M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Wednesday, March 30, 2011

"Getting an edge"

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.


March 30, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 15, 2011

Call options ... again

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.”



March 15, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 8, 2011

Rajaratnam's judge

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.


March 8, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, March 7, 2011

Still more bad lawyers

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.


March 7, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, March 3, 2011

23 Seconds

... 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. 


March 3, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, January 28, 2011

Insider trading still a bad idea

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).



January 28, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 18, 2011

"I plead guilty because I am guilty."

Attorney Arthur Cutillo (Villanova Law, '05) pleads guilty to his role in the Galleon insider trading ring.  Background from the US Attorney's press release:

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. 


January 18, 2011 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 7, 2010

Bad tech support

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.  


Update:  The PhillyDeals blog (via ABA Journal) names the firm:  Richards Layton & Finger

December 7, 2010 in Insider Trading | Permalink | Comments (2) | TrackBack (0)

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.





December 1, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Wednesday, November 24, 2010

Like athletes using performance enhancing drugs

Inside information ... a financial steriod.


November 24, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Monday, November 22, 2010

Boston hedge funds raided by FBI

"Ripples from the Galleon insider trading scandal..."


November 22, 2010 in Hedge Funds, Insider Trading | Permalink | Comments (0) | TrackBack (0)

Saturday, November 20, 2010

Insider trading dragnet?

The WSJ is reporting that the FBI has an insider trading dragnet in the works (also being reported by Bloomberg).  From the tone of the article, it sounds like it could be bigger than the Galleon sweep. They reprinted an e-mail from Broadband Research to its clients:

"Today two fresh faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information," the email said. "(They obviously have been recording my cell phone conversations for quite some time, with what motivation I have no idea.) We obviously beg to differ, so have therefore declined the young gentleman's gracious offer to wear a wire and therefore ensnare you in their devious web."

Another research firm in the article suggests that as many as three dozen firms have been contacted as part of this investigation.  The focus of the investigation are apparently expert-network firms that connect hedge funds and professional investors to experts and consultants, some of whom I imagine have inside information.


November 20, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Friday, November 19, 2010

Reward for insider trading? Disbarment.

Remember Brien Santarlas, the former Ropes & Gray associate who along with Arthur Cutillo, got wrapped up in the Galleon insider trading scandal last year (here)?   He took $30,000 in exchange for his tips on transactions.  In addition to paying $32,500 in fines, he was recently disbarred.  So now you know.  (H/T Lawshucks


November 19, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, November 12, 2010

Bad Lawyers

Bad Canadian lawyers.  Still.  According to the Ontario Securities Commission Mitchell Finkelstein, a partner at the Bay St. firm of Davies Ward Phillips and Vineberg, is alleged to have gathered information on were four major Canadian business transactions that took place between 2004 and 2007.  Here's how the OSC describes Finkelstein actions in the complaint

Kohlberg Kravis Roberts & Co. (“KKR”) acquisition of Masonite International Corporation (“Masonite”), announced December 22, 2004 (the “Masonite Transaction”) – Davies acted on behalf of Masonite and Finkelstein was counsel on the matter. On the evening of November 16, 2004, Davies’ lawyers, including Finkelstein, met with management of Masonite to discuss the Masonite Transaction.

In the following three days, there were several telephone contacts between Azeff and Finkelstein, the last one occurring approximately two hours before the first buy order was placed on November 19, 2005 by Azeff and/or Bobrow.On January 26, 2005, Azeff met with Finkelstein in Toronto. In the two days following the meeting, Finkelstein made two cash deposits in $50 and $100 bills to his two bank accounts.

Cash. He took cash.  The OSC isn't clear on how much was deposited, but as any good lawyer knows, if you're making a large cash deposit banks are required to report it to the Treasury Department - in the US anyway.  Canada has a similar requirement.

In any event, the OSC alleges that Azeff (the tippee) passed along the informatio to Miller who in turn sent the following e-mail out to clients:

Call me I have a tip … Stock trades on TSX at around $34 - cash takeover of $40 Timing should be before xmas but you never know with lawyers … I'm long

So what probably started out a tip to a friend in exchange for some extra walking around money got broadcast over the Internet in the form of an e-mail to clients that identifies the source of the info as a "lawyer".  Great.  

OK, kids, don't do this at home.


November 12, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 26, 2010

Insider trading on the railroad ...

 Andrew Ross Sorkin flags this recent insider trading prosecution.  It's of a breed of cases where the SEC is pursuing its "level playing field" theory of insider trading.  Traditionally, there has to be a breech of a fiduciary duty tied to the trading in order to lead to liability of the insider trading laws.  The SEC, obviously, hates that.  They have pushed for years to get the court to adopt a level playing field theory that would permit prosecutions even in the absence of a fiduciary obligation.  Such was the case last year in SEC v Dorozhko.  That was the case of a hacker who stole inside information and was then prosecuted for trading on it.  Clearly, hacking is a bad act.  But, was it insider trading?  The Second Circuit thought so. 

