White Collar Crime Prof Blog

Another Deal, Another Spike in Options Trading -- Part Deux

The private equity deals are coming fast and furious these days, as the multitude of posts on the recently-launched M&A Law Prof Blog can attest -- written by my colleague Steven Davidoff, make sure to check it out.  Almost every deal seems to be preceded by an inevitable bump in trading in out-of-the-money call options in the week(s) before the announcement.  The transaction at issue this time is one of the "smaller" ones this week, the May 16 disclosure of the acquisition of Acxiom Corp. by Silver Lake Partners and ValueAct Capital Partners L.P. for $27.10 per share, a total value of $2.24 billion.  Bigger deals announced in just the past couple days include the Bausch & Lomb acquisition for $4.5 billion by Warburg Pincus and Alliance Data by Blackstone for $7.8 billion.  But the trading in Acxiom is particularly striking, and hints strongly at insider trading.  According to a Bloomberg article (here), average volume in the call options was 135 contracts a day, but 1,400 traded on May 10 and another 1,300 on May 14, 15, and 16.  To make things worse -- or better, depending on your point of view -- most of the transactions were in May 25 call options that would expire on May 19, and the stock price was almost two dollar below that price and hadn't traded above $25 in months.  Risky, you say?  Add the fact that all the trading on May 16 took place in the last seventy minutes of trading, and the deal was announced after the market closed, and the SEC will be burning the midnight oil to figure out who was behind the trading, especially because the calls increased in value by 1,000% after the disclosure.  Timing in life is everything, of course, and can be a good starting point for an insider trading investigation, but it won't end there.  Another day, another deal, another SEC investigation no doubt.  Anybody getting tired of this yet? (ph)

Stop Me If You've Heard This Before

Another husband-wife team involved in insider trading, this time with the information coming from inside Oracle Corp. about its pending acquisitions.  The wife worked as the executive assistant to Oracle's CEO and its two co-presidents, and the husband buys in advance of announcements about companies Oracle acquires.  To make things worse, the husband also works for Oracle, but apparently doesn't have access to the same kind of inside skinny as his wife does -- or did, I suspect.  The SEC Litigation Release (here) recounts the trading:

The complaint alleges that Balkenhol engaged in pattern of insider trading by purchasing stock in Oracle acquisition targets before any public announcement of Oracle's interest. Balkenhol's first profitable trade came on March 1, 2005, when he invested $85,000 in Minneapolis-based Retek Inc. the day after Oracle executives began considering a tender offer for Retek. When Oracle announced the tender offer the following week, Retek's stock price jumped and Balkenhol sold the shares for approximately $15,000 in alleged unlawful profits.

Balkenhol allegedly continued his pattern of insider trading with a series of stock purchases in another acquisition target, Siebel Systems, Inc., during Oracle's negotiations to acquire the company in 2005. On June 9, 2005, the day after Oracle's two co-Presidents secretly met with Siebel's CEO to initiate merger discussions, Balkenhol bought over $270,000 worth of Siebel's stock. Over the next three months, Balkenhol made three additional purchases of Siebel stock, each following a critical advance in the confidential negotiations. Again, Balkenhol's wife had access to detailed inside information relating to each such advance. From June to September, Balkenhol ultimately purchased over 50,000 shares of Siebel stock for a total of approximately $448,000. Immediately after Oracle's September 12, 2005 announcement of its acquisition of Siebel, Balkenhol sold his entire position for approximately $82,000 in unlawful profits.

The defendant settled the matter by paying $97,282 in disgorgement plus $4,115 in prejudgment interest, and a one-time civil penalty of $97,282.  The wife was not named as a defendant in the SEC complaint.  Maybe the Commission should save these cases to come out around Valentine's Day, or that horrible marketing pitch for Sweetest Day. (ph)

Insider Trading as Marriage Therapy

Married couples need to have at least some common interests, and engaging in joint projects can certainly strengthen a relationship.  When the venture involves trading on insider information one partner gets on the job and passes on to the other, however, then the prospect of a jail sentence and SEC enforcement action might not be a salve for the relationship.  Three insider trading cases this week involve trading by married couples, which should set some kind of record.  First, Jennifer Wang and her husband Ruben Chen were charged with one count of conspiracy and three counts of insider trading for transactions in on-line brokerage accounts in the name of Wang's mother (Feng) that netted over $600,000 in profits, and the SEC also filed a civil enforcement action.  Wang was a vice president at Morgan Stanley, and the trading involved (1) Morgan Stanley Real Estate's (MSRE) December 19, 2005 announcement of its acquisition of Town & Country Trust; (2) MSRE's August 21, 2006 announcement of its acquisition of Glenborough Realty Trust; and, (3) Formation Capital, LLC and JER Partners' January 16, 2007 announcement of its agreement to acquire Genesis HealthCare Corporation.  Chen was an analyst at international banking firm ING Group, and the SEC Litigation Release (here) discusses how the trading occurred:

