M & A Law Prof Blog

Insider trading lawyer disbarred

You remember that former Wilson, Skadden, Cravath, Fried Frank associate who pleaded guilty to insider trading last year?  He got 12 years.  Oh, and he just got disbarred, too.  Word to the wise starting a new career...

-bjmq

Perfect Hedge Update

 

As the Feds turn their sites to big fish, Reuters talks to the FBI about Operation Perfect Hedge ... "only the tip of the iceberg":

Message:  "We're out there and we're going to continue to be out there."

-bjmq

High school buddies in alleged insider trading ring.

Be careful when you start thinking like this:

"At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."

Chances are, once the SEC picks that up, you'll be next.  That's the lesson this group of high school buddies is learning now.  

Here's the complaint.

-bjmq

Idiot investment analysts

OK, so you've heard this from me before....and this is directed at all those juniors about to start.  Don't do it.  Sure, there are lots of academic debates about why insider trading is ok. I get that.  But don't do it.  Today's installment:  idiot former investment analysts. Did you pick that up?  Former.   In any event, the SEC just charged Jason Lee and his friends from college, one of whom lived in the saame condo complex with him, with insider trading.  The complaint itself is full of lots of cicumstantial evidence.  It doesn't look like the giovernment had access to a wiretap or that any of the alleged co-conspirators has flipped, so the case is a series of internal investment emails lining up with times of cell phone calls and text messages, the kind of stuff you get from a pen register, and bank cash withdrawals and deposits.

In any event, this is where everything seems to go really south for Jason Lee:

 

OK, so a decision point for Lee.  Come clean and say that you know Chen.  Or ... well ...

 

 

 Yeah ... this isn't going to turn out well.  Don't do it.  It's not a good career choice.  Ok, off my soapbox.

-bjmq

Sigh ... more idiot inside traders

OK ... I know I've said that if you are going to trade on inside information that you should trade in call options, cause you're just going to swamp the market and put a target on your back.  But, here's a tip I thought I wouldn't have to give you.  If you are going to trade on inside information, please don't use your work computer to do the following searches: 

"can option be traced to purchaser?" 
"can stock option be traced to purchase inside trading" 
"how to detect can stock option be traced to purchase inside trading"
"insider trading options" 
"insider trading options trace"
"illegal insider trading options trace"
"insider trading options trace illegal"

Can you say "scienter"?  

You'd think it would go without saying, but apparently not everyone is smart enough to simply not trade on inside information.  In fact, some people are stupid enough to do internet research from the office computers before doing the deed.  You think I'm kidding?  Well, the SEC has just charged a Bristol-Meyers-Squib executive with trading on inside information in advance of a series of acquisitions.

Just don't do it.

-bjmq

 

Bad paralegal

What?! You think only lawyers can be idiots? The first two paragraphs of the SEC's complaint tells you more than you need to know:

This case involves insider trading in the securities of Semitool, Inc., a semiconductor manufacturer based in Kalispell, Montana that was acquired in a tender offer by Applied Materials, Inc. in December 2009. Beginning in at least October 2009, defendant Angela Milliard, a legal assistant at Semitool, learned confidential information regarding the terms and timing of the acquisition. Basedon this information, Angela Milliard secretly wired $38,000 to her boyfriend's account and purchased 5,400 Semitool shares in the account, as well as 300 Semitool shares in her own brokerage account. Angela also tipped her father, defendant Kenneth Milliard, about the then-secret acquisition, and he purchased 10,800 Semitool shares and helped other family members purchase another 4,000 Semitool shares.

When the acquisition was publicly announced on November 17, 2009, the company's stock price jumped over 30 percent, and defendants immediately profited that day, selling all of their Semitool shares for total realized profits of $68,160.

This being the end of exams and the start of graduation season, I suppose it's as good a time as any to give some good advice to recent law grads.  This year, I'll give it in the form of a link to a memo written seven years ago to employees of public corporations, titled Your Future (or Lack Thereof).

-bjmq

 

Insider trading - an insider's perspective

Thanks to Garrett Bauer for visting the law school today to speak with my students. Lessons worth learning early in one's career.

-bjmq

 

 

Insider trading investigations far from over

I don't usually troll the Fox Biz sites, but this caught my eye.  Apparently, the recent insider trading investigations are far from over.  According to Charlie Gasparino, the DOJ/SEC have only just begun:

   --They have “scheduled out” cases for the next five years, meaning that the use of wire taps and informants have netted far more cases than they had originally thought.

