Wednesday, September 21, 2011
Wednesday, August 17, 2011
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.
Tuesday, August 16, 2011
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.
Wednesday, July 20, 2011
According to this story from Bloomberg, the SEC
sued a Michigan man, claiming he traded on information he learned from a houseguest about the impending acquisition of Brink’s Home Security
investment banker for Tyco International Inc., the buyer, inadvertently left behind a draft presentation on the deal.
According to the SEC, months later, the homeowner discovered the draft. Another month or so after the discovery, the homeowner intuited from changes in the banker’s travel schedule that the transaction was imminent.
According to the SEC, the homeowner profited from trading in Brink’s stock after the public announcement of the deal caused its price to jump 30 percent.
The homeowner's lawyer said his client has settled the case and will turn over his profits and pay a fine.
Obviously the facts are incomplete, but I wonder if Professor Bainbridge would have advised the homeowner to fight the case.
Monday, June 20, 2011
The New Yorker has a very good piece running down the whole Galleon insider trading story. You read the whole thing home, but if you can't, read this. It's got everything in just a couple of paragraphs - wires, prepaid phones, and trading on your own account minutes after getting inside information...
In October, 2009, Rajaratnam and Kumar flew to Trinidad with their wives to attend a wedding. On their way home, they stopped in Miami to spend two days at Rajaratnam’s beachfront condominium. On the evening of October 6th, the men went out in Rajaratnam’s boat, then returned to shore and took a swim. They were lounging on deck chairs, reading and chatting, when Rajaratnam’s phone rang. Excusing himself, he walked down the beach to talk. Five minutes later, he came back, excited. “That was a Cisco executive,” he said. “Cisco is buying Starent”—an information-technology company. Kumar had never heard of Starent, and he wondered which Cisco executive was calling Rajaratnam.
Rajaratnam then gave Kumar a warning: a man named Ali Far, who had worked at Galleon, was rumored to be wearing a wire. “I have to be really careful,” Rajaratnam said. “I can’t believe he’s doing that and betraying me.” He instructed Kumar to start using unregistered prepaid cell phones for their calls. When they returned to the condominium, Kumar opened his laptop, went into his Charles Schwab brokerage account, and bought three hundred shares of Starent, worth about eight thousand dollars. The deal was announced a week later. It was Rajaratnam’s last known inside trade.
Friday, June 3, 2011
OK, so let me get this straight. Last year, Groupon turned down a $6 billion acquistition offer from Google. Now the company is planning an IPO that values the company at $30 billion. The company also lost more than $400 million last year. And, insiders plan to sell up to $345 million worth of their own stock as part of the planned $750 million IPO. What do they know that we don't?
Did I miss something? Are sock-puppets back in fashion again? Aren't companies supposed to have profits before going public? Didn't we resolve that question already? Maybe this is why I did get rich during the dot com bubble. None of it made any sense back then and it still doesn't the second time around.
Here's the Groupon S-1. Have fun.
Friday, May 20, 2011
This is how it starts (Bloomberg):
[Brien] Santarlas told jurors he and [Arthur] Cutillo began passing tips after a conversation over drinks in the summer of 2007.
“While we were making good money, it seemed like nothing compared to what they were making on Wall Street,” Santarlas said. “Art made the suggestion that there’s other ways to make money.”
A friend of Cutillo’s knew a trader who would pay for tips about corporate acquisitions, Santarlas said Cutillo told him.
“My understanding was the trader would buy the stock and he could essentially make money when the acquisition was announced publicly,” Santarlas testified.
Santarlas said he picked up information from talking with colleagues, trolling office printers for deal-related papers and searching Ropes & Gray’s document management system for keywords including “3-Com” and “merger.”
Wednesday, April 6, 2011
The SEC is alleging that the insider trading scheme began in 1994 while this guy was a summer associate and continued until very recently. That's really incredible. This guy apparently sat through a legal ethics class, presumably a corporate law class, and a securities reg class at NYU where he went to law school. I'm sure he was taught all about insider trading laws while there. Presumably, he also took and passed the MPRE where there is undoubtedly an emphasis on client confidences and the obligations of the profession. I'm also assuming he sat through countless CLE sessions at the various firms he worked where people were admonished to take client confidences seriously and where they were presumably instructed on their obligations with respect to inside information. All that ... and still ...
