Friday, October 5, 2007
The SEC filed a settled insider trading enforcement action accusing the defendant of trading on information about the impending takeover of Commercial Federal Corp. According to the Commission's complaint (here), the defendant learned about the transaction from his brother, who received the information from his wife, an administrative assistant to Commercial Federal's CEO at the time who discussed her concerns about job losses from an acquisition of the bank. The SEC asserts that by trading on the information, the defendant breached a fiduciary duty to his brother, based on the fact that they "had a history of sharing and maintaining confidences." The defendant is a self-employed farmer/rancher, and the nature of the confidences the brothers shared is not described in the complaint.
That's not the classic duty of trust and confidence described by the Supreme Court in Chiarella v. United States, 445 U.S. 222 (1980), which discussed legal fiduciaries like trustees and lawyers as examples of those with the duty of confidentiality. But it does fit within the SEC's more expansive definition of such a duty in Rule 10b5-2(b)(3), which covers, inter alia, any person who "receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling." The broader definition of "duty of trust and confidence" in the SEC rule has never been tested in court, and won't be in this case because it is a settled matter. But it's an open question whether a court would find the requisite duty based solely on the familial relationship and the trading of confidences. The defendant settled the matter by disgorging over $39,000 in profits from his trading and a tippee's, and a civil penalty of $31.150 based on his profits.
Thursday, October 4, 2007
A preliminary investigation by the French financial regulator Autorité des marchés financiers (AMF) indicates that a number of senior executives at Franco-German aircraft manufacturer European Aeronautic Defense & Space Co. NV (EADS) sold shares before the announcement of problems with the company's largest development project ever, the A380. The AMF report was discussed in the French newspaper Le Figaro and the trading allegedly occurred between November 2005 and March 2006, before the June 2006 announcement of technical problems with the superjumbo A380 and also the A350 aircraft. The stock dropped over 25% on that announcement, and it is not clear how far in advance the information was known to 21 managers and executives who sold shares. The AMF issued a statement (here) that
it submitted an interim memorandum to the prosecuting authorities in Paris in early September, in accordance with law; it obviously has no comment on the Le Figaro report; it insists that it has not completed its investigations and is unlikely to do so before the beginning of 2008; consequently, the AMF Board, which has sole authority to commence regulatory proceedings against persons suspected of infringing its General Regulation, has not given an opinion on the matters reported in the article and, at this stage, has decided solely to inform the criminal court thereof; at this stage of the procedure, which is still a standard inquiry, the persons concerned have not had the opportunity to exercise their right of defence.
Insider trading cases in the European Union are fairly uncommon, at least as compared to the United States. It will be interesting to see how the investigation develops, especially when it involves a company with the political significance of EADS. A story on CNN.com (here) discusses the report. (ph)
Friday, September 28, 2007
With the end of the fiscal year nearly upon us, the SEC seems to be clearing its docket of insider trading cases, announcing three new ones on the second to the last day of FY 2007. Last year, the Commission was criticized for the decrease in enforcement actions, specifically insider trading cases, and it's unlikely that criticism will be leveled again with the increase in the number of such cases filed. Note when the trading involved in the three cases occurred:
- A father and son were accused of trading in the shares of Aspen Technology, Inc., Regeneration Technologies, Inc., and Triangle Pharmaceuticals, Inc. in 2001 and 2002 based on information the son obtained while working for Banc of America Securities and passed on to his father. The father comes with quite a pedigree, having been "a founding member and Director of the Chicago Board of Options Exchange, Director of the American Stock Exchange, a Board member of the Securities Industry Automation Corporation, and a Director of the New York Institute of Finance." The two defendants settled the matter by agreeing to be jointly and severally liable to disgorge profits of $204,476 plus prejudgment interest of $72,511.48. The son will pay a one-time civil penalty, while the father agreed to a double penalty. The SEC Litigation Release is here.
- A former director and member of the audit committee at NBTY, Inc. is accused of tipping a friend about an impending announcement of an earnings shortfall in the third quarter of 2004. Based on the information, the friend "sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children," realizing $400,000 in gains and losses avoided. The SEC complaint is here.
