EFFECTIVELY MONITORING THE MARKETS FOR INSIDER TRADING
The FINRA-NYSE Regulation market supervision program established last August to help weed out insider trading seems to be working. In cooperation with the two SROs, the SEC filed three separate insider trading cases in three courts naming eleven defendants. The cases are based on two different takeovers.
Unlike other instances in which the SEC filed insider trading cases naming a large number of individuals as defendants, such as the blockbuster Guttenberg case, which named 14 defendants as discussed here, these cases are not based on serial insider trading rings. Rather, they involve a number of traders who are alleged to have obtained inside information from a variety of sources ranging from pillow talk arrangements to work, friends or simple theft. The disparate pattern of traders and information sources suggests that the new FINRA-NYSE Regulation supervision arrangement, discussed here, is very effective.
First, two settled actions were filed based on the acquisition of Safeco Corp., then a publicly-traded Seattle based insurance company, by Liberty Mutual. A third case based on this transaction is in litigation.
SEC v. Hipp, Case No. C09-0987 (W.D. Wash. Filed July 15, 2009) is a settled civil injunctive action brought against Math Hipp, Jr. The complaint alleges that Mr. Hipp misappropriated inside information about the transaction from his wife, the executive assistant to Safeco’s EVP of insurance operations. Specifically, the SEC claims that in the period before the public announcement Mr. Hipp learned that his wife was working late and on weekends, that representatives from another company were visiting her employer and that she was concerned people would lose their jobs although she declined to state the reason.
Over a period of several days prior to the public announcement, Mr. Hipp sold Safeco call options which netted him a profit, after the announcement of the deal, of over $118,000. Mr. Hipp settled the insider trading case by consenting to the entry of a permanent injunction and agreeing to disgorge his trading profits along with pre-judgment interest and pay a civil penalty equal to his trading profits. See also Lit. Rel. 21133 (July 15, 2009).
SEC v. Perez, Civil Action No. 6:09-cv-1225 (M.D. Fla. Filed July 15, 2009) is the second settled civil injunctive action based on the Safeco transaction. This case named as defendants Anthony Perez, then an investment banker at Goldman Sachs, and his brother Ian Perez. Goldman Sachs, retained to represent Safeco in a possible acquisition, assigned Anthony Perez to work on a deal for Safeco involving an unidentified company. Anthony, in turn, told his brother that Safeco would be acquired at a large premium. According to the complaint, Ian Perez bought call options in Safeco and another company to cover his trading. Following the announcement of the deal, the options netted him a profit of over $152,000. To settle the action, each defendant consented to the entry of a permanent injunction and of an order holding them jointly and severally liable for payment of disgorgement of the trading profits and pre-judgment interest. No penalty was imposed on Ian Perez based on his financial condition. Anthony Perez agreed to pay a financial penalty of $25,000 which was based on his financial condition. See also Lit. Rel. No. 21133 (July 15, 2009).
SEC v. Binette, Case No. 09:CV-30107 (D. Mass. Filed July 15, 2009) is the third insider trading action based on the Safeco transaction. The defendants in this case are Carl Binette and his uncle Peter Talbot, an assistant vice president at Hartford Investment Management Company. Mr. Talbot, according to the complaint, knew that Hartford was shopping for the acquisition of another insurance company. He opened a folder on the computer of another employee and saw a file which had Safeco’s latest Form 10-K and detailed spreadsheets listing Safeco’s investment assets and his company’s evaluation. Subsequently he noticed key company employees working long hours while refusing to discuss their work. He shared this information with his nephew and helped him open brokerage accounts using false information to trade Safeco options. Following the announcement of the transaction the options netted a profit of over $615,000. This case is in litigation. See also Lit. Rel. 21133 (July 15, 2009).
Second, the Commission filed a complaint naming six defendants based on the acquisition of Neff Corporation by Odyssey Investment Partners, LLC, a private equity investment firm. SEC v. Acord, Case No. 09-21977 (S.D. Fla. Filed July 15, 2009. This case is in litigation.
The complaint has three groups of defendants: (1) Kevan Acord, an attorney, and Philip Growney, an accountant, both of whom were tax consultants to Neff; (2) Alberto Perez, a person who worked in an office at Neff’s headquarters where he was a business associate and close friend of Neff’s CEO, and his brother Jose Perez; (3) Dr. Sebastian De La Maza, the father-in-law of Neff’s CEO, and Thomas Borell.
Group 1: Messrs. Acord and Growney did tax work for Neff during the transaction. At one point, the company authorized them to provide certain documents to Odyssey’s tax consultants and to answer any necessary questions. Later, Neff’s Director of Financial Reporting specifically told Philip Growney about the deal. Within one hour of that phone call, Mr. Acord bought 2,200 Neff shares. The next day he purchased additional shares. Following the deal announcement, Mr. Acord sold his shares for a profit of over $146,000. Defendant Growney also purchased shares which were sold following the deal announcement for a profit of just under $13,000.
Group 2: The Perez brothers are long time friends and business associates of Neff’s CEO and his two brothers. The men have a relationship dating back twenty years, according to the complaint. As a result of their close relationship, the Perez brothers had almost daily contact with Neff’s CEO. Several months before the deal, Neff’s CEO gave Alberto Perez and office in the headquarters building. While the deal was being negotiated, Alberto Perez had free access to the office building, including an office with the deal file.
Previously, the Perez brothers had run up a margin debt balance in their joint trading account of about $225,000. This slowed the trading activity of the brothers, according to the SEC. Against this backdrop two days after the due diligence teams arrived at Neff’s headquarters the Perezes’ joint account purchased 17,000 shares of Neff stock — the first purchase of Neff shares. Overall, the account acquired a total of 83,000 shares, in part with funds from liquidating other shares. Following the announcement the shares were exchanged netting a profit of $399,000,
Group 3: Dr. De La Maza’s daughter, Vivian Mas, was married to Neff’s CEO. The doctor and his wife had a close relationship with his daughter and her family, according to the complaint, and visited several times per week in addition to talking on the phone periodically. Vivian Mas learned about the deal from her husband. The SEC claims that through contacts with his daughter, the Doctor learned about the transaction and began purchasing Neff shares for the first time in three years. Prior to the transaction, he made fourteen purchases. Later, the shares were sold for $111,000, according to the complaint.
Finally, Mr. Borell is a long time friend of Jose Mas, a Neff director during the negotiations which led to the acquisition and a brother of Neff’s CEO. As a result of his close relationship with Jose Mas, Mr. Borell had access to inside information, according to the Commission. Although Mr. Borell had previously only purchased a small quantity of Neff stock, in the weeks prior to the acquisition announcement he repeatedly made large purchases. For example, during one five week period he purchased 300,000 shares at a cost of more than $1.3 million. During one nine day period he called his broker over 50 times and purchased an additional 171,894 shares. Subsequent to the announcement Mr. Borell sold his shares for a profit of over $974,000. See also Lit. Rel. 21132 (July 15, 2009).