The Commission's complaint alleges that Chen and Wang funded and exercised control over Feng's online brokerage accounts. When Feng's first brokerage account was opened, it was funded with money from a checking account in Wang and Chen's name. In addition, Feng, who lives in Beijing, China, did not access the two online brokerage accounts that were opened in her name on the days of the relevant trading. Rather, most of the logins to the brokerage accounts were from Internet Protocol addresses at ING and from Chen and Wang's home in New Jersey.

A press release issued by the U.S. Attorney's Office for the Southern District of New York (here) discusses the arrest of Wang and Chen and the charges.

The second case involves the guilty pleas of Randi and Christopher Collatta to conspiracy and insider trading charges involving tipping and trading before the announcement of four deals.  Sticking with the marriage and Morgan Stanley theme, Randi was an attorney in the investment firm's compliance office, the office whose responsibilities include monitoring and preventing insider trading.  Both Collattas are attorneys, although not for too much longer with their guilty pleas.  Three other defendants have pleaded guilty, according to a press release issued by the U.S. Attorney's Office (here).

Finally, On May 8, the SEC filed insider trading charges against Kan King Wong and Charlotte Ka On Wong Leung, a married couple in Hong Kong, alleging that they purchased 415,000 shares of Dow Jones stock in April in advance of the announcement of News Corp.'s offer of $60 per share to buy the company.  The transactions netted them over $8 million in profits, and the SEC obtained an order freezing the money at Merrill Lynch where they conducted the trades (SEC Litigation Release here). 

Maybe bowling, or tennis, or even just long walks would be a better way to strengthen the relationship, rather than insider trading. (ph)

SEC Files Insider Trading Charges Against Hong Kong Couple for Dow Jones Trades

The offer by Rupert Murdoch's News Corp. for Dow Jones may come to naught, but it has triggered another insider trading case against foreign purchasers.  The SEC filed a complaint (here) in the U.S. District Court for the Southern District of New York against Kan King Wong and Charlotte Ka On Wang Leung, a husband and wife, for their purchase of 415,000 shares of Dow Jones from April 13 through April 30 in an account at Merrill Lynch.  After the announcement, the value of the shares increased by over $8 million.  Trading in Dow Jones garnered significant attention after News Corp.'s announcement (see earlier post here), but it was in the out-of-the-money call options that the real profits occurred.  The trading here shows that buying stock is not as cost effective as buying options because the defendants had to commit over $15 million to the trades, a far higher amount than would be necessary to buy call options for a comparable amount of shares -- not that I'm advocating any trading on material non-public information, of course.  The SEC's complaint does not connect the defendants to any identified source of information, but it does note that one of the defendants put in a sell order and inquired when the money would be available.  The Commission needed to act quickly to keep the money in the United States, and the District Court entered a freeze order (here) to ensure that the proceeds do not disappear.  As always, the challenge now is to link the defendants to the information. And look for the SEC to move on the options trading at some point. (ph)

Another Deal, Another Spike in Options Trading

It's the same refrain: a deal is announced -- usually a buyout by a private equity firm -- and in the days before the public disclosure trading in out-of-the-money call options shoots up.  The latest example: the acquisition of Florida East Coast Industries by Fortress Investment Group for $84 per share, a bit more than $10 above its market price prior to the announcement on May 8.  According to a Bloomberg article (here), the average daily volume in Florida East Coast options was 375 per day, but on April 30 it was 1,888 contracts, and then 4,722 contracts on May 2.  The most active options the day before the deal were the May 80s, which would expire in a bit more than two weeks and were fairly deep out of the money -- until the announcement, of course.  Insider trading, perhaps?  Time (and the SEC) will tell.

