Naseem and Nacchio: The Beginning of One Era and the End of Another

Insider trading continues to be the flavor of the day, as both the SEC and DOJ continue to focus on the issue along with regulators around the globe. Two high profile securities fraud cases currently moving forward may represent the beginning of one period or phase in enforcement and the end of another.

Naseem begins

In Manhattan, jury selection began yesterday in U.S. v. Naseem, Case No. 1:07-mj-UA-1 (S.D.N.Y. May 3, 2007). Mr. Naseem, an investment banker at Credit Suisse, was originally charged with illegally tipping a Pakistani banker about the takeover of TXU led by KKR which was announced on February 26, 2007. Prior to that announcement the government claims that the tippee purchased 6,700 call options which were later sold at a profit of $5 million. Mr. Naseem was initially charged with having tipped eight others. The inside information came from his employment at Credit Suisse, which was a financial advisor to TXU.

Last month a superseding indictment was filed in this case. The new indictment added three counts relating to trading in shares of Caremark and TXU options. According to this indictment, the scheme has yielded total trading proceeds of more than $9 million and profits of over $7.5 million.

The Naseem case is related to the action brought by the SEC captioned SEC v. One or More Unknown Option Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill March 2, 2007) which is discussed here. The SEC’s complaint has been amended twice since filing. That case is currently in discovery.

Naseem is the first of the large insider trading cases filed by the SEC and DOJ this year to go to trial. As discussed earlier, these cases were filed quickly in an effort to freeze at least part of the trading profits as the SEC successfully did in this case. At the same time, the speed with which the cases were brought precluded development of the usual factual record the SEC amasses through its extensive investigative powers.

Nacchio approaches the end

As the Naseem case begins, another huge case heads for what may be the final round. Next week, the Tenth Circuit Court of Appeals will hear the appeal of Joe Nacchio, former chairman of Quest Communications. Mr. Nacchio was convicted last April on 19 counts of insider trading and securities fraud. He was sentenced to six years in prison, ordered to forfeit $52 million in ill-gotten gains and pay a $19 million fine. As has been widely reported, there has been extensive briefing on this case. While the Supreme Court could be requested to review the decision by the Circuit Court, in probability this will be the end of Mr. Nacchio’s case, unless he prevails.

Nacchio and Naseem may thus signal the end of the Enron era mega securities fraud case and the beginning of a renewed period of insider trading enforcement.