TWO SEC INSIDER TRADING CASES
The SEC filed back to back insider trading cases just prior to the Christmas holiday against unknown option purchasers. Each centers huge option trading positions. Each was brought to obtain a freeze of the trading profits. These cases contrast sharply with the recent expert network criminal complaint filed by the Manhattan U.S. Attorney’s Office (here).
The Commission’s first case involves trading shortly prior to the announcement that Royal DSM N.V., a Dutch company, would acquire all of the outstanding shares of Maryland based Martek Biosciences Corporation. Shareholders would receive a 35% premium over the market price under the terms of the agreement. which was announced on December 21, 2010.
According to the SEC, between December 10, 2010 and December 15, 2010, 2,616 Martek call options were purchased through a UBS account. These purchases represented over 90% of the volume for those contract days.
Following the acquisition announcement, the share price increased by 36%. This placed the account in a position to realize total profits of about $1.2 million on the sale of the call options. The complaint alleges a violation of Exchange Act Section 10(b). SEC v. One or More Unknown Purchasers of Securities of Martek Biosciences Corporation, Case No. 10 Civ. 9527 (S.D.N.Y. Filed Dec. 22, 2010); see also Litig. Rel. 21792 (Dec. 23, 2010).
The day after filing Martek, the Commission brought SEC v. One or More Unknown Purchasers of Options of InterMune, Inc., Case No. 10 Civ. 9560 (S.D.N.Y. Filed Dec. 23, 2010); see also Litig. Rel. 21794 (Dec. 23, 2010). This action centers on option trading prior to the announcement by the European Union’s Committee for Medicinal Products for Human Use that a drug of InterMune, Inc, a biotechnology company based in Brisbane, California, would be recommended for approval. The recommendation was scheduled to be announced on December 17, 2010.
On December 7 and 8, 2010, four hundred call options were cleared through UBS Securities LLC. The purchases constituted 100% and 57.2%, respectively, of the volume of transactions for the two days on which they were made. On December 13, 2010, an additional 237 option contracts were cleared through Barclays Capital, New York.
On the day of the announcement the share price of InterMune rose about 144%. If realized the accounts would have had a trading profit of $912,000. The complaint alleges a violation of Exchange Act Section 10(b).
Both Martek and InterMune focus on suspected insider trading. Each complaint centers on the large option trading positions established by the unknown purchases. Each case was brought to freeze the potential trading profits before they could be realized and possibly move out of the country. The critical questions to be resolved in each case focus on the identity of the traders and their source of information.
In contrast, the “expert network” actions being investigated and brought by the U.S. Attorney in Manhattan are not about illegal trading and profits which damage the markets and other traders. The recent criminal complaint does not mention trading. That complaint does not contain any allegations about illegal trading profits. Indeed, the only references to money in that complaint are to consulting fees paid to network consultants. In and of themselves, there is nothing illegal about consulting fees.
Rather, the criminal expert network case is about information flow. A central question in that case is if the information communicated to various confidential witnesses was important or material to a decision to purchase or sell a security. Perhaps it is; perhaps not. Since the case did not involve trading, there was no harm to the markets or other traders. If it turns out that the information is in fact material, then the case will have prevented that harm. If it turns out that the information is bits and pieces of items that traders might find of interest or valuable when combined with other data, but not necessarily material, then the action will have harmed the market it was intended to protect. Under those circumstances, the case and the related investigations will have thwarted price discovery. That is the same kind of harm that insider trading causes.