Here's a pictorial of today's allegations against the former M&A lawyer at WSGR(c/o the SEC):
This from NBC News:
The FBI has arrested a banker and a Washington, D.C., attorney on insider trading charges, law enforcement officials said.
Garrett Bauer was arrested Wednesday morning and was taken to the FBI offices in New Jersey. He is expected to be arraigned in federal court in Newark on the securities fraud charges.
Officials said for years, attorney Kluger revealed information about mergers his prominent law firm, Wilson, Sonsini, Goodnick and Rosato, was working on and they said Bauer was able to trade on that information.
Investigators said they believe more than $30 million in illegal profits were made over the years.
This arrest comes as some Justice Department officials have called insider trading on Wall Street "rampant."
According to Reuters, authorities are describing this as a "decades long scheme." Goodness.
From the wiretaps...
Hmm. Seems like a clever fellow...
By now, everyone and his brother has had an opinion on the l'affaire Sokol. I've poked around a little and given it some thought. I think there are two issues. First is the corporate opportunity issue. I think that's pretty clear. The second, and more ambiguous issue, is the potential insider trading liability. I have thoughts on that one, but I'm clearly still in the elevator stage of my thinking there.
I found it amusing that in his CNBC "defense" of his trading, Sokol took away from his experience the conclusion that in the future it would be better for managers not to share opportunities with their employers. Uh... no. That's not the right answer. The Lubrizol deal presents a pretty straightforward example of a corporate opportunity. Here's the clearest statement of the doctrine from Broz v Cellular Info. Systems:
The corporate opportunity doctrine, as delineated by [Guth v Loft] and its progeny, holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation. The Court in Guth also derived a corollary which states that a director or officer may take a corporate opportunity if: (1) the opportunity is presented to the director or officer in his individual and not his corporate capacity; (2) the opportunity is not essential to the corporation; (3) the corporation holds no interest or expectancy in the opportunity; and (4) the director or officer has not wrongfully employed the resources of the corporation in pursuing or exploiting the opportunity.
Now, this doctrine is not a 'check-the-box' approach to corporate opportunities. Rather, directors must consider all of elements as a whole. In any event, Sokol apparently first learns about the Lubrizol in his corporate capacity at a meeting with Citigroup bankers who are pitching potential acquisition targets for Berkshire Hathaway. The bankers say they are "shocked" that Sokol bought shares after their meeting with them. It's hard to imagine too many things that will shock a group of bankers pitching deals, but there you have it. In any event, Berkshire Hathaway is clearly in a financial position to exploit the opportunity to acquire Lubrizol. Berkshire Hathaway is in the business of making acquisitions of promising targets and has an expectation that when such opportunities are presented to its agents that it [Berkshire Hathaway] will have first crack at them. Finally, when Sokol acquired $10 million worth of Lubrizol stock a week before presenting the deal to Buffet, he clearly put his thumb on the scale and put himself in conflict with Berkshire with respect to doing the deal. At the very least, he should have recused himself and not taken the lead with respect to the deal.
I think the case that Sokol, by buying ahead of Berkshire and then pushing the deal on his employer violated his duty of loyalty to the corporate by usurping a corporate opportunity. So what measure of damages is appropriate? Disgorgement of the approximately $3 million of profits he made on his $10 million investment would seem right. He should turn that over to Berkshire on his way out the door.
Now ... on the question of whether Sokol's trading constistutes insider trading, I haven't convinced myself to pull the trigger on that yet. But ... I don't think there is any question that when Citigroup presented a list to Sokol of potential targets for Berkshire that the content of this list was material information. I mean ... would a reasonable investor find it useful to know that of the thousands of companies out there, that Citigroup was pitching twenty or so to Warren Buffet's guys and that a deal might be in the offing? Let me venture a guess that if Rajaratnam knew what Sokol knew, he'd be trading on it and that can't be good for Sokol.