Now comes the SEC's prosecution of this group of 5 railway engineers, railyard workers, and their families.  Their crime?  According to Sorkin, they were a little too observant for their own good.

 More specifically:

(a) in early March 2007, FECR’s Chief Financial Officer requested that Gary Griffiths prepare a comprehensive list of all of the locomotives, freight cars, trailers and containers owned by FECR, along with their corresponding valuations, which she had never requested before; 

b) Gary Griffiths became aware of the unusual number of Hialeah yard tours, which began on March 15, and he believed that the tours were being provided to investment bankers who were considering buying or investing in FECI; and

(c) shortly after the tours began, yard employees began asking Gary Griffiths whether FECI was being sold and whether their jobs would be affected by any such sale.

I don't know.  It strikes me as a bridge too far.  Although, this group did have the sense to go big - scoring $1.6 million in profits.  Anyway, I don't imagine the SEC has exhausted its supply of inside-trading investment bankers to go after.  It's a little odd that they would focus on this crew.



October 26, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Sunday, September 19, 2010

Lessons worth learning

By now it should be obvious to most readers that one of my target audiences when I write this blog is mostly recent law grads still getting their footing as young associates.  I think it's useful to reinforce a couple of lessons that they may not have thought much about while in law school, but once you get out in practice confront you every day.  First among them for transactional lawyers - particularly those new to the practice who are, often for the first time, handling confidential client information - is insider trading.  As any transactional lawyer will tell you, when you work on deals, you're constantly handling inside information.  If you want to have a long career you have to take that seriously.  That's why I will often highlight "idiot lawyers" and others who ruin their careers for small amounts of cash, or for fleeting personal glorification.  Some of these people deserve what they get, others ... well ... others could have been you.   These are lessons worth learning.

All that said, the latest addition to the pantheon of people who should have known better, but thought maybe nobody would notice, is Dr. Bobby Khan. The SEC recently filed a civil complaint against Khan alleging that Khan traded on material nonpublic information that he acquired from a long time business associate and friend.  The associate was an officer at Sciele who shared information with Khan about a pending transaction in which Sciele would be acquired by a Japanese pharmaceutical firm.  The SEC alleges that Khan received that information after having assured his associate he would keep it confidential.  In fact, the SEC alleges that after having learned about the acquisition from his associate over dinner, Khan sent the following email:

"Had a great dinner with you on Friday and I wish all the best with the negotiations on the potential buyout of Sciele. Of course, I will keep it confidential."

Of course, he will.  But, you know how the story ends.  Following his receipt of this information, Khan allegedly opened an online brokerage account, his first since 2003 and then transferred approximately one-third of his then liquid net worth into that account in order to purchase about 4,000 shares of Sciele stock only a few days before public announcement Sciele's acquisition on September 1, 2008.  Following the tender offer announcement, Khan sold all of his Sciele shares in October 2008, making $45,000 in profits.  

 I'll give you three guesses where the SEC got the e-mail to the officer of Sciele.  It probably wasn't Khan.  I'm sure that when the SEC starting putting the dots together on who Khan was it took them about three minutes to realize that the Sciele officer was on the advisory board of Khan's startup.    In fact, I wouldn't be surprised if the Sciele officer gave up Khan right away.  

The good news for Khan is that he is a medical doctor and not a lawyer.  Presumably he will still have a career after this is over. 


September 19, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 14, 2010

Throwing it all away

Before his arrest, Bob Moffat had it all - stand out student in college, led to an "extraordinary career with IBM, a happy family.  He had it all.  And then he threw it all away when he became involved with the Galleon crew. From today's Bloomberg report on the latest Galleon sentencing:

“Why the defendant betrayed the only employer he has had for his entire career has not been addressed,” Batts said. “His astounding breach of his fiduciary duty to his employer is why he is here.”

I think I know why.  He didn't make any money.  No, that's true.  But it's a familiar story. According to the pre-sentencing report (Moffat - PSR):

   "My actions were not driven by greed or the desire to profit by disclosing this information.  In fact, I did not make any money as a result of what I did.  In the end, I believe my actions stemmed from misplaced trust, letting 'my guard down' and a misguided desire to appear important and knowledgeable to share Ms. Chiesi that I was 'in the know' about important matters."  Bob's mistakes were real and he is deeply sorry for them, but it must also be understood that his motives were not venal and not profit-driven.  Perhaps his ego got in the way by making him want to impress someone with whom he had become intimate.  Perhaps he just wanted to seem knowledgeable and worldly.  This case is tragic precisely because Bob Moffat's actions are so inexplicable and because he threw away what he had spent so much of his life working for -- in exchange for non-pecuniary benefits that were, at most, fleeting and insubstantial. 

