Thursday, June 28, 2007

Three Former Executives Plead to Insider Trading in Their Company

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)

June 28, 2007 in Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Thursday, June 14, 2007

Former Law Firm Managing Partner Settles Insider Trading Case

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)

June 14, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, June 8, 2007

Nacchio Takes Another Shot at a Change of Venue

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)

June 8, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Thursday, May 31, 2007

Barclays Settles SEC Insider Trading Case

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)

May 31, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, May 27, 2007

No Insider Trading Is Too Small for the SEC These Days

The SEC's crackdown on insider trading is bringing in some fairly small cases.  In one case, the two defendants learned about the buy-out of Serologicals and the next day bought 500 and 400 shares.  When the deal was announced the following day, the stock jumped 34%, and the defendants made $3,785 and $2,897.  Not a bad gain on a one-day investment, but still fairly small potatoes for the SEC.  Nevertheless, the defendants settled a civil enforcement action by disgorging their profits and paying a one-time penalty plus interest, for a total of a bit less than $14,000.  The SEC Litigation Release (here) discusses the filing. In a second case, the Commission settled an insider trading claim for trading by the son of former Ohio State University business professor Roger Blackwell, who was convicted on insider trading charges and sentenced to six years (see earlier post here).  The son made $4,317.01 based on a tip from his father, and will disgorge his profits plus pay the usual one-time penalty plus interest (Litigation Release here).  The SEC's push on insider trading seems to know no minimum, so beware. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (1)

Insider Trading Investigation of Sallie Mae Chairman

The House Education & Labor Committee released information that representatives from student loan giant Sallie Mae met with the Office of Management & Budget in December 2006, less than two months before President Bush's budget called for a significant cut in support for student loans that caused a significant drop in the company's shares.  Three days before the President announced the budget proposal, Sallie Mae's chairman sold 400,000 shares, about 1/3 of his holdings, over a two-day period (Form 4 here).  If the sale had taken place after the budget announcement, it would have resulted in about $1.4 million less in proceeds.  A Washington Post article (here) notes that a Sallie Mae representative asserted that the transaction was coincidental and there was no prior notice of what the budget proposal entailed; the chairman was not involved in the meeting with OMB.  Sallie Mae is being taken private in a $25 billion transaction, and has been subject to heavy criticism from Democrats on Capitol Hill.  The Post article notes that the SEC is looking into the trades. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Wednesday, May 23, 2007

Government Seeks to Freeze Nacchio's Assets

A Denver Post story (here) discusses a recent filing by the government seeking a temporary freeze of the assets of former Qwest CEO Joseph Nacchio, who was convicted of nineteen counts of insider trading from stock sales in 2001.  According to the filing by federal prosecutors, Nacchio transferred assets in 2002 to his wife, and even considered divorcing her to shield money and property from claims in the burgeoning investigation of Qwest's accounting.  The nineteen counts of conviction -- the jury acquitted on 23 other insider trading charges -- can be the basis for a criminal asset forfeiture order for up to $52 million.  If the court orders the forfeiture, that would permit the government to seize proceeds from the trading and any substitute assets to satisfy the judgment.  Nacchio is scheduled to be sentenced on July 27, and the asset freeze, if granted, would allow federal prosecutors to begin the process of identifying assets and preventing any transfers before they can execute on the property to satisfy a forfeiture order.  (ph)

May 23, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, May 18, 2007

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)

May 18, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Friday, May 11, 2007

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)

May 11, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (1)

Wednesday, May 9, 2007

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)

May 9, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

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)

May 9, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Saturday, May 5, 2007

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

May 5, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, May 4, 2007

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)

May 4, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (1) | TrackBack (0)

Thursday, May 3, 2007

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)

May 3, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Friday, April 20, 2007

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)

April 20, 2007 in Insider Trading, Verdict | Permalink | Comments (0) | TrackBack (0)

Thursday, April 19, 2007

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)

April 19, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, April 12, 2007

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)

April 12, 2007 in Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Thursday, April 5, 2007

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

April 5, 2007 in Insider Trading, Prosecutions | Permalink | Comments (1) | TrackBack (0)

Thursday, March 15, 2007

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)

March 15, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (1)

Saturday, March 10, 2007

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)

March 10, 2007 in Fraud, Insider Trading, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)