Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Friday, September 28, 2007

SEC Files Insider Trading Charges Against Former Dell Accountants

On September 28, the SEC filed an insider trading action in the United States District Court for the Western District of Texas against Salvador Chavarria, Glenn D. Leftwich and John A. Nieto. At  the  time of the alleged misconduct, Chavarria, Leftwich and Nieto were employed as accountants in Dell Inc.'s (Dell) Americas  Business  Unit  at  its corporate headquarters in Round Rock, Texas.  The  Commission  alleges that the three accountants engaged in unlawful insider trading in  the securities of Dell in advance of a public  announcement  on  Aug.  11,2005, that Dell's second quarter 2006 revenues had fallen short of the company's earlier guidance and analysts'  expectations.  In  addition, the Commission alleges  that  Leftwich  engaged  in  unlawful  insider trading when he  purchased  Dell securities  in  advance  of  a  Dell earnings release on Oct. 31, 2005, announcing Dell's  failure  to hit its earnings target for the third quarter 2006.

In its complaint, the Commission alleges  that,  in  July  and  August 2005, Chavarria, Leftwich and Nieto purchased Dell put  options  while in possession of material,  non-public  information  regarding  Dell's financial performance for the second quarter  of  2006.  Specifically, the Defendants knew, in advance of the Aug. 11, 2005 release, that the company's second quarter revenues had fallen short  of  the  company's earlier guidance and analysts' expectations.  On  the  day  after  the announcement of the revenues miss, Dell's  stock  price  dropped  more than 7% on the news. By selling their Dell put options, the Defendants profited as  follows:  Chavarria,  $153,240;  Leftwich,  $81,658;  and Nieto, $16,677.

In addition, on Oct. 31, 2005, Leftwich bought Dell put options  prior to a negative Dell earnings announcement. The negative news caused  an 8.3% decline in Dell's stock price. Leftwich  sold  the  puts  on  the following day and profited $24,769.

Without  admitting  or  denying  the  allegations  in  the  complaint, Chavarria and Nieto have agreed to settle the Commission's charges  by consenting  to  the  entry  of  a  final  judgment  that  would:   (i)permanently enjoin them from further violations of  Section  10(b)  of the Securities Exchange Act of 1934, and Rule 10b-5  thereunder;  (ii)order them to pay $153,240 and $16,677, respectively, in disgorgement; (iii)  order  them  to  pay  $16,673  and  $2,059,  respectively,   in prejudgment interest; and (iv) order them to pay a  civil  penalty  of $153,240 and $16,677,  respectively.  With  regard  to  Leftwich,  the Commission alleges in its complaint  that  Leftwich  violated  Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In its complaint, the  Commission  seeks  against  Leftwich  a   permanent   injunction, disgorgement plus prejudgment interest, and  a  civil  money  penalty.

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