    --Though it’s difficult to predict future case loads, law enforcement officials are in general agreement that “hundreds” of additional people could be charged in the years ahead. “In five years, we can easily see hundreds of people arrested and charged,” another senior law enforcement official told FOX Business.

Scheduled out for years?  Wow.

-bjmq

Insider trading review -- 2011

MoFo has the definitive overview of insider trading prosecutions over 2011: Galleon, Octopussy, Kluger, all of it.  Get it here.

-bjmq

Galleon 2.0: Watch it live

You can watch Preet Bharara's press conference announcing the Galleon 2.0 insider trading arrests here (1:00pm, ET):

 

"A circle of friends who formed a lucrative club...to make $62 million in profits ..." That's as big as Galleon. That made all that money on trades related to Dell.  Wow.

Three of the seven defendants have already pleaded guilty and are cooperating.

Bharara says that the group's trading in advance of Dell earnings announcements was "the big illegal short". Too cute.

"But cheating on the test and getting away with it are two different things."

Here is the civil complaint filed by the SEC against Level Global, Diambondback Capital, and the seven individual defendants in the criminal case.

-bjmq

Hedge funds, M&A, and private information

In their new paper, Hedge Funds in M&A Deals, Dai, et al find evidence "consistent with informed abnormal short selling" by hedge funds prior to M&A announcements. The authors observe larger stakes where there is evidence of private information.  I'm shocked. ... Actually I'm not really shocked, given what's come out over the past year or two.

Abstract: This paper investigates recent allegations regarding the misuse of private insider information by hedge funds prior to the public announcement of M&A deals. We analyze this issue by using a unique and comprehensive data set which allows us to analyze the trading pattern of hedge funds around corporate mergers and acquisitions in both the equity and derivatives markets. In general, our results are consistent with hedge funds, with short-term investment horizons (henceforth, short-term hedge funds) taking advantage of private information and engaging in trading based on such information. We show that short-term hedge funds holdings of a target’s shares in the quarter prior to the M&A announcement date are positively related to the profitability of the deal as measured by the target premium. In addition, we also find that the target price run-up before the deal announcement date is significantly greater for deals with greater short term hedge fund holdings. We also find evidence consistent with informed abnormal short selling and put buying in the corresponding acquirer’s stock prior to M&A announcements. This is particularly evident when hedge funds take larger stakes in target firms. In addition, we show that such a strategy is potentially very profitable. We consider alternative explanations for such short term hedge fund holdings in target firms; however our results seem inconsistent with these alternative explanations but rather, seem to be consistent with trading based on insider information. Overall, our results have important implications regarding the recent policy debate on hedge fund regulation.

-bjmq

Representative plaintiff sanctioned for improper trading

After Calix, Inc. announced its acquisition of Occam Networks, Inc. in September 2010 the by now usual lawsuit appeared to challenge the transaction. One of the representative plaintiffs in this case was Michael Steinhardt, a hedge fund investor, described as "one of the most successful investors in the history of Wall Street" and an Occam shareholder.  The suit alleged that the directors of Occam violated their fiduciary duties to the corporation when they agreed to sell the corporation to Calix at an "unfair price."  OK, so far, so good.  Well, not good, but expected. You know what I mean.  In any event, the plaintiffs pursued their case and were permitted to take discovery subject to a confidentiality order. That order read, in part:

Confidential Discovery Material, or information derived therefrom, shall be used solely for purposes of this Litigation and in an appraisal proceeding that Plaintiffs in this Litigation may file . . . . Confidential Discovery Material shall not be used for any other purpose, including, without limitation, for any business or commercial purpose or for any other litigation or proceeding. Confidential Discovery Material Parties and non-parties who receive Confidential Discovery Material shall not purchase, sell, or otherwise trade in the securities of any company, including but not limited to Occam and Calix, on the basis of confidential information contained in the Confidential Discovery Material to the extent such information is still confidential at the time of such purchase, sale or trade. 

Of course, with an order like this and with sophisticated investors like Steinhardt, you can only guess what happened next.  That's right, after Steinhardt was in possession of confidential information (via one of his co-plaintiffs) he began to short Calix common stock. When the Calix defendants found out that Steinhardt had shorted their stock they moved in the Delaware Chancery Court for sanctions against him. 

