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Univ. of Toledo College of Law

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Thursday, April 30, 2009

SEC Charges Former Citigroup Investment Banker with Insider Trading Scheme

On April 30, 2009, the SEC filed a civil action in the United States District Court for the Northern District of California against Maher Kara, his brother Michael Kara, and others. The Commission alleges that Maher Kara, a former Citigroup investment banker, repeatedly tipped his brother about upcoming merger deals in an insider trading scheme that involved friends and family throughout Northern California and the Midwest.  The SEC alleges that Maher Kara, a former director in Citigroup Global Markets' investment banking division in New York, repeatedly told his brother Michael Kara of Walnut Creek, Calif., about upcoming deals involving Citigroup's health care industry clients. According to the SEC's complaint, Michael Kara is a self-employed environmental clean-up consultant who traded in at least 20 companies that were involved in confidential transactions pending in the Citigroup health care investment banking group where Maher Kara worked.  The SEC further alleges that Michael Kara also leaked the information to a network of friends and family who also traded in advance of the deals. The SEC has charged the Kara brothers and six others in the case.

The participants in the scheme made their biggest profits trading in the stock and options of San Diego, Calif.-based medical testing company Biosite, Inc., less than three days before a March 25, 2007, announcement that it would be acquired. According to the SEC's complaint, Maher Kara tipped his brother on March 22 about the confidential merger negotiations, and less than 15 minutes later Michael Kara began acquiring a large volume of Biosite stock and short-term call options. That same day, Michael Kara began calling friends and family members to pass along the tip, and they too began buying Biosite securities. After the acquisition of Biosite was publicly disclosed days later, the stock price jumped over 50 percent. Michael Kara made illegal profits of more than $1.2 million, while his six tippees together made nearly $4 million.

In addition to the Kara brothers, the SEC complaint also names the following defendants: Emile Jilwan of Pleasanton, Calif. (Michael Kara's friend), who made $2.3 million on Biosite trades; Zahi Haddad of Stockton, Calif. (Michael and Maher Kara's uncle), who made $82,000; Bassam Salman of Orland Park, Ill. (brother of Maher Kara's wife), who passed the information to his brother-in-law; and Karim Bayyouk of Livonia, Mich. (Salman's brother-in-law), who made $950,000 (some of which he returned to Salman).

The SEC's complaint alleges that Maher Kara, who is now residing in San Carlos, Calif., also tipped his brother about a planned March 2006 acquisition of Andrx Corporation, a Florida drug manufacturer. Michael Kara allegedly made nearly $400,000 in illegal profits trading on the tip, and passed the information to Jilwan, Haddad, Azar, and Salman (who then tipped Bayyouk). Together, they made an additional $750,000 when the Andrx acquisition was announced.

The SEC's complaint charges the defendants with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The complaint seeks disgorgement of illegal profits, civil penalties, and a permanent injunction against future violations of Sections 10(b) and 14(e).

In separate civil actions filed April 30, 2009, the SEC also charged two of Michael Kara's tippees, Nasser Mardini of Stockton, Calif. and Joseph Azar of Pleasanton, Calif., with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Azar and Mardini have agreed to settle the SEC's charges without admitting or denying the allegations. Mardini has agreed to repay illegal profits and the entry of a permanent injunction against future violations of Section 10(b) and 14(e), and Azar has agreed to repay illegal profits, pay a penalty, and the entry of a permanent injunction against future violations of Section 10(b) and 14(e).

The SEC acknowledges the assistance of the Chicago Board Options Exchange, the Federal Bureau of Investigation, and the U.S. Attorney's Office for the Northern District of California in this matter. The SEC also acknowledges the assistance provided by Citigroup during the investigation.

http://lawprofessors.typepad.com/securities/2009/04/sec-charges-former-citigroup-investment-banker-with-insider-trading-scheme.html

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