Meanwhile, in another insider trading case, Credit Suisse investment banker Hafiz Naseem was released on $1 million bail while he faces charges of tipping a Pakistani banker about pending deals that garnered over $7 million in profits.  A man identified as the tippee denied that Naseem gave him any inside information, saying that he only received "generic" information, whatever that means.  A Sharewatch story (here) discusses the bail grant. (ph)

Prosecutors Seek to Hold Credit Suisse Banker Due to Flight Risk

Hafiz Naseem, a Credit Suisse investment banker accused of conspiracy and twenty-five counts of securities fraud for allegedly tipping a senior banking official at a Pakistani bank, may be forced to stay in jail for a while.  According to a story on Sharewatch (here), federal prosecutors have asked that Naseem be detained because he is a flight risk with few ties to the United States.  Naseem's attorney argued that he has a wife and two children in the U.S., one of whom faces surgery in the near future, and asked for a $1 million bail.  One item that came out at the hearing is that Naseem returned from a trip to his native Pakistan just a couple days before his arrest, and after his arrest he told an investigator, "One thing you guys should know is had I been guilty, I would have never come back."  Perhaps not the smartest thing to say because it arguably indicates that he could flee the country.  Moreover, his return may be more a sign that he thought he was getting away with tipping rather than proof that he committed no crime.  Leaving the U.S. would have cut him off from his position with Credit Suisse and the source of his information if he was in fact tipping.

The criminal complaint (available below) is interesting because it does not include as separate securities fraud counts any of the options trading in TXU that generated so much of the alleged proceeds, almost $5 million, from the tips to the unnamed Pakistani banker.  The SEC complaint (here) that alleges a 10b-5 violation based on the TXU options trading was filed in the Northern District of Illinois, while the criminal complaint is in the Southern District of New York and only alleges violations based on stock trades in companies other than TXU.  One reason for not charging the TXU options purchases in the criminal case may be a lack of jurisdiction in New York because the transactions occurred through foreign brokers and the trades were executed through the Chicago Board of Options Exchange (CBOE).  The TXU options transactions can be charged as part of a broad criminal conspiracy because jurisdiction is permissible in any district in which an overt act occurred, and the stock trades alleged as part of the conspiracy were executed through the New York Stock Exchange. 

Another interesting question is whether prosecutors will be able to extradite the unnamed Pakistani banker on insider trading charges.  A quick check shows that the extradition treaty that governs is the U.S.-United Kingdom extradition treaty of 1931, adopted at a time when Pakistan was a British colony.  Under Article 3 of the Treaty (here), the following offenses -- which can be based on aiding and abetting -- may reach insider trading:

17. Fraud by a bailee, banker, agent, factor, trustee, director, member, or public officer of any company, or fraudulent conversion.

18. Obtaining money, valuable security, or goods, by false pretences; receiving any money, valuable security, or other property, knowing the same to have been stolen or unlawfully obtained.

Whether insider trading can fit into these provisions to meet the dual criminality requirement will be one issue, and the state of U.S.-Pakistani relations could well affect the decision.  Whether the banker will ever set foot in the United States is certainly an open question. (ph)

Download us_v_naseem_complaint_may_3_2007.pdf

Credit Suisse Investment Banker Charged With Insider Trading

Federal prosecutors and the SEC filed criminal and civil insider trading charges against Hafiz Naseem, who worked in the Global Energy Group at Credit Suisse.  Naseem is accused of tipping an unnamed Pakistani banker about the impending buy-out of TXU by private equity funds in early March 2007.  In addition, he is accused of tipping the banker about a number of other deals in which Credit Suisse acted as an investment adviser.  An SEC press release (here) states:

According to the SEC's complaint, after receiving the insider information from Naseem, the Pakistani banker purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and made profits of approximately $5 million following public announcement of the buyout.

The SEC's complaint further alleges that Naseem also divulged pending, but unannounced, business combinations and deals involving eight other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The complaint notes that Credit Suisse served as an investment banker or financial advisor in all of these deals, and Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. The complaint alleges that the Pakistani banker also purchased securities in those companies in advance of public merger announcements, obtaining additional profits of more than $2.4 million.

