Saturday, June 10, 2006

Hoop Dreams and Insider Trading

If you don't share the basketball with your teammates, you are likely to lose the game.  When you share insider information with them, however, you may well come to the attention of the SEC and be sued for insider trading.  Such is the fate of Matthew Roszak, Douglas Jozwiak, Darrin Edgecombe, and two others when Roszak learned from a director of Blue Rhino that the company was in the process of being acquired by Ferrellgas Partners.  Roszak worked with the director closely, including serving as the CFO of a company controlled by the director. The director first told Roszak in December 2003 that he would be doing significant work on a deal involving Blue Rhino, and on January 9, 2004, after spending two days together, Roszak made his first purchase of Blue Rhino shares and tried to figure out how to buy call options on the stock -- a much more cost-effective way of trading on inside information. 

If the trading had stopped there, Roszak might have stayed underneath the radar because he had once before bought Blue Rhino shares.  Inside information is like a wad of cash in one's pocket, however, and pretty soon it burns a hole and has to be let out.  On January 29, the director told Roszak that he would be in daily Blue Rhino board meetings, a clear signal that the deal was close to completion.  That evening, Roszak called basketball teammates Jozwiak, his brother-in-law, and Edgecombe, his friend for 15 years, apparently to tell them about the deal.  The SEC complaint (here) details a number of telephone calls between the three men, the type of circumstantial evidence on which these types of cases are often built.  Roszak also called two relatives, who are not identified in the complaint, that evening.  The next morning, the Blue Rhino spigot was turned on as the tippees began buying up shares at a rapid clip.  Jozwiak bought $56,000 worth of stock the next morning, his largest trade since opening the account, and Edgecombe bought almost $300,000 the moment the market opened the next morning -- nothing like trying to be subtle about using your inside information.

Edgecombe tipped two other friends, Trifon Beladakis and Mark Michel, who also started buying Blue Rhino.  The complaint details the calls on January 29 down to the minute as the information burned up the telephone wires in Illinois, where all the defendants reside.  To compound matters by making it more likely that the securities exchanges and the SEC would notice the trading, Michel, a registered rep at Wachovia Securities, also bought $1.2 million worth of Blue Rhino for relatives and clients in addition to his own purchases.  When the companies announced the deal on February 9, Blue Rhino jumped almost 20%, and the defendants reaped the following profits: Roszak $23,230; Edgecombe $65,017; Jozwiak $14,136; Beladakis $29,783.  Michel made almost $32,000 for himself, $92,381 for relatives, and almost $202,000 for clients.  Not bad for less than two weeks worth of investing.  I vaguely recall an adage about hogs getting slaughtered.

According to the SEC Litigation Release (here), four of the five defendants settled on the following terms: "Roszak, Edgecombe and Beladakis have agreed to pay disgorgement, plus prejudgment interest thereon, and civil penalties totaling $240,740, $114,805 and $62,353, respectively. To settle charges against him, Jozwiak agreed to pay a civil penalty in the amount of $14,136."  Michel did not settle the case, and likely faces some pretty unhappy Wachovia Securities clients (and if he hasn't been fired yet, he probably will be very soon) who do not want to have to return their ill-gotten Blue Rhino bonanza. (ph)

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Civil Enforcement, Insider Trading, Securities | Permalink

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Comments

Great commentary on Mr. Michel (Wachovia) and how the rest of his clients probably feel now (especially if they have to return ill gotten gains on Blue Rhino which used to trade as RINO on the NasDaq as I recall).

I very much enjoy your blogsite and have recommended it to friends including journalists and current SEC/NASD enforcement types.

Posted by: SEC/NASD Enforcement SuperBull | Jun 11, 2006 7:07:55 PM

Trifon: They finally got you!! I
cannot believe it took so long?
A crook is a crook is a crook!
Better luck next time!

Pete

Posted by: pete | Feb 9, 2007 12:47:46 PM

Trifon Beladakis is a CROOK? Not a chance!
He plead no contest. This makes him ethically
bankrupt , but NOT GUILTY!

Posted by: mike | Feb 17, 2007 12:16:48 AM

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