The Deal Professor has some very relevant thoughts on the question of materiality. They're right on point and worth reading.
Thursday, March 31, 2011
If what people are saying is true ... well ... wow. Here's Berkshire Hathaway's press release and excerpts:
Finally, Dave brought the idea for purchasing Lubrizol to me on eitherJanuary 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts.
That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings.
Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price.
Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once hesuggested the idea; it would be up to me and Charlie Munger, subject to ratificationby the Berkshire Board of which Dave is not a member.
As late as January 24, I sent Dave a short note indicating my skepticismabout making an offer for Lubrizol and my preference for another substantial acquisition for which Mid American had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in theacquisition of Lubrizol.
Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign.
Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters andreceived no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation.
Berkshire Hathaway announced its acquisition of Lubrizol on March 14, 2011 for $135/share. Just last week, the WSJ lauded Sokol's early role in helping Berkshire make the Lubrizol deal happen and pointed to that as evidence that Sokol would eventually succeed Buffet:
David Sokol, considered a possible successor to Warren Buffett at Berkshire Hathaway Inc., identified chemicals maker Lubrizol Corp. as a potential acquisition and took the lead in early negotiations to buy the company, according to a regulatory filing late Friday that detailed how last week's $9 billion deal came about.
It was Mr. Sokol, a Berkshire executive, who plucked Lubrizol from a list of 18 chemical companies that bankers at Citigroup Global Markets had compiled in December 2010 as possible acquisitions at Mr. Sokol's request, according to the filing. ...
Mr. Sokol's early involvement in the deal is further evidence that he has become an important lieutenant for Mr. Buffett in recent years, and may give more ammunition to followers of Berkshire who consider him the front runner to eventually succeed Mr. Buffett as Berkshire's CEO. Mr. Buffett had already tapped Mr. Sokol to turn around Berkshire's fractional-jet business, NetJets, and sent him to China to meet with executives at battery-maker BYD Inc. before investing in that company.
Dennis K. Berman of the WSJ attributed Sokol with the following previous quotation:
“Integrity is not complicated. If it seems to be, you probably do not belong on our team."
If nothing else, Sokol may be liable for usurping a corporate opportunity with his early purchases. For a guy like Sokol it's small money, but really embarrassing for him at the very least.
Update: Not all that impress with the "Well...Charlie did it, too" defense.
Wednesday, March 30, 2011
I've stayed away from the Galleon trial for the most part. Not because it's not interesting, in fact it's way too interesting. It would suck up all my free time if I were to try to follow it too closely. The testimony of Adam Smith (nice name for a hedge fundie, I guess) as reported in Bloomberg yesterday caught my eye, though.
“Research is sort of doing your homework ahead of time,” Smith told jurors. “Getting the number is more like cheating on the test.” ...
“I was tasked with doing research, getting an edge,” Smith testified when asked about leaks he said he got from an Intersil insider. ...
“Getting an edge is the key component to arbitraging consensus” when hedge funds are “looking for situations” in which a company’s results differ from Wall Street expectations, Smith said. “You need to have an edge.”
For Smith, getting an edge meant receiving inside information from friends and insiders. Smith has since pled guilty to insider trading and cooperating with the Feds. "Getting an edge " turned out to be not much of a career move for this Harvard MBA.
Tuesday, March 15, 2011
Buffet has jumped back into the M&A game, and it looks like the inside traders are right behind him. You'd think that the SEC wasn't in the middle of a massive campaign against insider trading complete with criminal prosecutions. Why? Well, according to Bloomberg someone has been trading in call options just ahead of Berkshire Hathaway's recent acquisition announcement:
Trading of bullish Lubrizol Corp. (LZ) options surged to the highest level in a year on March 9, before Berkshire Hathaway Inc. (BRK/A)’s offer today to buy the world’s largest producer of lubricant additives lifted the shares 28 percent.
Call trading surged to 2,931 contracts on March 9, and open interest for the April $110 calls jumped to 2,654 from 41. A block of 2,168 April $110 calls traded for $2.35 each on March 9, data compiled by Bloomberg show. Lubrizol’s four-week average trading volume is 413. The April $110 calls advanced almost 11- fold to $24.70 today. The Wickliffe, Ohio-based company surged 28 percent to $134.68.