Nothing like trying to cover your tracks by using your office telephone to make the tips.  The SEC initially filed a complaint against "unknown purchasers" because of the use of overseas accounts to buy TXU options, so it needed to move quickly before the money left the country, never to be seen again.  The criminal complaint filed against Naseem charges him with one count of conspiracy and twenty-five counts of securities fraud.  A Reuters story (here) discusses the criminal charges. (ph)

Options Explosion in Dow Jones

The surprise $5 billion bid by Rupert Murdoch's News Corp. for Dow Jones & Co. may not have been quite as surprising to some who bought call options on the publisher of the Wall Street Journal before the announcement.  In a continuing refrain when large offers are made for companies, trading in the options spiked in the days before the information became public, netting some "lucky" traders outsized profits.  In this case, a Bloomberg story (here) notes that the average volume in Dow Jones call options in the month before the bid was a bit more than 300 per day, but on April 25, four trading days before the announcement, the volume was over 3,000 contracts; on April 30, the day before the bid emerged, the volume was over 4,300 contracts.  The article notes that all the 3,464 September 45 call options, which were well out of the money, that traded on April 30 were purchased in the last eleven minutes before the market closed at 4:00 p.m. EDT.  The price on these calls jumped from less than $.50 to a $12 close the next day, which is at least a 2,400% return in one day -- I won't even try to annualize it.  Timing in life is everything, but that's just way too much to not draw a lot of attention from the SEC and the U.S. Attorney's Office. (ph)

Possible Insider Trading Before Harman Deal -- Say It Ain't So!

This will come as a shock for those who follow the mergers and acquisitions area.  A Bloomberg story (here) notes that in the days before Harman International Industries announced it had agreed to be bought out by KKR and Goldman Sachs on April 26, trading in call option contracts on the company's shares spiked, to the tune of almost twenty (20) times the average daily volume.  On April 18, the volume of contracts was over 11,000 while the average daily volume over the previous twenty days was a shade under 600.  The volume in the May 105 contracts, which are the shortest term options available, led the way, and when Harman announced the deal, its stock shot up by $19 to $122 per share.  Imagine that -- trading in slightly out of the money call options are suddenly way in the money, leading to an outsized gain.  Look for the SEC insider trading case to be filed at some point, and perhaps even a criminal case, and on the chance any of the call option purchases came through an overseas account the filing will be sooner rather than later.  (ph)

Nacchio Convicted on 19 Counts of Insider Trading

Former Qwest CEO Joseph Nacchio was convicted on 19 counts of insider trading and acquitted on 23 other counts by a jury in Denver, Colorado.  According to a report from the Rocky Mountain News (here), the acquittals came on the counts during the earlier part of the five-month period charged in the indictment, and the convictions were for the later transactions, totaling $52 million in sales.  Under the Federal Sentencing Guidelines in effect for 2001, that amount of gain would result in a sentence of 57-71 months, but it could increase if the district court were to add any enhancements for abuse of a position of trust or more than minimal planning, which could take the range up to 8-10 years.  Of course, the Sentencing Guidelines are no longer mandatory, but judges frequently use them as the starting point for the determination of an appropriate sentence, and they give a good idea of the general range for a likely prison sentence. 

In light of the defense's decision to go with a scaled-down presentation and not deal with the whole "national security" information that was only available to Nacchio, a natural question will be whether the defense was over-confident that the government had not established its case.  Of course, the decision not to call Nacchio to testify will be second-guessed, but it is always difficult to say whether that would have made a difference, and if he had come across poorly, he could well have been convicted on all 42 counts and even faced an obstuction of justice enhancement to the sentence. (ph)

SEC Accuses GC of Insider Trading

The SEC filed a civil enforcement action accusing Kevin J. Heron of selling shares in Amkor Technology, Inc., while he served as the company's general counsel, ahead of corporate announcements.  Making it unlikely that he can offer an ignorance defense, Heron's responsibilities included serving as the chief insider trading compliance officer at the Arizona semiconductor packaging and testing company.  The SEC Litigation Release (here) states:

[F]rom October 2003 through June 2004, Heron engaged in a pattern of insider trading by trading in Amkor securities prior to five Amkor public announcements relating to financial results and company business transactions. During this period, Heron executed more than fifty illegal trades in Amkor stock and options on the basis of material, nonpublic information that Heron had learned as a result of his position as general counsel. Heron executed nearly all of these illegal trades while he and other company employees were subject to company blackout periods that prohibited them from trading in Amkor stock. Even though Heron was the person at Amkor who was responsible for administering these blackout periods, Heron routinely violated Amkor's blackout periods by trading on inside information. Heron's trading yielded profits, and losses avoided, totaling approximately $290,000.