- A tippee of a vice president of LendingTree, Inc., traded and tipped others before the announcement of a buyout of the company in May 2003. The defendant realized profits of $14,078 himself, and his tippees made $74,516. In settling the matter,the defendant agreed to disgorge his profits and pay a $88,594 penalty, equal to the total profits made through his and his tippees trading. The SEC Litigation Release is here.
Just like the auto companies, the SEC needs to clear the lot for next year's models. (ph)
Thursday, September 27, 2007
The SEC filed a settled insider trading case against a consultant for Frederick's of Hollywood for buying stock in Movie Star, Inc., before the announcement of a deal. The two firms are leaders in the intimate apparel market -- I will abjure further comments -- and the merger was announced on December 19, 2006. The defendant participated in the merger negotiations, and according to the SEC Litigation Release (here):
[B]etween September 14 and November 20, 2006, Keeney made over a dozen purchases totaling 157,000 Movie Star shares at an average cost basis of $0.97 per share, on the basis of material, nonpublic information concerning both the possible merger as well as the financial projections for Movie Star he had received in the course of the merger discussions. On December 19, 2006, both Movie Star and Frederick's publicly announced that the two companies had entered into a merger agreement. That same day, the price of Movie Star shares increased to close at $1.46. As a result, the complaint alleges, Keeney had imputed illicit profits of $77,540.50 from his unlawful trading.
The defendant agreed to disgorge profits (plus interest) of $81,210.96 and pay a one-time civil penalty. (ph)
Friday, September 7, 2007
A former executive and co-founder of telecommunications company UTStarcom Inc. settled an SEC civil complaint alleging he and his wife sold shares of the company shortly before it planned to announce that it would not meet its earnings target for the quarter. The SEC Litigation Release (here) states that
In late September 2005, UTStarcom failed to finalize a significant deal and the company was preparing to pre-announce to the market that it would not be able to meet its earnings guidance for the quarter. According to the Commission, Shey spoke to the UTStarcom executive by phone the weekend before the public announcement. Shortly after that conversation, Shey contacted his broker and began the process of liquidating his extensive UTStarcom stock holdings.
According to the complaint, just minutes after the market opened on Monday, October 3, Shey began selling his UTStarcom stock, and Shey's wife began selling UTStarcom stock in accounts of her family members. Shey sold more than 600,000 shares over the following days, making his final sale less than an hour before UTStarcom announced the revenue shortfall on October 6. Following that announcement, the company's stock price fell by more than 26 percent.
The defendant settled the SEC action by disgorging $420,226.60 representing the losses avoided by the sales, plus prejudgment interest of $31,909.96, and payment of a one-time civil money penalty. (ph)
Thursday, September 6, 2007
A former vice president at Morgan Stanley and her husband, a former analyst at a hedge fund, pleaded guilty to conspiracy and insider trading charges. The defendants had been charged earlier this year with making over $600,000 on trading in three companies based on tips from the wife to the husband, who bought the securities through an account in the name of her mother. The defendants agreed not to appeal a sentence between 30 and 36 months, which means they will each be serving a substantial term of imprisonment. A story on CNN.com (here) discusses the guilty pleas. (ph)
Wednesday, September 5, 2007
The SEC's insider trading investigation of questionable options purchases in Placer Dome in October 2005 has taken an international turn as the Commission is seeking authority to interview witnesses in Canada, the U.K., and the Isle of Man. On October 31, 2005, Barrick Gold Corp. made a hostile offer for Placer Dome, and as happens in so many deals, there was questionable trading in Placer Dome before the announcement. Both companies are headquartered in Canada, and the SEC recently made a filing in federal court in New York seeking judicial authorization to require witnesses outside the United States to testify in its investigation. The SEC filed an "unknown traders" suit on November 3, 2005, to freeze the $3 million proceeds of the Placer Dome options trading (see SEC Litigation Release here), and has identified the primary investor in Toronto. The SEC is now trying to trace who might have been the source of the information.
