The Leaky Merger and Insider Trading


On December 21, 2009, Sanofi-Aventis, a French pharmaceutical company, announced a tender offer for Chattem, a Tennessee-based distributor of over-the-counter pharmaceutical products, at the price of $93.50 per share. Shares of Chattem closed 32.60% higher than the prior trading day’s close of $69.98 and volume increased more than 3,000% to 10.3 million shares. This may be one of the leakiest M&A transactions. So far the SEC has brought 8 insider trading cases that came from this transaction. The latest case is against Andrew W. Jacobs and his brother Leslie J. Jacobs II.

Andrew met with his brother-in-law who was the vice-president of marketing for Chattem. The brother-in-law leaked the news that Chattem was going to be acquired in the near future. He was apparently looking for career advice since the transaction was likely to affect his employment. Andrew had been through a similar experience when his company was acquired by a European company.

Even though the brother-in-law required Andrew to keep the conversation confidential, the SEC alleges that Andrew leaked the information to Leslie. He saw the opportunity and purchased 2,000 shares of Chattem and made a tidy profit of almost $50,000.

That’s not going to cover his legal bills.

The SEC charged Leslie with insider trading and Andrew for tipping the material non-public information. The brother to brother connection is a lot easier to prove than the Facebook friends sources of inside information the SEC used in the Badin Rungruangnavarat insider trading case.

Chattem was a leaky company when it came to information about the transaction.

Most of the insider trading cases are sourced to one conversation. A Chattem board member told his accountant, Thomas D. Melvin about the transaction. Melvin tipped a bunch of friends who traded on Chattem stock. Melvin, his friends, neighbors and brokers have all been charged with insider trading.