“That is more than suspicious,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “It looks like a naked purchase of calls, and that’s highly suspicious if not straight insiders trading.”
Tuesday, March 8, 2011
According to Bloomberg, Raj Rajaratnam just pulled Judge Richard Howell for his insider trading case. You'll remember that Judge Howell came down hard on Eugene Plotkin, a former Goldman Sachs banker whose international insider trading scam should be taught to all investment bankers and young lawyers as examples of hubris and doing all the wrong things. It's got all the elements of a bad movie - hiring a guy to steal advance copies of Business Week, trading ahead of client deals, funneling trades through an aunt's account in Croatia. You couldn't ask for more. Anyway, Judge Howell came down hard on Plotkin, calling him a person "with no moral compass" before he sentenced him to 57 months. Rajaratnam is probably hoping things will go better.
Monday, March 7, 2011
If you're on the deal team and you trade in the target's stock ... well ... it goes without saying that you're a bad lawyer. The latest to learn this lesson? Todd Leslie Treadway, a former employee benefits and executive comp associate at Dewey & LeBouef's New York office. Here's the litigation release from the SEC:
The Commission today charged attorney Todd Leslie Treadway with insider trading in advance of two separate tender offer announcements during 2007 and 2008. According to the complaint, while employed as an attorney in the New York office of Dewey & LeBoeuf, LLP, Treadway provided advice on, among other things, the employee benefit and executive compensation consequences of mergers and acquisitions and had access to material nonpublic information concerning contemplated corporate acquisitions. The SEC alleges that in 2007, and again in 2008, Treadway used material, non-public information he obtained through his position at D&L to purchase stock in two separate companies prior to the announcement of the acquisition: In June 2007, Treadway purchased securities in Accredited Home Lenders Holding Company, and in May 2008 Treadway purchased securities in CNET Networks, Inc. According to the complaint, Treadway’s illegal trading resulted in profits of approximately $27,000.
The Commission’s complaint charges Treadway with violations of Sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and monetary penalties against Treadway.
The Commission acknowledges the assistance of FINRA.
See that little bit there - at the bottom -- that thanks FINRA for its assistance? My guess is that FINRA popped up Mr. Treadway's trades as anamolous trades and then compared the insider lists it got from the companies to the list of people making trades. Seems like a pretty easy case to make. You'd think that Dewey would instruct its associates not to be so stupid.
Update: The Am Law Daily has posted the complaint. Here's what you need to know about the trading alleged by the SEC:
On June 1, 2007 - the same day he reviewed a draft of the merger agreement -Treadway purchased 290 shares of Accredited common stock at $13.76 per share for a total purchase price of $3,990.40. Treadway purchased the shares through an online brokerage account from his office computer at D&L. Treadway used all of the available cash in the account to purchase the Accredited stock. ...
Additionally, on May 6, 2008, from approximately 8:00 p.m. until midnight,Treadway received at least thirteen emails related to the CNET matter, including an email sent to Treadway around 9:00 p.m. that attached a draft of the CBS and CNET merger agreement. The subject line of that email read: "FW: Agreement & Plan ofMerger CNET_v2.DOC." By at least May 6, 2008, Treadway was aware that CNET was D&L's client.
On May 7, 2008 at around 2:36 p.m., Treadway purchased from his computer at D&L 7,079 shares of CNET common stock at prices ranging from $7.49 to $7.56 per share. The total purchase price was $53,499.58. At that time, this was the largest securities purchase Treadway had made in terms of share and dollar amounts. Treadway purchased the CNET stock in four separate online brokerage accounts - three of which Treadway owned. The other was in the name of his fiance. Treadway sold his entire portfolio of stock holdings in each of the four online brokerage accounts to purchase the CNET stock.
Uh ... a couple of things. First, he bought the stock using his office computer?! It's hard to know what to say about that, so I won't say anything. It's just too ridiculous. Second, he apparently used all of his available cash to make the purchases. If you've got a good feeling about a stock, you invest some of your money in it. If you have a REALLY good feeling about a stock, I guess you invest it all. Finally, the guy used his fiance's brokerage account to make some of the purchases. Hint to her - it's not really love. I'd move on.