While the federal court has subpoena authority to compel witnesses to appear in the U.S., the Commission has to resort to the foreign courts and foreign securities regulators to obtain evidence abroad. In its filing, the Commission cited an e-mail sent on October 23, 2005, by the Toronto investor who purchased the Placer Dome call options that states, "I hear from the Swiss lads that G is running at PDG. Act accordingly." "G" is the ticker symbol for Barrick Bold, and "PDG" the symbol for Placer Dome. There's more than a little smoke coming from that e-mail, which likely means a criminal investigation for insider trading. A Globe and Mail story (here) discusses the SEC filing. (ph -- with thanks to YH)
Thursday, August 23, 2007
In an uncommon decision, a panel of the Tenth Circuit issued an order (available below) granting former Qwest CEO Joseph Nacchio bail pending completion of his appeal of the nineteen insider trading convictions returned in April 2007. On July 27, U.S. District Judge Edward Nottingham turned down Nacchio's request for bail pending appeal of the convictions and sentenced him to a six year prison term, although Nacchio had not yet reported to the Bureau of Prisons. The Tenth Circuit maintained the same bail conditions that currently apply, and set the case for expedited hearing. Under the accelerated schedule set by the appellate court, the defense brief is due October 9, the government answer on November 9, and any reply on November 20. Unlike many appeals, in which the parties have upwards of six to nine months after sentencing to prepare and file their briefs, the hearing will be in mid-December, only five months after the sentencing. While the panel's decision does not mean the conviction will be reversed, it does indicate that there is enough there to trigger a higher measure of scrutiny of the appellate issues, including Judge Nottingham's exclusion of classified information and his instructions on the materiality of the inside information. (ph)
Friday, August 17, 2007
The Wall Street Journal Deal Journal blog (here) raises a question about trading in First Charter stock before the announcement that it would be bought out by Fifth Third Bank. While financial stocks have been pummeled the past few weeks as the meltdown in the subprime market is causing significant problems throughout the credit markets, especially for banks with mortgage operations, First Charter's stock increased 13% since the beginning of August. The deal for First Charter is at $31 per share, more than a 50% premium to the previous closing price of $20.25 per share -- you don't think Fifth Third may have overpaid a little bit, do you? Trading in First Charter shares was higher than usual in August, although that could be ascribed to the generally higher volume in the whole market due to the recent volatility, but then, some of the buying that increased the price could be due to information seeping into the market. I was not able to locate a listing for call options on the company's shares, so buying the stock may have been the only way to bet on an increase in its price if someone had inside information about the buyout. A premium that fat is awfully tempting to trade on, especially when so many stocks are down over the past few weeks, so the SEC will probably take a look. (ph)
Saturday, August 4, 2007
The SEC filed an amended complaint (here) identifying a heretofore unknown purchaser of out-of-the-money call options in Petco in July 2006 before the company announced it was being taken private. The SEC identified suspicious overseas trading in the weeks before the announcement, and filed an "unknown purchasers" complaint three days after the deal became public in order to freeze the proceeds from the transactions before they could leave the United States. According to the Litigation Release (here):
The amended complaint alleges that Suterwalla entered into the transactions while aware of material nonpublic information regarding the pending acquisition of Petco, and that he took highly leveraged and speculative positions in the price of Petco's securities, which exposed him to the potential for millions of dollars in losses if Petco's price declined. The amended complaint further alleges that Suterwalla made all of his purchases within 17 days of Petco's acquisition announcement, that he made a number of his purchases the day before the announcement, and that his illicit profit from these transactions was more than $3 million.
