Wednesday, July 27, 2005

SEC Files Insider Trading Suit Against Brothers

The SEC filed a securities fraud complaint in the U.S. District Court in Oregon against Philip and Paul Evans alleging insider trading in the securities of Merix Corp. immediately before the company announced an earnings shortfall in 2004.  Philip is a financial analyst for Merix, and when he learned about the bad news he sold all his shares in a brokerage account despite a company policy against trading during the "black out" period before the public disclosure of the information.  The Commission further alleges that Philip  tipped his brother Paul, who sold short Merix shares and, in a more aggressive move, bought put options on the company's stock, which gave him the right to sell shares at a specified price.  When the stock dropped 30% after the disappointing earnings announcement, Paul's transactions generated a profit of over $400,000.  The Commission's Litigation Release (here) also notes that Philip told his mother about the bad news, and she sold her shares and avoided a loss of approximately $3,000.  The SEC chose not to name the mother as a defendant in the case -- she may well have simply followed his suggestion to sell her shares without knowing the true reason. (ph)

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