THE SEC CONTINUES THE WAR ON INSIDER TRADING
The battle with insider trading continues as the Commission considers its options in the high profile loss in the Mark Cuban insider trading case discussed here. SEC v. Leyva, Case No. 09 cv 1565 (S.D. Cal. Filed July 20, 2009) is an insider trading case brought against the former Director of Strategic Marketing Analysis at Qualcomm, Inc. The complaint claims that Mr. Leyva made over $34,000 in trading profits by purchasing options just prior to the announcement of a new licensing agreement between Qualcomm and Nokia Corp. stemming from the settlement of a long running legal dispute between the companies.
The licensing agreement and settlement between Qualcomm and Nokia on which this insider trading case is based stems from the resolution of a legal battle which began in 2005, two years before a licensing agreement between the companies was set to expire. The battle included numerous cases filed in different jurisdictions around the globe, including an action in Delaware which had the potential to impact the others. By 2007, the key to the disputes was whether Nokia owed Qualcomm royalties under the expired agreement, and, if so, for which wireless technologies at what rate.
A number of efforts were made to resolve the Delaware case over a two year period. Mr. Leyva worked with the leader of Qualcomm’s team during the negotiations. His job was to “run the numbers” for the discussions to analyze the potential impact of various settlement approaches.
In May 2008, Mr. Leyva attended settlement meetings at which Nokia indicated that it would accept Qualcomm’s proposed set of royalty terms in exchange for a cap on the royalties. The discussions broke down over the upfront payment: Qualcomm proposed $4 billion while Nokia offered $300 to $500 million. Mr. Leyva was told to mark all of his work as privileged or “done at the direction of counsel.”
As the July 23 Delaware trial date approached, it appeared unlikely that a settlement would be reached, according to the SEC’s complaint. On July 22 however, Nokia surprised Qualcomm with an offer which included a $2.5 billion upfront payment. Qualcomm’s lead negotiator called Mr. Leyva and asked him to do a quick financial analysis. Shortly after conducting the analysis, but without learning if the parties had settled, Mr. Leyva purchased 80 Qualcomm call options priced at $0.39 each with a strike price of $50.
On July 23, 2008, just before trial was set to start in Delaware, the companies notified the court that a settlement had been reached. As the company finalized the settlement papers Mr. Leyva worked with Qualcomm’s comptroller to determine its impact. At a subsequent meeting he explained the ramifications of the settlement for Qualcomm. The meeting participants were told the company was about to sign-off on the settlement.
Qualcomm and Nokia announced the settlement after the close of trading on July 23. The next morning the company announced its fourth quarter results. That day the volume of trading rose significantly and the stock closed up 17%. Mr. Leyva made a profit of over $34,000 on his options.
When the company asked Mr. Leyva about his option purchase, initially he lied, telling them he bought them prior to July 23. Later he told the company the truth. Mr. Leyva was terminated. The case is in litigation. See also Lit. Rel. 21140 (July 20, 2009).