by T. GormanPosted on Posted in SECActions

Insider trading and backdated options dominated securities enforcement again this week, continuing the trends which have been going on for weeks.

Insider Trading

Insider trading investigations and enforcement continued to preoccupy securities regulators both here and abroad.

A key defendant in SEC v. Guttenberg, Civil Action No. 07CV 1774 (S.D.N.Y.) settled with the SEC. Defendant Andrew A. Srebnik, a former registered representative at Bear, Stearns & Co. consented to the entry of a statutory injunction. In addition Mr. Srebnik consented to the entry of an order requiring him to pay $54,730 in disgorgement, $8,374 in prejudgment interest and a civil penalty equal to the amount of the disgorgement. In a related administrative proceeding, Mr. Srebnik consented to the entry of an order barring him from associating with any broker dealer or investment advisor. The Commission’s Litigation Release is here.

Guttenberg has been called perhaps the most significant insider trading case brought by the SEC since the late 1980’s when a series of blockbuster cases was brought against the likes of Ivan Boesky and others. Fourteen individuals and entities were named as defendants in the SEC case, while thirteen were named in the related criminal cases. Most of the defendants in those cases are currently litigating the claims.

According to a Form 10Q filed by Phoenix based First Solar, Inc., the Financial Industry Regulatory Authority is continuing an insider trading probe with respect to trading in its shares in advance of a July 9, 2007 announcement regarding certain major contracts. Following the announcement the share price of the company shot up about 13%. This is the second request for information from the self regulatory organization.

Regulators abroad are also continuing to be concerned with insider trading. For example, securities regulators in New Guinea are conducting an insider trading probe regarding the shares of Credit Corp. whose shares are traded on the Port Moresby Exchange. The probe began after the share price rose 251% in a short period of time. This is reportedly the first formal inquiry for the regulator. At the same time, securities regulators in Singapore fined Ms. Angela Yeo Yoke Foong, a senior executive with Human Resources of Systems Access Ltd., $50,000 for insider trading.

Option Backdating

Option backdating has been a consistent preoccupation of securities regulators and in private litigation for months. That trend continued last week.

A shareholder suit against Apple based on backdated options was dismissed last week. In making the ruling, Judge Jeremy Fogel of Northern District of California reviewed the stock price and its performance and was unable to conclude that the shareholders had suffered any injury. The Court did permit shareholders to replead.

In contrast, a shareholder suit based on backdated options against the Monster World Wide founder Andrew J. McKelvey was allowed to continue. Judge Jed S. Rakoff, sitting in the Southern District of New York denied a motion to dismiss the amended complaint.

Finally, the SEC issued a closing letter to VeriSign, ending its probe of the issuer’s options backdating practices. This is one of several such letters the SEC has issued recently, signaling that the agency is cleaning up its inventory of these cases which have been going on for months. This is not to say that additional cases will not be brought – clearly they will. But, it does mean that there may be light at the end of the regulatory tunnel for those caught up in this on-going scandal.

by T. GormanPosted on Posted in SECActions

A variation of the pillow talk cases is the family trading ring. These cases involve various family members coming together in a new family activity: insider trading.

SEC v. Aragon Capital Management, Case No. 1: 07-cv-00919-FM (S.D.N.Y. Feb 13, 2007) is typical of this group of cases, although the trading ring here is more expansive. Trading in this case is alleged to have centered on a family group and the family hedge fund. In this case, which is currently being litigated, the SEC claims that a father and his sons engaged in an insider trading scheme which to date has yielded about $4 million in illegal profits.

The scheme involves the following family members who, according to the complaint, all have successful careers aside from the claimed family trading ring:

• the father, a senior manager at Taro Pharmaceuticals;
• a son who is an attorney at a large NYC law firm;
• a son who formerly was with PWC; and
• a son who is currently an attorney with an LA law firm.

In addition, the scheme is alleged to have expanded to include other relatives and friends.

In the basic scheme, the father is alleged to have obtained material non-public information from his employment at Taro. The sons were then tipped and they in turn tipped others. The basic scheme is thus similar to those involved in the pillow talk cases. Here, however the scheme kept expanding as various family members tipped others. To date, one friend of the family has settled while the other defendants are litigating the claims.

A second case involving fathers and sons is SEC v. Smith, Civil Action No. 07-CV-8394 (S.D.N.Y. Filed September 27, 2007). This case, which is perhaps a less expansive version of Aargon Capital, where trading proliferated outside the family circle, involved a father and son who were both securities professionals. Here, however it is the son who is alleged to have obtained inside information from his employment at Bank of America Securities, rather than the father. According to the SEC, the son obtained material non-public information about three transactions and furnished it to his father. The father, in turn, traded while in possession of the inside information.

Both the father and son agreed to settle, consenting to the entry of statutory injunctions and the entry of an order making each jointly and severally liable for the disgorgement of all illegal profits along with prejudgment interest. In addition, the father agreed to the entry of an order requiring him to pay a penalty equal to twice the amount of the disgorgement, while the son agreed to pay a penalty equal to that amount.

Another variation of this theme is a daughter-father team through the daughter’s husband. In SEC v. Dearmin, Civil Action No. 1:07-CV-01089 (D.D.C. Filed June 18, 2007), the SEC alleged that the husband, a former CEO of Ionatron, learned that the company was about to be acquired by U.S. Home & Garden. After the husband told his wife about the pending deal, she tipped her business partner father, who purchased Ionatron shares prior to the announcement. The father sold the shares post-announcement at a substantial profit.

The daughter-father insider trading team both agreed to settle with the SEC, consenting to entries of statutory injunctions. The father also consented to the entry of an order requiring the payment of $9,123 in disgorgement, $1,714 in prejudgment interest and a penalty of $9,323. The daughter consented to the entry of an order requiring that she pay $13,178 in disgorgement, $2,390 in prejudgment interest and $13,178 as a penalty. The husband, in similar fashion to several of the spouse cases, was not charged.

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