Thursday, March 3, 2011
... really? That can't be true. Maybe it is. I don't know, but it's pretty ridiculous. From the SEC's order against Rajat Gupta:
Gupta dialed into the October 23, 2008, Board meeting around the time it was scheduled to start and remained on the call until 4:49 p.m. Just 23 seconds after disconnecting from the call, Gupta called Rajaratnam. The call lasted approximately 13 minutes. The following morning, just as the financial markets opened at 9:30 a.m., Rajaratnam caused the Galleon Tech funds to begin selling their holdings of Goldman Sachs stock. The funds finished selling off their holdings — which had consisted of over 120,000 shares — that same day at prices ranging from $97.74 to $102.17 per share. The same day (October 24, 2008), in discussing trading and market information with another participant in the trading scheme, Rajaratnam explained that Wall Street expects Goldman Sachs to earn $2.50 per share but that Rajaratnam had heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share. As a result of Rajaratnam’s trades based on the material nonpublic information that Gupta provided, the Galleon Tech funds avoided losses of over $3 million.
This is a guy who was the former head of McKinsey, sat on the boards of Goldman and P&G and apparently, still feels the need to show how important he is buy sharing inside information with a hedge fund trader.
Friday, January 28, 2011
OK, I'll let the allegations in the a couple of early paragraphs of this recent SEC complaint speak for themselves:
Beginning in at least August 2010, defendant Zizhong Fan, a manager at Seattle Genetics, learned confidential information about positive clinical trial results for a cancer drug under development by the company. Zizhong Fan tipped this information to a relative in southern Califoniia, defendant Zishen Fan, who purchased several hundred thousand dollars of Seattle Genetics stock and options in the U.S. brokerage account of another family member living in China, relief defendant Junhua Fan. When Seattle Genetics reported to the public in late September 2010 that its flagship drug had proven effective in fighting Hodgkin's lymphoma, the company's stock price jumped nearly 18%. By trading on inside information learned by Zizhong, the Fans netted over $803,000 in illicit profits.
Upon being contacted by the staff of the Securities and Exchange Commission ("Commission"), Zizhong Fan denied being related to or even knowing Zishen Fan, despite the fact that they have shared multiple addresses over the years. Zishen Fan similarly denied to the Commission staff that he knew anyone who worked at Seattle Genetics. Almost immediately after being contacted by the Commission staff, Zishen Fan contacted his broker and attempted to transfer several hundred thousand dollars from Junhua Fan's brokerage account to a bank account in China. While two of these attempts were unsuccessful, as of the date of this Complaint, one such request is still pending with the brokerage. ...
Between August 24 and September 24,2010, Zishen Fan purchased over 2,750 Seattle Genetics option contracts - options which provided the right to purchase Seattle Genetics common stock at a designated price - at a total cost in excess of $360,000. On many of the days during which the trades were made, Zishen's purchases represented the vast majority of the option trading volume for the entire market. He purchased these securities in a brokerage account held in the name of Junhua Fan, a relative in Beijing.
The call options purchased by Zishen Fan had an exercise price of$12.50 and an expiration date ofOctober 16,2010. At the time, Seattle Genetics' stock was trading at around $12 per share. This meant that the options were "out-of-the-money" and would have value only if some event caused the company's stock price to jump to $12.50 by October 16; if the stock did not rise by that date, the options would expire worthless,and Zishen and Junhua Fan stood to lose the entire $360,000 investment.
This looks like a run-of-the-mill insider trading case, but there are a couple of important lessons to take from this. First, trading ahead of major corporate events is always a bad idea. Regulators -- actually their computers -- regularly comb through trades and try to correlate them with unusual trading patterns. If you have piling into a stock a week or two before a major announcement, they'll see that. I guarantee it.
Second, if you're buying call options ahead of a major corporate event, you might as well turn yourself in right away. In this case, the SEC alleges that Fan was on many days the largest single purchaser of options in the market. The option market is really thin and definitely not a place for an insider.
