M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, December 1, 2010

Bad Accountants

With all the interest in the ongoing Galleon/SAC/expert networks insider trading investigation, this run of the mill scam almost slipped past.  Thankfully this one doesn't involve lawyers - just bad accountants and traders.  The SEC charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.  Arnold and Annabelle McClellan are alleged to have shared inside information about pending transactions with Anabelle's family in London.  This guys were no slouches - the SEC alleges they made $3 million in profits from trades related to pending acquisitions.  Here's the complaint.

Now it's hard to imagine what McClellan was thinking.  This guy was a tax partner at Deloitte in their M&A group. He clearly knew that information about targets in pending transactions was material inside information.  Buy yet ... he is alleged to have passed it on to his wife and her family in London anyway:

On March 11, 2007, Arnold McClellan participated via his cell phone in a two hour call with H&F [investment bank] to discuss Deloitte's report on Kronos.  Less than one hour later, there was a 19 minute call from the same cell phone to Annabel's mother's home in France, where James and Miranda Sanders were staying at the time.

On March 12, 2007, James Sanders purchased additional spread bet contracts on Kronos. That day, Blue Index [James Sanders' firm] circulated a "client pitch" on Kronos to its traders, noting that Kronos could be an opportunity to make a huge amount of money for their clients.

 Oh, and you think that you're brother-in-law is a smart guy who won't be so stupid as to give you up?  Guess again: 

On March 16, 2007, James Sanders told his father in a recorded telephone conversation specific information about the timing and pricing of the Kronos acquisition. James Sanders identified Annabel McClellan as the source of this information and told his father that he had arranged to split half the profits of the trading with Annabel.

On March 19, 2007, H&F and two other firms submitted bids for Kronos. That day, James Sanders recommended to a close friend that he set up a spread bet account and buy Kronos contracts. James Sanders described the tip to his friend as "a bit cloak and dagger." He added that the deal was 98 percent certain and that Blue Index stood to double its money under management from the deal. 

A recorded phone call!  This guy was so arrogant that he figured no one would pay attention to his scheme that he made a call to his father from his work number at his specialist brokerage!  Even I can tell you that brokerages routinely record calls.  You'd think he'd know -- afterall he was co-owner and director!!

In any event, it's worth noting that McClellan is fighting the charges:

Attorneys for Arnold McClellan said their client was "a conscientious, law-abiding professional with a 23-year unblemished track record of client service at Deloitte" and would fight the charges.

"He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone," said his lawyers, Elliot Peters and Christopher Kearney of the law firm Keker & Van Nest LLP.

As these things go, this case is pretty plain vanilla.  I am continually amazed at how little regard people appear to have for the SEC's enforcement capabilities and how arrogant initial success in these schemes seem to make people feel.   Word to the wise:  Don't let this be you.






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I suspect it's complicated to draw the line though, as most of the time people of a same socio-professional network will have studied together, been friends, even gotten married, in this specific case. This man may not even fully see what's wrong in the situation, and have felt entitled to share the information he possessed. We had several cases of insider trading/selling here in France, and when you hear the facts, you wonder how it can even be prevented since there seems to be so little distance between the various actors of a deal and the network that surrounds them.

Posted by: C.A-P.L | Dec 6, 2010 7:30:25 AM

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