No word yet on whether the newly identified defendant will show up to defend the SEC complaint and seek to regain his profits -- but I rather doubt it because there may well be a sealed indictment with his name floating around. (ph)
Saturday, July 28, 2007
U.S. District Judge Edward Nottingham described the insider trading convictions of former Qwest CEO Joseph Nacchio as "crimes of overarching greed" in sentencing him to six years in prison. The judge also rejected the defense request for bail pending the appeal, ordering that Nachio report within fifteen days of receiving his assignment from the Bureau of Prisons. While it is always hard to predict whether a defendant will be allowed to remain free while pursuing an appeal, the trend in recent high-profile white collar cases, such as the prosecutions of Jeffrey Skilling and I. Lewis Libby, is for judges to reject the request and order the defendant to report shortly after sentencing. Judge Nottingham did agree to recommend that Nacchio be directed to report to the Schuylkill FCI in Pennsylvania, which is relatively close to his home in New Jersey. But, the Bureau of Prisons makes its own decision on prisoner placement, so Nacchio could end up anywhere in the Northeast, and perhaps even further than that. A Bloomberg article (here) discusses the sentencing. (ph)
Friday, July 27, 2007
U.S. District Judge Edward Nottingham sentenced former Qwest CEO Joseph Nacchio to a six-year prison term, at the lower end of the Federal Sentencing Guidelines range. In addition, he imposed a $19 million fine, the maximum permitted based on the 19 counts of conviction, and ordered a forfeiture of $52 million based on his total gain. The Denver Post blog on the Nacchio trial (here) has the details. (ph)
Former Qwest CEO Joseph Nacchio faces sentencing before U.S. District Judge Edward Nottingham, and an important question beyond the prison term -- the Sentencing Guidelines range is 70 to 87 months based on the government's calculations -- is whether he will be allowed to remain free on bail pending appeal. Nacchio filed a brief (available below) outlining four likely issues that raise a substantial question regarding his convictions to allow the court to permit him to remain free while he pursues the appeal. Two of the issues relate to the materiality of any information he had at the time of the trading, and the others relate to the sufficiency of the evidence and the trial court's exclusion of classified information related to contracts Qwest might have obtained that would have bolstered its stock price. Trying to gauge whether an issue will be successful on appeal is always difficult, and in the bail-after-conviction context it is even more difficult because the standard essentially asks Judge Nottingham to second-guess himself. As co-blogger Ellen Podgor points out (see here), recent white collar cases are all over the place on the issue, with some defendants granted bail (e.g. Bernie Ebbers) while others (Jeffrey Skilling) are not. Former HealthSouth CEO Richard Scrushy and former Alabama Governor Don Siegelman were even taken into custody at the end of the sentencing hearing, an uncommon but not impossible scenario. The bail statute presumes the defendant will not be granted bail pending appeal, so the odds are against Nacchio. (ph)
Wednesday, July 11, 2007
The sentencing of former Qwest CEO Joseph Nacchio is currently set for July 27, and prosecutors and defense counsel filed sentencing documents with the district court on July 6 (available below). Nacchio was convicted on nineteen counts of insider trading for sales of Qwest stock in 2001 that resulted in a gain of approximately $52 million; the jury acquitted him on twenty-three other counts. All of the sales took place before the company announced a significant decline in its business and accounting problems that caused the stock to drop by over 90%.
The government recommends a sentence of 87 months based on the Federal Sentencing Guidelines calculation that uses the $52 million gain to enhance the prison term. Under the Guidelines, Nacchio's offense level is 27, which leads to a sentencing range of 70 to 87 months, and prosecutors argue that abusing his position as CEO to profit at the expense of investors supports a sentence at the top of the Guidelines range. The sentencing calculation applies the 2000 version of the Guidelines because the insider trading took place before a substantial increase in the recommended sentencing for economic crimes took effect at the end of 2001. If the more severe version of the Guidelines was in effect, Nacchio would be looking at a sentencing range of 151 to 188 months. As it is, even if U.S. District Judge Edward Nottingham sentences him to the lower end of the Guidelines range, he is still looking at a prison term of nearly six years. Nacchio argues that the gain should only be caculated at $1.8 million based on a "civil damages analysis" that looks to the effect of the undisclosed information on the value of the stock. That figure would yield a Guidelines sentencing range of 41 to 51 months.
Nacchio's lawyers have argued for a downward departure from the Sentencing Guidelines "because of extraordinary circumstances concerning the effect that a lengthy period of incarceration will have on the health and potentially even the life expectancy of two of his immediate family members, and because of Mr. Nacchio’s prior good works." Charitable and civic works are frequently cited in white collar crime cases, but as the U.S. Attorney's Office notes in its filing, both grounds are usually not the basis for a downward departure unless the situation is unusual (for family matters) or extraordinary (for charitable works). (ph)
Friday, July 6, 2007
A grand jury indicted a former Credit Suisse banker for tipping a banker in Pakistan about deals on which the firm had an advisory role before the disclosure of the transaction. The investment banker was arrested on a criminal information in May 2007 (see earlier post here), and at that time the tippee was unknown. He has now been identified as a "Country Head of Investment Banking" at Faysal Bank Ltd., headquartered in Karachi, Pakistan, and now living in Canada after resigning from the bank in April 2007 (See Bloomberg story here).