Amkor terminated Heron, who worked out of the company's West Chester, Pennsylvania office, from his position in September 2005.  Heron was indicted in December 2005 on four counts of securities fraud (indictment here) in the Eastern District of Pennsylvania. (ph)

Nacchio Prosecution Heads to the Jury

The prosecution of former Qwest CEO Joseph Nacchio heads into its final phase, at least for the guilt portion of the proceedings, as the jury will receive the case and begin its deliberations on the 42 counts of insider trading.  The defense put on only three witness, adjuring having Nacchio testify or presenting any evidence of the secret national security contracts that had been touted before trial as a basis for his positive outlook on the company before its stock collapsed.  The Race to the Bottom blog (here) , sponsored by the University of Denver Sturm College of Law, has by far the best coverage of the trial, with outstanding summaries and analysis of the closing arguments.  The posts are especially good at providing perspective on how the lawyers for each side framed their cases that, in the end, revolve around a determination of what exactly was in Nacchio's mind in 2001 when he sold shares valued at over $100 million.

Like any prosecution, the outcome will cause one side or the other to be second-guessed.  If the jury convicts, then the decision not to put Nacchio on the witness stand will be the first strategic decision questioned.  Some will also ask whether a guilty verdict is more a judgment on a CEO who made an almost obscene amount of money while ordinary investors lost 98% of their stock value (measured from the peak, of course) and numerous employees lost jobs when Qwest had to make layoffs due to financial problems exacerbated by accounting problems.  Nacchio sought a change of venue before trial because he claimed that he was the most vilified man in Denver -- something former Broncos QB Jake Plummer might argue.  If the jury returns a not guilty verdict, then the government's strategy of charging a narrow insider trading case without any "smoking gun" evidence of what was in Nacchio's mind will call into question whether the government was motivated by a desire to bring another high-profile CEO prosecution based on shaky evidence for the sake of the headlines.  The whole "criminalization of agency costs" discussion will be resurrected -- although that's not dependent on a not guilty verdict -- to question whether the decisions of executives should be the subject of criminal cases.  If the jury deadlocks and a mistrial is declared . . . well, maybe it's better not to think about that one right now. An AP story (here) discusses the case as it heads to the jury. (ph)

On to the Defense in the Nacchio Prosecution

The government rested its case-in-chief in the prosecution of former Qwest CEO Joseph Nacchio on insider trading charges related to his sales of over $100 million in stock in 2001, right before the shares went into a tailspin.  The defense now starts presenting its case, and there is a substantial controversy already about whether law professor and former University of Chicago Law School dean Daniel Fischel will be allowed to testify as an expert regarding whether the sales were based on material nonpublic information.  The government filed a motion to exclude him from testifying, and if the size of the brief is a measure of the potential importance of the witness, then the sixty-page filing (available below) means Fischel could be quite helpful to Nacchio.  The government argues that the defense did not comply with the expert disclosure rules under Federal Rule of Criminal Procedure 16, and more importantly that Fischel's opinions do not qualify as permissible testimony from an expert because he will simply be restating facts that are ultimately up to the jury to decide, giving only his interpretation.  The defense report on Fischel's opinions (available below) states he will testify that "the economic evidence is not consistent with the Government's allegation that Mr.Nacchio's stock sales during the first two quarters of 2001 . . . were made on the basis of material nonpublic information."  Instead, according to Fischel, the transactions were consistent with Nacchio's stock sales in other periods.

Exclusion of a defense expert can be dangerous because this is the type of issue that can lead to a reversal of a conviction if an appellate court determines that the testimony was admissible.  To this point, the judge has kept the parties on a short leash, prohibiting the government from questioning a witness about Nacchio's transactions in 2002 because it was outside the time frame of the indictment.  While Fischel is well pedigreed in the law and economics field, the judge may well keep his testimony very close to economic principles and away from broad conclusions about Nacchio's intent.  If Fischel is allowed to testify, look for lots of objections from the prosecutors.