Last Friday, Vice Chancellor Laster sanctioned Steinhardt for trading in violation of the confidentiality order (Steinhardt Sanctions Opinion).  The sanctions Steinhardt and his funds for improper trading include:

 (i) dismissal from the case with prejudice and barred from receiving any recovery from the litigation; 
(ii) requirement to self-report their improper trading to the SEC;
(iii) requirment to disclose their improper trading in any future application to serve as lead plaintiff; and
(iv) an order to disgorge their trading profits (approximately $500,000).

Lesson?  If you are going to be a representative plaintiff in one of these transaction related lawsuits, you can't trade in the stock of the either the acquirer or the target during the pendancy of the litigation.  That seems pretty straightforward.  You'd have thought Steinhardt would have already known that.

-bjmq

Bad lawyer pleads on insider trading charge

Matt Kluger, the former Wilson/Skadden/Cravath/Fried Frank associate, who was engaged in a 17 year insider trading scheme together with two co-conspirators pleaded guilty today.  He faces up to 20 years in prison.  

-bjmq

Fmr. Ropes lawyer gets 6 months

Brien Santarlas who along with another former Ropes & Gray lawyer, Arthur Cutillo ,was convicted as part of the Galleon insider trading investigation was sentenced yesterday to 6 months in prison. Cutillo was previously sentenced to 30 months in prison. Here's the original criminal complaint in that case (US v Goffer, et al).

-bjmq

 

There oughta be a law!

What would you do if Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson gave you a confidential briefing on the day before the 2008 financial crisis - a briefing in which they said everything was going to hell?  Well, if you are Rep. Spencer Bachus (R-AL) the anwer is clear - you rush out and buy Proshares Ultra-Short QQQ the next day. 

I suppose insider trading is illegal unless you are congressman.  Unfortunately, this isn't even a new story!  See papers from Donna Nagy and Stephen Bainbridge on congressional insider trading. Moving on. 

-bjmq

Another target for Galleon prosecutors

Raj Gupta was arrested early this morning at his home by FBI agents and has been charged with insider trading as part of the Galleon investigation.  He posted $10 million in bail and was released this afternoon.  Here's the criminal complaint.

-bjmq

 

Insider trading wrap

It looks like the Galleon investigations and trials are wrapping up.  Raj Rajaratnam was sentenced last week to 11 years. Danielle Chiesi just started her 30 month sentance at "Camp Cupcake".  Octopussy got 10 years, and his fellow small fish (Cutillo, Goldfarb, etc) got prison terms ranging from 2.5 to 3 years.  The prosecutors wanted to send a message about insider trading and it's fair to say that ... well ... message sent.  With the help of data collected by the WSJ, I generated the sentencing chart below:


It seems pretty clear that the sentences generated in the Galleon cases while not outrageous, are stiffer than the norm since 1992. It's worth noting the other 10 year insider trading sentence handed out went to Hasif Naseem who orchestrated a ring with friends overseas to trade ahead of pending merger announcements in the following transactions: TXU Corp., Hydril Company, Trammell Crow Co., John Harland Col, Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. So, the Rajaratnam sentence, though heavy, may not be entirely at odds with sentences handed out in similar cases in recent years. 

-bjmq

"You gambled and you lost."

Ten years for Zvi Goffer - Octopussy.  By almost any stretch, that's a lengthy sentence for insider trading.

-bjmq

More on Insider Trading and Relationships of Trust and Confidence

A commenter on my previous post on the hazards of telling your no-goodnik boyfriend material, non-public information asked whether it made a difference in the analysis if the person with whom you are sharing material, non-public information is a spouse.  

In short, it doesn't.  It just hurts more to learn that they person you have decided to spend the rest of your life with is a jerk.  Christie Hefner, former CEO of Playboy, is probably learning that right now.  Last week, the SEC charged Hefner's husband with insider trading:

The Securities and Exchange Commission today filed a civil injunctive action in the U.S. District Court for the Northern District of Illinois charging William A. Marovitz, the spouse of former Playboy CEO Christie Hefner, with illegal insider trading in Playboy stock in advance of public news announcements.