It's just another reminder that if you're handing out tips on inside information, you don't actually have to "profit" (as in receive cash) for those tips to be liable.  Moffat got six months in jail and lost it all today.


September 14, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Thursday, September 2, 2010

More Advice for Young Lawyers

Yesterday, the SEC settled insider trading charges against James Self and Stephen Goldfield. Self was director of Business Development at Merck and Goldfield, Self's classmate at the Wharton School (UPenn), was a hedge fund manager.  According to the complaint, Self disclosed confidential inside information about Merck's pending acquisition of MedImmune to Goldfield.  Goldfield traded on that information and according to the complaint made approximately $14 million in profits.  

Here's the thing.  Self didn't make any money on this deal.  In fact, he didn't "profit" at all.  Rather, he provided the information for reasons that most facebookers will readily recognize. According to the SEC,

"Self divulged the confidential information to Goldfield in order to boost his reputation in Goldfield's eyes and to show Goldfield that he was working on important matters"

Hey, I get it.  Your buddy got out of Wharton and immediately joined a hedge fund.  As near as you can tell, he's making a gazillion dollars a year, has houses in three cities, and leads a glamorous life-style.  You?  Well, you were smart, but you decided to work for Big Pharma.  You might not be rolling in cash, but you're doing important work.  There's a natural inclination to let others know that you, too, are important, that you, too, are a big deal.  Like I said, I get it. 

But ... get over it.  Before you start first day at that fancy law firm.   Here's some advice - it's time to learn to be discreet.  You may not brag to hedge fundies you know from law school about deals you are working on.  (Who would be that stupid?)  But you may do other things.  I know everyone always has to have a status update on their facebook page or gchat that lets everyone what exactly they are up to.  If you're not careful, these could get you into trouble.  How about this possible facebook status update for example:   

"On my way to a board meeting at MedImmune.  Who wants to buy a cheap biotech company?!" 

Definitely a career killer if you posted something like that.   Now might be a good time to start weening yourself off of many of the social media sites.  Less is more.  


September 2, 2010 in Hedge Funds, Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, August 26, 2010

Potash and Idiot Insider Traders

I haven't touched on BHP's hostile bid on Potash to date and hadn't planned to.  But, now I feel like I have to.  The SEC just charged two Spaniards (Juan Jose Fernandez Garcia and Luis Martin Caro Sanchez) with insider trading in advance of BHP's bid for Potash.  Garcia and Sanchez fall into the growing category of idiot insider traders.  Forget the insider trading charges, these guys should be charged with "idiot insider trading."  Why?  Well, two words:  call options. I've blogged about the idiocy of using call options for insider trading before (here and here).

According to the complaint Garcia and Sanchez bought 331 out-of-the-money call options for Potash in the two weeks prior to the transaction being announced.   Prior to these purchases, neither Garcia nor Sanchez had ever dipped into the call option market.  And, what?  The very first time they decide to buy options they load up on one company's options just prior to the announcement of a hostile acquisition and make $1.1 million in profits?!  [Anyway, props to them for going big.]

The second reason that these guys are idiot inside traders is that bought all these options through their personal brokerage accounts.  What?  No old aunt in Croatia to run the trades through?!

The final reason why these guys are idiot insider traders is that Garcia was head of equity derivative research at Banco Santander, which had been advising BHP on its bid.  Let's see BHP approaches its bankers at Banco Santander and says, we'd like to acquire Potash and the first thing that enters Garcia's mind is that he should trade on the info?!  Garcia should have known better than to betray client confidences.

Anyway, is it any surprise that the SEC filed its complaint on August 25, just eight days after BHP announced its offer for Potash?  Wait a minute -- the original complaint was filed last Friday (August 20) but only unsealed yesterday.  That's three days between announcement of the deal to filing of the sealed complaint.  Man, these guys are idiots.



August 26, 2010 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, July 30, 2010

Now that's insider trading!

You know, I can't understand why people risk so much (career, reputation, family) for so little.  How many times have you heard about the lawyer who gave in to the temptation to trade on client confidence only to reap $5,000 profit and an indictment.  Now, comes word of two guys who know what they are doing.  The SEC alleges that the Wyly brothers of Texas used a series of offshore trusts and corporations to engage in a monumental sized insider trading scheme to the tune of $750 million worth of stock and profits in excess of half a billion dollars!  On one series of transactions they allegedly earned more than $30 million. "Go big, or go home" as they say.  