The indictment, available below, outlines a conspiracy to trade on inside information in which the Credit Suisse banker would call the banker in Pakistan, after which trades were placed in companies that were the targets of takeovers. The largest deal involved call options in utility TXU before the announcement of its acceptance of a buyout proposal, which generated over $5 million of the alleged $7.5 million in trading profits. In addition to a conspiracy count, the defendants are charged with twenty-five counts of securities fraud. The TXU options trades are not included in the substantive insider trading counts because the securities were traded on the options market in Chicago, so there is no jurisdiction over the transactions in the Southern District of New York even though there is on the conspiracy count. (ph)
Thursday, July 5, 2007
Trading in Hilton Hotels Corp.'s stock and call options jumped wildly right before the announcement after the close of trading on July 3 that Blackstone Group would take the company private at $47.50 per share. The stock price had been hovering in the low thirties, although on July 3 the shares jumped over $2 per share to $36, still more than $10 from the offer price. According to a Bloomberg story (here), trading in Hilton Hotels call options was up over nine times the average volume before the announcement, and a number of trades were in out-of-the-money contracts, indicating that -- here's a shocker -- someone had a pretty strong inkling something was about to happen to the stock. Another deal, another SEC insider trading investigation, in all likelihood. We'll see if anything comes of it. (ph)
Thursday, June 28, 2007
The U.S. Attorney's Office for the Central District of California announced that three former vice presidents at mortgage lender Countrywide Financial agreed to plead guilty to one count of securities fraud for trading on inside information about the prospect of the company not meeting earnings projections. According to a press release (here), the defendants sold their shares in the company, and also sold put options and shorted the stock to take advantage of the bad news that caused Countrywide's shares to fall over 11% after its disclosure. "As a result of the scheme, Cao realized profits of approximately $47,668. Zhu's total illegal profits from the tips he received from Cao was $35,547. And, Shi realized illegal profits totaling $19,995." The profits were relatively small and usually would not seem to merit a criminal prosecution -- and two of the defendants settled an SEC case in 2006 (Litigation Release here) by disgorged their profits along with paying a civil penalty. But the fact that the defendants were aggressive in their trading by using put options and short sales, and their positions at the company, likely triggered the interest of federal prosecutors. The focus on insider trading is certainly growing on both the civil and criminal side these days. (ph)
Thursday, June 14, 2007
The former managing partner at Katten Muchin Rosenman's D.C. office, David A. Schwinger, settled an SEC civil enforcement action alleging insider trading in Vastera, Inc. According to the complaint (here), Schwinger learned about an impending merger of Vastera when he interviewed the company's general counsel, who was seeking a new job because of the transaction. Schwinger bought 10,000 shares and made a profit of a shade over $13,000 after the announcement of the deal. According to the complaint, Schwinger violated a duty of trust and confidence he owed to Katten Muchin to maintain the confidentiality of firm information, especially because Vastera was a client of the firm. The case shows how hard the SEC is pushing insider trading cases these days. Schwinger settled the action by disgorging his profits, prejudgment interest, and a double penalty based on the profits. Lawyers certainly pay a price for trading on inside information far beyond the amount at issue. Whether the D.C. Bar will impose sanctions on Schwinger for possible misuse of confidential firm information remains to be seen. (ph)
Friday, June 8, 2007
Former Qwest CEO Joseph Nacchio filed a motion for a new trial and a request that the venue be changed on the nineteen counts of insider trading on which he was convicted in April 2007. The motion, available here through the Denver University Sturm School of Law's Corporate Governance Project, points to the prejudice from overly negative publicity in Denver before the trial. The motion argues:
As a result of the unceasing publicity, much of the voir dire was devoted to individual questioning of the venire panel about their prior knowledge concerning the case. This revealed that, of the 44 individuals who were called into the jury box and questioned, an overwhelming majority of 32 jurors responded yes, that they had learned about the case from the media or other outside sources. The Court nevertheless denied the motion to dismiss for cause prospective jurors with prior knowledge, denied our renewed application for change of venue, completed voir dire and impaneled a jury. The result was that, among the 18 jurors and alternates who were ultimately impaneled, an even larger majority of 14 had prior knowledge of the case. The prejudicial publicity then continued unabated throughout the trial.