The SEC alleges that on five occasions between 2004 and 2009, Marovitz traded based on confidential information that he misappropriated from Hefner, who was the CEO of Playboy during most of the trades at issue. Marovitz bought and sold Playboy stock in his own brokerage accounts ahead of public news announcements despite instructions from his wife that he should not trade in shares of Playboy and a warning from the general counsel of Playboy about his buying or selling Playboy stock. In total, Marovitz gained profits and avoided losses of $100,952.

According to the SEC’s complaint, between 2004 and 2009 Marovitz misappropriated confidential, non-public information about Playboy from Hefner. Hefner made clear to Marovitz in 1998, both personally and through Playboy’s general counsel, that she expected him to keep any information he learned from her about Playboy confidential and not to trade based on this information. 

The SEC doesn't particularly care aboout the legal status of the relationship -- husband/wife, boyfriend/girlfriend, boyfriend/boyfriend, father/son, it doesn't really matter.  What matters is that between the two people there is a "relationship of trust and confidence" and that the recipient knows or should know that he is receiving material, non-public information and should not trade on it.  

If the recipient (e.g. the CEO's spouse) consoles his wife about an upcoming negative earnings release ("It's okay, honey, you've done everything you could.  Anyway, you know I love you.") and then goes out and trades on that information ... well ... first of all, he had betrayed the trust that the spouse has put in him.  In short, he's a jerk.  The SEC also considers that a violation of a fiduciary duty to the spouse in this case sufficient to trigger liability under the misappropriation theory of insider trading.

So, it's a tough call.  You work 18 hours a day.  When you come home, your spouse wants to know what you've been doing all day that justifies you missing your children's school plays, dinners with family and friends, etc.  Discretion is the textbook answer, but that's not easy.  More often than not, we tell our significant others everything and then trust that we've made the right choice.  Sometimes we're right, sometimes we're not.

-bjmq  

 

Another school year, more lessons for young lawyers

Apologies for the relatively long hiatus.  Blogging is more work than it seems at times and sometimes one needs a little break.  In any event, the current administration is continuing to teach lessons to the current generation of idiot inside traders.  Law students -- there are real life lessons to be learned from the experience of a young woman who interned at Walt Disney in 2009.   

Lesson number one:  Don't share material non-public information with your no-goodnik boyfriend. Why?  Isn't it obvious by now?  Cause he probably doesn't love you as much as he loves money.  

The allegations that the SEC is making against Toby Scammell are really just head-shaking.  One wonders not just where the moral compass is, but what happened to common sense.  

First, Scammell's girl friend was working as an "extern" at Walt Disney during the summer of 2009.  She was assigned to work on the deal team that was taking the lead on the acquisition of Marvel.  For her, this was apparently an important career opportunity.  She shared her good fortune with her boyfriend of two years, Scammell.  She discussed with him whether or not she should delay applying to business school so she could include the Marvel acquisition experience in her application.  She discussed with him the timing of the deal - because it apparently impacted on plans they had to attend a wedding together.  She let him access her Blackberry where she kept work-related e-mails, etc. 

Of course, it turns out that Scammell was less than a loyal boyfriend.  The SEC alleges that Scammell made over 3000% profit on short term call options in Marvel that he purchased on the basis of the inside information he misppropriated from his girlfriend.   Not only that, but his purchases of short term call options swamped the market - making it more than a little obvious to investigators that something was up:


Apparently, Scammell had only purchased options once before -- long-term Google call options in which he lost 99% of his investment.  So, his purchases of short term Marvel options was highly unusual.

Of course, with all insider trading prosecutions, the real challenge for the government is scienter.  Well, it appears that Scammell went out his way to help the government with its case:

Googling "insider trading"?!  C'mon.

Why does it matter that he didn't mention his trades and profits to his brother?  Oh, I forgot to mention that Scammell was managing the finances of his brother who was serving Iraq.  The SEC alleges that Scammell was hard up on funds, so he accessed his brother's account to get cash to fund his option purchases.  

I'm sure this guy was planning on telling his brother about the profits ... at some point.  In fact, Scammell's brother didn't learn about the profits Scammell made with his funds until the SEC called him months later to ask him about it. 

There are real lessons for law students and young associates in this story.  First, discretion is the watch-word.  Just because you happen to love your boyfriend, doesn't mean that he won't trade on your inside information.  Don't believe me?  Just ask Scammell's girlfriend.  

It's no way to start a professional career.

Here's the SEC complaint.

-bjmq