by T. GormanPosted on Posted in SECActions

Insider trading cases have been brought against corporate executives by the SEC and DOJ alleging misuse of corporate information in a variety of contexts. Frequently, the cases are based on trading ahead of earnings or product announcements. In other instances the trading was related to a proposed corporate take over. These cases include:

SEC v. Kopsky, Civil Action No. 4:07-CV-0379 (E.D. Mo. Filed Feb. 26, 2007). Here, defendant Ronald Davis, former Engineered Systems President, is alleged to have tipped his friend and broker Matthew Kopsky regarding future earnings announcements. According to the complaint, Mr. Kopsky was tipped in each of the first three quarters of 2003 about the results. In the third quarter, Mr. Kopsky purchased call options for the first time and invested over 90% of an IRA. When the company announced earnings that greatly exceeded expectations, the options yielded a 132% profit. Mr. Kopsky is also alleged to have traded for his accounts and friends. This case, in which Mr. Kopsky is alleged to have made over $276,000 in profits while his clients made over $169, 000, is in litigation.

SEC v. Cao, Case No. 2:06-cv-1269 DSF-RC (C.D. Ca.) involved three executives at Countrywide Financial. The defendants in this settled action learned that the third quarter earnings for 2004 would be seven cents below projections. Prior to the announcement, each defendant purchased options and sold Countrywide shares short. To resolve the action, each defendant consented to a statutory injunction and an order requiring the payment of disgorgement, a penalty equal to the amount of the disgorgement and the payment of prejudgment interest. In the related criminal case, U.S. v. Cao, 2:07-cr-598 (FMC) (C.D. Ca. Filed June 26, 2007), each defendant pled guilty to one count of securities fraud. The defendants are awaiting sentencing.

SEC v. Shah, Civil Action No. 2:07CV1075 (D.N.J. Filed March 8, 2007). Defendant Shah was the vice president of quality control assurance and regulatory affairs of Able Labs. On eight occasions he is alleged to have traded using employee options while in possession of material non-public information. In each instance, according to the complaint, the defendant was aware of problems with products that had been concealed from the FDA. Eventually Able Lab discovered the faulty testing practices that cause the difficulties and disclosed them. The share price dropped 75%. Mr. Shah avoided over $900,000 in losses by trading prior to the disclosures. The SEC’s cases was settled with a consent to a statutory injunction and an order requiring the payment of disgorgement, prejudgment interest and a penalty in an amount to be determined by the court. The defendant consented to the entry of an order baring him from being an officer or director of a public company for five years. Criminal charges were also filed. U.S. v. Shah, Case No. 2:07-cr-00198 (D.N.J. Filed March 8, 2007). There, defendant Shah pled guilty to one count of conspiracy to commit securities fraud and to the distribution of misbranded and adulterated drugs. He is awaiting sentencing. Five colleagues also pled guilty to one count of conspiracy to distribute misbranded and adulterated drug products and are also awaiting sentencing.

SEC v. Fontana, Case No. 01:07CV0195 (D.D.C. Filed June 19, 2007). Here, the complaint claims that the defendant corporate director learned from the Chairman of Sadia that the company would bid for Perdigao S.A. Subsequently, the defendant bought 18,000 ADRs. After the tender offer was announced, the board decided to revoke it. Prior to the announcement of that decision, Mr. Fontana sold his shares reaping a profit of over $139,000. To settle the action, the defendant consented to the entry of a statutory injunction and an order requiring him to pay disgorgement, prejudgment interest, a penalty equal to the disgorgement and a five year officer/director bar. Two related cases are SEC v. Murat, Case No. 1:07CV00381 (D.D.C. Filed Feb. 22, 2007) (defendant is former CFO of Sadia); and SEC v. Azevedo, Case No. 1:07CV00380 (D.D.C. Feb. 22, 2007) (defendant is an employee of Banco ABN). Both cases settled with the entry of statutory injunctions and orders requiring the payment of disgorgement, prejudgment interest and a penalty.

SEC v. Ericksen, Civil Action No. 3-07-CV-0254-N (N.D. Tex. Filed Feb. 6, 2007). This case was brought against the former Chairman of the Audit Committee of Magnum Hunter Resources. The complaint claims that the defendant, as a member of the board and audit committee, engaged in a search for a merger partner and negotiations with that potential partner. Defendant purchased call options, which were exercised shortly before the announcement. This case, which charges insider trading and filing late and incorrect trading reports, is in litigation.

Next: Attorneys

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.