The other issue facing the defense is whether it will call Nacchio as a witness.  One aspect of the defense is that Nacchio knew about top-secret national security contracts that others in Qwest's management were not privy to, so he did not sell the shares because he anticipated a decline in the stock price but rather only wanted to diversify his finances while believing good things were on the horizon.  To establish that defense, it may well be that Nacchio will have to testify because it puts his state of mind at the time of the sales directly at issue, and he's the only one who can say what he knew.  The defense could opt not to call Nacchio, but as happened in the trial of I. Lewis Libby, it risks not having any of the evidence of the secret contracts admitted to bolster the claim that he sold for reasons other than the problems with Qwest's deteriorating business -- problems that came to light the following year, leading to a collapse of the stock price.  Like most white collar crime cases, the decision to put the defendant on the witness stand depends on a number of factors, many unknowable to the defense lawyers, and whether the decision was a good or bad one ultimately awaits the jury's verdict.  (ph)

Download government_motion_fischel_testimony_april_3_2007.pdf

Download fischel_expert_testimony_report.pdf

Former CFO Settles SEC Insider Trading Case

The SEC is unleashing its insider trading cases with near abandon, filing and settling a case against the former CFO of a company who was working there as a consultant when he got wind of an impending takeover.  Melvyn C. Goldstein was CFO of Del Laboratories, Inc. until he retired in 1997, and he returned at the end of the quarters to help out the finance department (see SEC complaint here).  In 2004, he figured out that Del was in the process of being acquired by another company, and he bought shares a week before the announcement, realizing a $38,000 profit.  As part of the settlement, he will disgorge his profits and pay a one-time penalty plus interest, totaling $81,498.31, according to the Litigation Release (here).  The SEC Enforcement Division's current push on insider trading cases means that they will pursue even the small ones. (ph)

Two Former CEOs Head to Trial

Two former CEOs will be headed to court in March to face charges related to their tenure at the top of large, publicly-traded companies.  First, Lord Conrad Black, former CEO and controlling shareholder of newspaper publisher Hollinger International, Inc. -- now the Sun-Times Media Group -- faces charges along with three former company executives related to looting the company.  The indictment (here) alleges mail and wire fraud, money laundering, and perhaps most ominously for Lord Black, RICO related to a series of deals in which he received substantial payments that the government alleges essentially stolen from the company.  The trial is set to start on March 14 in U.S. District Court in Chicago, and may last up to three months.  A Bloomberg story (here) provides a good overview of the case.

Out in Denver, former Qwest CEO Joseph Nacchio faces 42 counts of insider trading related to his sales of company stock that netted him over $100 million shortly before the share price collapsed.  While Qwest had significant accounting problems, federal prosecutors brought an insider trading case rather than a broader securities fraud case of the type seen in the Enron and WorldCom prosecutions.  The allegations against Nacchio focus on his knowledge that Qwest's financials were deteriorating over the five months of 2001 when he sold the shares.  Insider trading charges will avoid much of the accounting minutiae that has bogged down other trials.  One aspect of the defense has been the claim that Nacchio was privy to secret intelligence contracts that could bolster Qwest's revenue, and there has been an ongoing issue with discovery under the Classified Information Procedures Act, as discussed in a Denver Post story (here).  Like most securities fraud cases, including insider trading prosecutions, the issues in the trial set to start March 19 in the U.S. District Court in Denver revolve around Nacchio's intent, whether his trading was motivated by knowledge of impending financial problems at Qwest, so that he sold to avoid substantial losses. (ph)

Charges Against Four Related to Collapse of Generic Drugmaker

Able Laboratories, Inc., which made generic drugs, collapsed in 2005 due to improper manufacturing procedures at its New Jersey facility, and now a former vice president and three former chemists at the company have been charged.  The three chemists agreed to  plead guilty to conspiracy to distribute adulterated and misbranded drugs, while Shashikant C Shah, who was Vice President of Quality Control, Quality Assurance and Regulatory Affairs, entered his plea to conspiracy to commit insider trading and selling the adulterated/misbranded drugs.  The SEC also filed a civil insider trading case against Shah, and its Litigation Release (here) describes his trading:

The Commission's complaint alleges that on eight separate occasions from August 2003 through December 2004, Shah acquired an aggregate of 58,000 shares of Able's common stock by exercising employee stock options, and in each case sold the securities either immediately thereafter or within a few days. According to the complaint, at the time he engaged in these transactions, Shah was aware that Able was concealing from the U.S. Food and Drug Administration (FDA) problems with the quality control testing of Able products that resulted in the public release of drugs failing to meet established quality control standards. Shah reaped $909,000 in ill-gotten gains as a result of his unlawful trading. In May 2005, Able's common stock price fell more than $18 per share, or 75%, in one trading day, after Able discovered faulty testing practices of the type Shah had known about, and the company suspended all product shipments. Able's stock price continued to fall in the ensuing months, and the company eventually declared bankruptcy in July 2005, selling substantially all of its assets five months later.

