When One Out of Three Equals Insider Trading Three Times
“Two out of Three Ain’t Bad is the title of one of rock band Meatloaf’s most famous songs. For most of us two out of three is probably a pretty good result. In major league baseball, in contrast, one out of three for a batter can be very good – a .333 batting average is far better than most. But what is the standard for insider trading? If the trader buys stock while in possession of inside information about a deal which later collapses but then profits from unforeseen events that have no relation to the inside information is that insider trading? If that happens two out of three times such that the trader fails the Meatloaf standard but not the major league baseball one should he be charged on one, two or three deals? According to the SEC and the Manhattan U.S. Attorney’s Office all three deals. SEC v. Maciocio, Civil Action No. 1:16-cv-04139 (S.D.N.Y. Filed June 3, 2016).
Messrs. Maciocio and Hobson were child hood friends. From 1998 through 2014 Mr. Maciocio was employed by PharmaCo. While he held various roles at the firm, eventually he became the Director of Chemical research and Development. In that role he was often consulted when the firm considered an acquisition and requested to assess if the company could manufacture the products of the potential target. David Hobson was a registered representative at various brokerage firms. One of his clients was long-time friend Michael Maciocio. When he moved firms Mr. Maciocio followed, even if the commission structure was higher.
The action centers on three transactions. The first began in January 2008. PharmaCO was interested in a potential deal with Mediavtion Inc. By March a confidentiality agreement had been signed and in April a term sheet followed.
Mr. Maciocio learned about the possible deal toward the end of May 2008. While the project was code named, Mr. Maciocio was given information about an Alzheimer’s drug manufactured by the other firm. That permitted him to identify the target and tip his long time friend in late May 2008. Both men began purchasing shares of Medivation.
In late July 2008 Mr. Maciocio learned that the two firms were in final negotiations. On August 7 he was given access to the electronic data room that contained the due diligence materials. One week later Mr. Maciocio purchased additional shares through an online brokerage account. Mr. Hobson also continued purchasing shares for his own accounts through his firm as well as for those of certain clients.
The deal was announced before the opening of the market on September 3, 2008. Medivation’s stock opened up 29.9% compared to the prior day’s close. That day Mr. Maciocio liquidated his holdings at a profit of $122,343. Mr. Hobson began liquidating his holdings on the day of the announcement, completing the process several days later at a profit of $100,169.
The second transaction involved Ardea Biosciences, Inc. Beginning in April 2010 PharmaCo considered the acquisition of the firm. Steps were taken to move forward with the deal. Those included having Mr. Maciocio analyze certain drugs of the code named target beginning in early June 2010.
Again Mr. Maciocio was able to determine the identity of the target. He tipped his long time friend, according to the complaint. Over the next several months the two men purchased and sold shares of Ardea. Mr. Hobson also bought shares for client accounts.
In early September PharmaCo learned negative information about Ardea. The two friends liquidated their share holdings. In early 2011, however, positive information about Ardea came to light. Mr. Maciocio purchased Ardea shares. Yet by mid-March 2011 Mr. Maciocio learned that his firm was not proceeding with the acquisition. Messrs. Maciocio and Hobson liquidated their shares.
The next year PharmaCo reversed course – the potential deal with Adrea was moving forward. In March Mr. Maciocio was again consulted regarding the target’s drugs. Again the complaint claims he tipped his friend. Mr. Maciocio made his first of two visits to Yahoo! Finance about Adrea. He began purchasing shares. After cell phone calls, Mr. Hobson also began purchasing and selling shares of Adrea. He purchased options and shares and shares for client accounts.
On April 9, 2012 PharmaCo again reversed course, dropping the Adrea deal. The two long time friends had four short cell phone calls. The next day Mr. Hobson liquidated a portion of his holdings. Mr. Maciocio also sold shares. Ten days later, however, on April 20, 2012 Mr. Hobson purchased an thirty additional Ardea call options, increasing his holdings. Three days later, on April 23, Ardea announced its acquisition by AstraZeneca before the market open. The share price opened up 51.25% compared to the prior day’s close. Mr. Maciocio liquidated his remaining holdings of the firm, realizing profits of $42,212. Mr. Hobson also liquidated his holdings as well as those in four customer accounts, realizing profits of, respectively, $34,113 and $5,445.
The third transaction involved Furiex Pharmaceuticals, Inc. It began in February 2014. The next month Mr. Maciocio learned about the potential acquisition when he discussed the code named deal and the firm’s drugs with his superior. From the information about the drugs he was able to determine the identity of the target.
Mr. Maciocio tipped his long time friend. Following a number of cell phone calls on March 25, 2014 the two men began purchasing shares of Furiex. Mr. Maciocio also conducted research on the stock that afternoon and evening. As the deal progressed the buying continued. Each man also liquidated other holdings, funding additional Furiex purchases. Mr. Maciocio continued to research the stock.
On Friday afternoon, April 25, 2014 Mr. Maciocio learned that his employer would likely abandon its effort to acquire Furiex. The two friends spoke on the phone several times. The next morning Mr. Maciocio received an email informing him that the deal was off. Mr. Maciocio briefly spoke with his friend.
On Monday before the market open Furiex announced its acquisition by Forest labs. Before the market open Mr. Hobson began placing sell order. At market open the share price of Furiex was up 28.6% from its closing price the day before. Minutes after the market open Mr. Maciocio liquidated his holdings, realizing profits of $70,719. Mr. Hobson liquidated all of his shares and those held by his customers, realizing profits of, respectively, $30,865 and $40,323.
The complaint alleges that Mr. Maciocio tipped his friend “in exchange for personal benefits to Maciocio, including investment advice, and also as a gift to Mr. Hobson. . .” The Commission’s complaint alleges violations of Exchange Act Section 10(b).
The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges against Mr. Hobson. Mr. Maciocio previously pleaded guilty to one count of conspiracy and two counts of conspiracy fraud. The SEC’s action is pending.