SEC Charges Three Market Professionals With Insider Trading
The Commission brought an insider trading case against three market professions in two different firms, an analyst and two investment bankers. The three men were charged with repeatedly trading on inside information and variously benefiting from tipping each other either as a quid pro quo or with the expectation that they would enhance their opportunity to obtain a tip in the future. SEC v. Napodano, Civil Action No. 1:17-cv-06917 (N.D. Ill. Filed Sept. 26, 2017).
Named as defendants are Jason Napodano, the former head research analyst of Zacks Small Cap Research; Bilal Basrai, former head of the investment banking division of LBMZ Securities, Inc., a registered broker dealer; and Bryce Stirton, an employee of LBMZ’s investment banking division. Collectively the defendants generated trading profits of about $185,000.
Defendants traded on inside information they obtained, with one exception, through their employment:
Deal 1: Company A was a small cap biotech firm for which LBMZ provided sponsored research. Through this relationship defendants learned that the company had completed a licensing agreement for a Phase-2 ready drug. The public announcement of the deal was made on January 14, 2014. Each of the defendants purchased shares prior to the announcement and sold profitably after it.
Deal 2: Company B was a medical tech company that signed a financial advisory agreement with LBMZ in August 2014. The stock was on the firm’s restricted list in connection with a possible merger. When the merger did not close it was abandoned. Messrs. Basrai and Stirton received a personal benefit from tipping Mr. Napodano by “increasing the likelihood that Napodano would likewise share material, nonpublic information about his clients in the future, which he, in fact, did.” Before the public announcement of the deal termination the defendants sold short. After the announcement on November 26, 2014 each trader covered his position at a profit.
Deal 3: Company C was a pharmaceutical company client of Zacks. Mr. Napodano learned through the relationship that the firm was going to announce it had been approved for a listing on NASDAQ. Mr. Napodano called his two trading partners. By doing so he received a personal benefit by increasing the likelihood they would tip him in the future. Prior to the deal announcement each defendant purchased shares. Following the August 19, 2014 announcement the shares were sold at a profit.
Deal 4: Company D was a bio tech company that was conducting a public offering through a firm where Mr. Basrai had a friend. In return for a promise to maintain the confidentiality of the information, his friend told Mr. Basrai about the transaction. He failed to honor his promise. Mr. Basrai told Mr. Napodano, furnishing the information as a quid pro quo. Both men sold short and then covered their positions at a profit after the offering was announced on May 6, 2014.
In addition, the defendants traded in advance of the publication of Zacks research reports. Specifically, between August 2012 and June 2015 Mr. Napodano traded in advance of 42 research reports. Similarly, in early July 2014 an analyst who reported to Mr. Napodano told his two co-defendants that the first report on a clinical lab company was being issued. All three men purchased shares the day before the report was issued. The shares were sold at a profit after the report was issued the next day.
Finally, between August 2012 and June 2015 Mr. Napodano traded profitably in advance of the publication of 100 reports issued by Zachs. Each report contained one or more material misrepresentations or omissions. Each website report of Mr. Napodano represented that he had no position in the stock and no plans to initiate any position over the next 72 hours. Other reports contained a disclaimer that firm analysts were restricted from holding or trading securities in issuers they cover. Each time Mr. Napodano traded just prior to the issuance of the report the representations were false. The complaint alleges violations of Exchange Act Section 10(b).
To resolve the case Mr. Napodano agreed to pay disgorgement of $143,865.48, prejudgment interest and a penalty equal to the amount of the disgorgement. He also agreed to the entry of a penny stock bar. Mr. Basrai agreed to pay disgorgement of $39,668.37, prejudgment interest and a penalty equal to the amount of the disgorgement. Mr. Stirton agreed to pay disgorgement of $2,218.87, prejudgment interest and a penalty equal to the amount of his trading profits. Both investment bankers agreed to the entry of penny stock bars and to be barred from the securities business. Mr. Stirton has the right to reapply after five years. Both investment bankers were named as defendants in a parallel criminal action brought by the U.S. Attorney’s Office for the Northern District of Illinois. In a separate action LBMZ agreed to be censured and pay a $240,000 penalty based on a failure to supervise charge. See Lit. Rel. No. 23943 (Sept. 26, 2017).
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Seminar: Annual Private Funds Symposium, September 27, 2017, New York City, here
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