Prior to its collapse, Able Laboratories employed 500 people and manufactured generic drugs to treat cardiac and psychiatric problems. (ph)

Insider Trading Smackdown

Having been roundly criticized on Capitol Hill for perceived softness on insider trading, the SEC and U.S. Attorney's Office for the Southern District of New York announced a set of indictments and civil fraud charges related to two insider trading schemes, involving a total of thirteen defendants, that allegedly netted over $8 million in total profits.  The trading involved tipping from insiders at securities firms, including information from an attorney at Morgan Stanley's compliance office -- the very place at the firm charged with preventing the misuse of confidential information.  The Morgan Stanley trading involved information about pending corporate deals in 2004 and 2005, and the lawyer, Randi Collotta, was charged along with her husband, Christopher, who is also a lawyer.  The other set of trading involved tipping by Mitchel Guttenberg, an executive in the institutional client department at UBS, who sold information about stock analyst upgrades and downgrades before their announcement.  A press release (here) from the Southern District of New York prosecutors provides a handy table listing the various conspiracy and securities fraud charges, and four defendants have pleaded guilty.  Nothing quite gets the attention of Wall Street -- and Congress -- like a good insider trading saga, and this one will certainly draw notice with two major investment firms involved. (ph)

Hacking the News for Fun and Profit

The SEC brought an emergency action against a Hong Kong company, Blue Bottle Ltd., and its named owner, Matthew C. Stokes, for alleged insider trading.  The SEC's complaint (here) asserts that Stokes (or others) obtained advanced information about company announcements by hacking into computer networks to view press releases and other documents shortly before the information was released into the market.  They are accused of trading in advance of the information by buying or shorting the securities of twelve companies to take advantage of the effect of the news on the stock prices, reaping profits of approximately $2.7 million.  The trading took place in January and February 2007, and it appears that Stokes is only a front name on the account.  The SEC Litigation Release (here) describes the most lucrative trading before the release of negative earnings news:

[W]ith respect to the defendants' trading in Symantec, the complaint alleges that on January 12, 2007 at approximately 1:03 p.m. EST, the defendants began buying 10,000 SYMC Jan07 20 put contracts, which represented 20 percent of the total trading in that security for the day. Those contracts were out-of-the money when purchased. Later that same day, at approximately 1:37 p.m. EST, the defendants began buying 500 SYMC Jan07 22.5 put contracts, which represented 41 percent of the total trading in that security for the day. All of the put contracts were to expire on January 20, 2007. Essentially, buying the put options was a bet by the defendants that the price of Symantec stock would decrease. The Commission further alleges that on the next trading day, January 16, 2007, at 7:48 a.m. EST, Symantec issued a downward revision of its third quarter 2007 earnings and revenue forecast. Shortly following Symantec's announcement, the defendants began selling the put contracts, amassing a profit of $1,030,471.

Not a bad profit on an investment made for only a couple days, at most. From the SEC complaint, it appears that approximately $1.6 million is still in the U.S., while about $1 million has joined Elvis in leaving the building.  The Commission likely moved now to keep the money here, and will have to continue its investigation of the source of the well-timed trades through civil discovery.  This kind of trading is sure to draw the interest of the Department of Justice. The U.S. District Court for the Southern District of New York froze Blue Bottle's assets and ordered a hearing for March 7, although any individuals who might want to claim the money are unlikely to show up and risk an immediate arrest on criminal charges. (ph)

Brazilians Settle SEC Insider Trading Case

Just in time for the end of Carnival, two Brazilians settled an SEC insider trading civil suit arising from purchases in the target of an impending tender offer.  The defendants are Luiz Gonzaga Murat was the chief financial officer and investor relations director at Sadia S.A., a Sao Paulo frozen food company, and Alexandre Ponzio De Azevedo, who formerly worked for ABN AMRO's Brazilian affiliate.  Sadia planned a tender offer for Perdigão S.A., another Brazilian company, and ABN AMRO's investment banking unit advised on the deal.  According to the SEC's Litigation Release (here):

[O]n April 7, 2006, representatives of an investment bank met with Murat and another Sadia executive to propose that Sadia make a tender offer for Perdigão. According to the complaint, Murat proceeded to purchase American Depositary Shares ("ADSs") of Perdigão both later the same day and subsequently on June 29, 2006, on the basis of material, nonpublic information concerning the proposed acquisition, and in breach of a duty of trust and confidence he owed to Sadia. The complaint alleges that Murat's holdings totaled 45,900 ADSs of Perdigão by the time Sadia announced the tender offer. On July 17, 2006, the price of Perdigão ADSs increased to $24.50, up $4.25 (21%) from the previous closing price. According to the complaint, Murat had imputed illicit profits of $180,404 from his unlawful trading.