Third, when the feds come knocking, don't lie to them. Certainly, you have the right not to incriminate yourself, but you don't have the right to lie. If you do, you just help them make a Martha Stewart-like case against you. If they can't get you insider trading, they'll get you for obstruction of justice. The knocked on Zizhong Fan's door because they knew he was related to Zishen Fan. Why lie about that? Anyway, better to say nothing than to lie.
Fourth, ...so many lessons...placing trades through a relative's account in another country doesn't make the trades any less visible. For some reason people that if they place a trade through a brokerage in China or Serbia or wherever that suddenly no one will notice. Guess what? They'll notice. Placing a trade through a brokerage overseas is like playing hide-and-seek by hiding behind a folding chair.
Fifth, immediately trying to move money out of accounts that you tell the SEC you don't know anything about does help your case. By the time they are standing on your doorstep, believe me, they already know where most of the money is. It isn't that hard to track. Also, don't think your broker is going to protect you. They'll be happy to put a freeze on your ill-gotten gains.
Sixth, though it's not here in the allegations above, prior to the complaint being filed, one of the defendants told his supervisor that he would have to be out of the office for four weeks to go back to China. Let me just offer up that it's a pretty good bet that skipping the jurisdiction is not a good idea. Here's the SEC litigation release and there are some write ups in the Seattle Post-Intelligencer (a great paper, by the way).
Tuesday, January 18, 2011
At all relevant times, CUTILLO worked at the law firm of Ropes & Gray LLP. In 2007 and 2008, CUTILLO and another Ropes & Gray attorney, BRIEN SANTARLAS, provided ZVI GOFFER with inside information they misappropriated from Ropes & Gray about several mergers and acquisitions of public companies for which the law firm was providing legal services. The inside information included information regarding the potential acquisition of 3Com Corporation ("3Com") and the potential acquisition of Axcan Pharma, Inc. ("Axcan"). CUTILLO and SANTARLAS provided the inside information concerning these companies to JASON GOLDFARB, another New York attorney, who allegedly passed the inside information to GOFFER. In exchange for providing the inside information to GOFFER, CUTILLO, SANTARLAS, and allegedly GOLDFARB, received cash payments.
Don't be like Arthur.
Tuesday, December 7, 2010
You know that tech support guy at the office? The one with the pocket-protector who seems totally out to lunch when it comes to anything other than networks and hardware? Yeah, that guy. Well, be careful what information you share with him, cause it's just an act. He's lulling you into suspicion and then he's going to trade on your merger information!
The SEC just announced charges against Jeffrey Temple who worked as an IT and security manager at a Delaware law firm. The SEC alleges that Temple stole confidential information about 22 pending mergers and traded ahead. It was pretty small potatoes as these things go - Temple was alleged to have made about $84,000 in profits on the 22 trades. The law firm is not identified in the complaint, but judging from their client list - it looks like Temple traded on almost every potential transaction that walked through the door- the firm is probably well known to all.
In any event, it appears that this guy opened a brokerage in his own name. According to the complaint, Temple accessed information about pending deals presumably by looking at documents/traffic flowing through his firm's network. Although he apparently knows how easy it would be to track activity over the firm's network that didn't stop him from allegedly snooping around and - when unable to reach his broker - use the firm's email to complain:
Still unable to trade options, at 9:08 am on March 8, 2010, Temple, using his Law Firm email account, sent another email to his brokerage firm complaining: "Can't login to my account and no one is picking up the phone. How do I get my trades done? I'm losing money because of your incompetence!"
Your incompetence is making it impossible for me to trade on inside information! Oh, he was trading call options. I thought we had come to the conclusion that trading in options was clearly a bad thing to do if you are engaged in insider trading? Why not just send an email to the SEC. It would be much more efficient. Clearly, Temple has not been to this site.
In any event, it just goes to show you that at law firms it's not just the lawyers who have to be mindful of their obligations to maintain the confidentiality of client information. Support personnel, including tech support, should also realize how the seriousness of their duties.
Wednesday, December 1, 2010
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.