SEC Secures Split Decision in Insider Trading Trial
The SEC received a split decision from a jury in an insider trading case that spawned three separate enforcement actions and ten different traders. The jury found in favor of the Commission and against one first tier tippee – one who obtained his information directly from the tipper – and against the agency and in favor of a second tier tippee. SEC v. Melvin, Civil Action No. 1:12-cv-02948 (N.D. Ga. Verdict entered Fe. 17, 2017).
The action centered on the tender offer by French pharmaceutical company Sanofi-Aventis for Chattem, Inc., announced on December 21, 2009. The offer was for $93.50 per share, a 32.60% premium over the closing share price the day before the announcement. In November 2009 the Chattem board members were informed that Sanofi had a serious interest in acquiring the company. The next month one of its board members consulted with his personal accountant, defendant Thomas D. Melvin, Jr., about 50,000 Chattem options he held that would be automatically exercised if there was a change in the ownership of the company.
After learning about the deal Mr. Melvin is alleged to have told four individuals about the pending deal. Each traded and was named in one of the three enforcement actions that emanated from the initial tips. Mr. Melvin is alleged to have tipped: Charles Cain, his longtime broker, who purchased 1,500 shares of Chattem which yielded $36,680.10 in trading profits following the announcement; Joel C. Jenks, a close friend, who purchased 1,000 shares of Chattem which yielded $24,337.43 in trading profits; R. Jeffrey Rooks, his partner at the accounting firm who purchased $16,000 in Chattem shares, yielding trading profits after the announcement of $6,020.39 and was named as a defendant in a separate action; and C. Roan Barry, a close friend who purchased 1,700 shares which yielded $41,859.71 in trading profits following the announcement and was also named in a separate action.
Each person tipped by accountant Melvin is alleged to have tipped another: Mr. Cain told his friend, defendant Peter Doffing, named as a defendant in the Melvin case, and an unidentified individual; Mr. Doffling purchased out of the money call options which yielded trading profits of $378,979.32 following the deal announcement; the unidentified individual bought 250 shares which yielded $5,877.35 in illicit trading profits; Mr. Jenks is alleged to have tipped another unidentified individual who purchased call options which yielded trading profits of $38,802.71; Mr. Rooks tipped another unidentified individual who purchased 725 shares of stock which resulted in $12,461.75 in illicit trading profits; and Mr. Berry tipped Ashley J. Coots, a friend and neighbor who, in turn tipped Casey D. Jackson and another person. Mr. Coots purchased 540 shares of Chattem which resulted in $13,231.40 in illicit trading profits while Mr. Jackson bought 100 shares which yielded $2,369.78 in trading profits; the other person tipped by Mr. Coots bought 165 shares yielding $4,128.63 in profits following the deal announcement.
The complaint against defendants Melvin, Cain, Jinks and Doffing alleged violations of Exchange Act Sections 10(b) and 14(e). The Melvin case went to trial. Prior to that time defendants Melvin and Cain settled. Each agreed to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Defendant Melvin also agreed to pay disgorgement, on a joint and several basis with Mr. Cain, of $36,991.20 along with prejudgment interest, and $28,840.75 on a joint and several basis with Mr. Jenks, also with prejudgment interest. In addition, Mr. Cain agreed to pay a penalty of $36,991.20.
Messrs. Jinks and Doffing went to trial. The jury returned a verdict in favor of Mr. Jinks and against Mr. Doffing.
See also SEC v. Coots, Civil Action No. 1:12-cv-02986 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Jackson, Civil Action No. 1:12-cv-02987 (N.D. Ga. Filed Aug. 28, 2012); SEC v. Rooks, Civil Action No. 1:12-cv-02988 (N.D. Ga. Filed Aug. 28, 2012). Defendants Berry, Coots, and Rooks settled with the Commission. Each consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Jackson also settled, consenting to the entry of an injunction based on Exchange Act Section 10(b). In addition, each agreed to pay disgorgement, prejudgment interest, and a penalty as follows: Mr. Barry, $55,091.51 and a penalty in the same amount; Mr. Coots $17,360.51 and a penalty of $13,231.80; Mr. Jackson $2,369.78 and a penalty of $1,184.89; and Mr. Rooks $18,482.14 and a penalty of $4,620.54. Mr. Rooks also agreed to be barred from appearing and practicing before the Commission as an accountant. His settlement reflects his cooperation with the Commission.