The Commission's complaint against Azevedo alleges that he learned of the possible tender offer on April 11, 2006, in his capacity as an employee of ABN AMRO assigned to the tender offer financing team, and that ABN AMRO later placed Perdigão on a list of securities in which ABN AMRO employees could not trade. According to the complaint, Azevedo subsequently purchased 14,000 ADSs of Perdigão on June 20, 2006, on the basis of material, nonpublic information concerning the proposed acquisition, and in breach of a duty of trust and confidence he owed to ABN AMRO. Azevedo sold 10,500 ADSs on July 17, 2006, one day after Sadia had publicly announced its tender offer for Perdigão. According to the complaint, Azevedo realized illicit profits of $52,290 on the 10,500 ADSs he sold on July 17 and had imputed profits of $14,875 on his remaining 3,500 ADSs.

Murat agreed to pay $184,028 in disgorgement and a civil penalty of $180,404, while Azevedo will pay $68,215.45 and a civil penalty of $67,165. 

An interesting aspect of the case is that neither defendant ever set foot in the United States in connection with the transaction, and none of their trading involved an American company or even any communications that passed through the U.S.  The jurisdictional hook is the securities of each company, which are traded on the New York Stock Exchange as ADS.  Under Section 10(b) of the Securities Exchange Act, the general antifraud prohibition applies to any person who "directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange . . . ."  The fact that the securities of the target trade on the NYSE brings the case under the Act, although it is a fair question whether conduct wholly outside the United States with only a tangential connection to this country should be subject to a civil enforcement action by the SEC.  The trades were placed in Brazil, and the companies were incorporated and operated there, but the transaction ultimately occurred in New York, bringing it into the SEC's cross-hairs.  The case shows the long arm of the insider trading prohibition. (ph)

The Family That Trades on Inside Information Together Goes to Jail Together

Federal prosecutors and the SEC filed criminal and civil insider trading charges against a father, two of his sons, and a family friend for transactions in the securities of the company where the father was an executive and later in companies retaining the accounting firms of one son and the friend.  The defendants in the criminal case, who entered guilty pleas, are Zvi Rosenthal, who was a vice president of Taro Pharmaceuticals Industries, Inc., his sons Amir and Ayal, and Amir's childhood friend, David Heyman.  The SEC suit also alleges insider trading by Oren Rosenthal, Zvi's third son, Amir's father-in-law, and Amir's supervisor.  Ayal worked at PricewaterhouseCoopers, and Heyman worked at Ernst & Young.  They admitted tipping Amir about pending mergers before the public announcement of the transactions, and Amir in turn tipped his supervisor.  The SEC Litigation Release (here) describes the insider trading at Taro Pharmaceuticals:

In its complaint, the Commission alleged that Zvi Rosenthal, a Vice President at Taro, abused his position at Taro by systematically stealing material, nonpublic information concerning 13 separate company announcements, including earnings results and pending generic drug approvals by the Food and Drug Administration. Zvi then traded on the information and passed it on to his family members who then traded in Taro stock and options. Typically, Zvi provided information to his son, Amir Rosenthal who traded in personal accounts he controlled, and in the account of the family- owned and controlled hedge fund, Aragon Partners, LP.

The Commission alleged that the gains and losses avoided total $3.7 million over a period from 2001 to 2005.  In addition to managing the family hedge fund -- which seems to be another way of saying he managed the family's investments -- a press release issued by the U.S. Attorney's Office for the Eastern District of New York (here) states that Amir is an attorney in New York City.  According to court records, there is an attorney with the same name admitted to practice in New York in 2006 after graduating from a New York area law school. An AP story (here) states that Zvi Rosenthal has a prior fraud conviction, which means his sentence may be higher if the court applies the Federal Sentencing Guidelines' criminal history provisions. (ph)