Because the pervasive publicity was so intensely negative and long lasting, a new trial should be granted pursuant to Fed.R.Crim.P. 33, and a change of venue ordered pursuant to Fed.R.Crim.P. 21.
The memorandum goes on to cite two instances during the trial when strangers approached Nacchio and vilified him, one wishing he contracted cancer.
U.S. District Judge Edward Nottingham denied Nacchio's motion for a change a venue before trial, and it is unlikely he will change his position now. Federal Rule of Criminal Procedure 21 gives the trial judge considerable discretion in deciding on a change of venue, and moving the trial to a different location is a last resort, and rarely granted. The fact that jurors have heard about the case from widespread publicity is not dispositive, so the numbers cited in Nacchio's memorandum are not sufficient in themselves. Courts focus more on the nature of the publicity, and whether it is particularly gruesome or heavily biased, and that is unlikely to take place in a white collar crime case -- regardless of how one might describe a 90% decline in a stock's value, it's only money and not a murder.
Perhaps the most salient factor weighing against Nacchio on this issue is the fact that the jury acquitted him of twenty-three counts of insider trading, and it deliberated for a long period of time before returning its verdict. The government will argue that this is hardly a jury overcome by emotional appeals against Nacchio, but rather one that set aside its prior knowledge and decided the case on the facts. While prosecutors usually do not like to see an acquittal on a number of counts, this is one instance when the jury's decision in favor of the defendant likely provides support for the government's position as well. Rather than a "rush to judgment" that would be the hallmark of a prejudiced jury, the verdict was a fairly balanced view of the facts. In the end, Nacchio's motion is aimed more at the Tenth Circuit by making a record on the issue in the District Court, and I doubt his attorneys will pin much hope on a favorable outcome. For additional discussion of Nacchio's motion and outstanding coverage of the trial, check out J. Robert Brown's Race to the Bottom blog (here). (ph)
Thursday, May 31, 2007
Insider trading can happen in lots of different ways, and Barclays Bank PLC chose an interesting one: using information from the creditors committees of bankrupt companies to trade in their debt securities. Steven Landzberg, a defendant in the case along with Barclays, was the bank's representative on the creditors committees for six different companies, and as a member received private information about the financial condition of the debtors. Landzberg's more important job at Barclays was as head of its U.S. Distressed Debt Desk, which traded the bonds of companies in bankruptcy, making it very hard to resist the opportunity to trade. According to the SEC Litigation Release (here):
The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported "big boy letters" to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as "Chair" of two of these bankruptcy committees at the time of its illegal insider trading.
The complaint further alleges that Barclays' senior management authorized Landzberg to buy and sell securities for Barclays' account while he served on bankruptcy creditors committees. Barclays' Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.
The reference to "big boy letters" concerns an agreement between parties to a private securities transaction in which they acknowledge that one side may have superior information and the counter-party will hold them harmless for taking advantage of the informational disparity -- it has nothing to do with hamburgers. The letters do not bind the SEC, however, and whether such an agreement could protect against a claim for illegal conduct in a transaction is very much an open question. As trading becomes more sophisticated, the use of such devices is likely to increase, although how much cover they provide is something that will only be clarified over time.
Barclays settled the case by agreeing to pay over $10.9 million: $3,971,736 in disgorgement plus prejudgment interest of $971,825, and a civil penalty of $6 million. The bank has a strong incentive to settle the case because it is pursuing a deal to buy global bank ABN Amro, and will need clearance from U.S. regulators and the SEC, among others, if it wants to move forward with that deal. Landzberg agreed to a permanent injunction barring him from participating in creditor committees in federal bankruptcy proceedings for companies that have issued securities and to pay a $750,000 civil penalty. (ph)