday the Commission filed an action against the former Chairman and Chief Executive Officer of a company and his long time friend and informal investment adviser. SEC v. Arrowood, Civil Action No. 1;12-cv-00082 (N.D. Ga. Filed Jan. 11, 2011).

The action centers on the announcement by Matria Healthcare, Inc. on January 15, 2008 regarding its future plans. The defendants are Parker Petit, the former Chairman and CEO of Matria and his friend, Earl Arrowood. According to the complaint, in the fall of 2007 the company was looking for strategic options. By late October five companies were conducting due diligence on Matria. In January two companies submitted bids. Subsequently, on January 15, 2008 the company made an announcement stating that it was considering strategic alternatives including being acquired. The share price rose 20% following the announcement. Ultimately the company was acquired in late January 2008.

Mr. Arrowood had requested that his friend assist him with his investments beginning in 2004. Accordingly, Mr. Petit placed trades in Mr. Arrowood’s retirement account between 2004 and 2007. He had discretionary trading authority.

In October 2007, after due diligence commenced, Mr. Petit tipped his friend about Matria’s plans, according to the complaint. Subsequently, Mr. Arrowood purchased over 17,500 shares of Matria over a two month period in the fourth quarter of 2007. Following the deal announcement the share price increased by 20%. Mr. Arrowood at that point had unrealized gains of over $94,000.

The Commission’s complaint alleges violations of Section 10(b) of the Exchange Act. It seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty and an officer and director bar. The case is in litigation.

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