According to the SEC's complaint, filed in U.S. District Court for the Southern District of New York, the public companies the Wylys used in the scheme were Michaels Stores Inc., Sterling Software Inc., Sterling Commerce Inc., and Scottish Annuity & Life Holdings Ltd. (now known as Scottish Re Group Limited)

 The SEC's complaint alleges that the Wylys and French knew or were reckless in not knowing their legal obligations as public company directors and greater-than-five-percent beneficial owners. The laws require such persons to report holdings and trading in their companies' securities on Schedule 13D and Form 4, which are filed with the SEC. The Wylys and French also knew or were reckless in not knowing that the investing public routinely uses such disclosures to gauge the sentiment of public companies' insiders and large shareholders about the financial condition and prospects of those companies, relying on those disclosures when making investment decisions.

The SEC alleges that the Wylys and French systematically and falsely created the impression that the Wylys' entire holdings and trading were limited to the fraction that they held and traded domestically. By depriving existing shareholders and potential investors of information deemed material by the federal securities laws, the Wylys were able to sell — in large-block trades alone — more than 14 million shares of issuer securities over a period of 13 years for undisclosed gains in excess of $550 million. The SEC further alleges that the sales generating most of these illicit gains were made pursuant to materially false or misleading SEC filings.

Read the complaint here.  My first reaction was, “Thank goodness the Wylys not lawyers.”  Then I realized that their alleged co-conspirator is French, the lawyer.  And, that their entire scheme would have been impossible without the help of a lawyer.  In fact, as far as I’m concerned if what has been alleged is true then the lawyer is at the heart of this decade long scheme.  It gets worse.  The lawyer was not content to simply set up and help run this conspiracy (while also sitting on boards), but he is alleged to have set up his own (smaller) network to carry out similar trades.  If you are a rising 3L studying for your MPRE next week, these guys as described in the SEC's complaint are not exemplary figures. 

I doubt ignorance of the disclosure rules will fly as an excuse (from the complaint):

Moreover, by the time the fraudulent scheme detailed herein commenced in early 1992, Sam Wyly and Charles Wyly each had over twenty years' experience as public company directors and Schedule13D and Form 4 filers; and Michael French had over twenty years' experience as a federal securities lawyer. They were each thus on abundant notice of the relevant SEC reporting obligations.

The SEC alleges that the Wylys with help from their lawyer used their positions as directors of public companies to trade on inside information in advance of mergers and other material corporate transactions.  You know, like during the Gilded Age, when public company directors routinely traded on inside information. 

In October 1999, after having agreed to put Sterling Software on the selling block, the Wylys had their Offshore System enter into a bullish offshore transaction in the form of a security-based swap agreement with Lehman Brothers that economically replicated the purchase of two million shares of Sterling Software for approximately $20.36 per share. Based on Sterling Software's closing price of$36.25 on February 14, 2000-the date that Sterling Software's agreement to be acquired by Computer  Associates was announced-the Wylys' illegal imputed profits from this transaction totaled approximately $31.7 million.

In what universe can someone think that this kind of activity would not violate federal securities laws?!  They probably knew it violated lots of securities laws, but that doesn’t seemed to have mattered much (again from the SEC's complaint).

As high level insiders of the Issuers, the Wylys and French were aware of the negative impact that sales by them of Issuer Securities-including the above detailed large-block sales-would potentially have on the Issuers' share prices if they were disclosed in accordance with law. In effecting these sales offshore, the Wylys and French were motivated by a desire both to avoid such declines and to eliminate any risk thereof. On March 24, 1995, for example, French wrote to Sam Wyly that filing of "insider sales reports ... seem to set everybody off" and that selling offshore without making such filings would facilitate "pull[ing] some gains out ... without attracting any attention." In September 2001, Sam Wyly elected to forgo an onshore collar transaction in Issuer Securities and instead attempted the same transaction offshore, in order to avoid any bearish signal to the market; and Charles Wyly, in September 2003, took a similar action for the same stated reason.

Hmm.  The best way for an insider to pull out some gains without attracting any attention is with a planned sale program.  Lots of firms have them.  Maybe the Wylys have heard about such programs.  On the other hand, planned programs are terrible if you want to make money on inside information about a pending transaction.  So, I can understand why one might neglect to pursue that option.  You’ve got to hand it to them.  They’ve got guts thinking that they could carry this out for so long.  ... And there’s a question worth asking.  How is it possible that the SEC, brokers, I-Banks, etc let them get away with this for so long?  I mean $500 million is still a lot of money.


July 30, 2010 in Insider Trading | Permalink | Comments (1) | TrackBack (0)