Category: Insider Trading

This insider trading case caught my attention because of the local setting. David Forte is an officer with the Needham Police Department. That’s the next town over from my town. I’m such a homer.

One of Forte’s brothers was the Chief Information Officer at Analog Devices. The brother discovered that Analog was going to buy Linear Technology Corporation in a transaction that would inevitably and rapidly raise the price of Linear stock. There was a phone call shortly before the merger between the brothers. Shortly after the phone call, Forte made some very aggressive trades on the stock of Linear.

What are aggressive trades?  Forte bought short-dated out-of-the-money call options on a merger target in an account that had never bought call option before or traded in that stock. I’m sure the compliance officer at Forte’s brokerage flagged the trades and reported them to the regulators as suspicious. The list of suspicious traders got shared with the companies and the shared last names were a sure giveaway.

Forte told two friends who also made aggressive trades and also got caught. All three were arrested and charged criminally for insider trading. 

Sources:

• Press release: https://www.sec.gov/litigation/litreleases/2022/lr25311.htm
• SEC Complaint: https://www.sec.gov/litigation/complaints/2022/comp25311.pdf
• DOJ Press Release: https://www.justice.gov/usao-ma/pr/needham-police-officer-and-two-others-arrested-insider-trading-scheme

You hate to see a peer break bad.

The Securities and Exchange Commission charged Jose Luis Casero Sanchez, a former Senior Compliance Analyst who worked in the Warsaw, Poland office of an international investment bank, with insider trading involving at least 45 corporate events with the investment bank’s clients. 

Ugh. He’s giving compliance a bad name.

For an investment bank, a role of compliance is to maintain a list of restricted companies for trading because of material non-public information. It should be held tightly and lovingly. Not used to profit.

The SEC didn’t want to drag the investment bank into the litigation press releases and complaint. The press identified it as Goldman Sachs, who confirmed.

Mr. Sanchez was a Spanish national, worked in Poland and did his illegal trading in US-based brokerage accounts. The accounts were in the name of his parents. He had accounts at Schwab, Interactive Brokers and Tastyworks. I have to admit that I hadn’t heard of Tastyworks before. Apparently if I make 750 referrals to the firm I get a Tesla. (anyone? anyone?)

This is a clear case of insider trading under US law. It’s clear that Goldman had the policies in place prohibiting this kind of behavior. The kind of behavior that Mr. Sanchez was supposed to prevent or stop.

The SEC got IP logs for access to the accounts. Those logs are not always that exact. But in this case they were traced back to Poland. It doesn’t need to be more exact than that to show that Mr. Sanchez was running the accounts, not his parents.

In his first account at Interactive Brokers, the compliance people at Interactive Brokers clearly saw stuff they didn’t like. Mr. Sanchez was trading options and doing really well. I assume they flagged the account, reported it and shut it down.

Undeterred and unafraid, Mr. Sanchez moved on to Schwab and Tastyworks. He continued his options trading. I’ll assume he was taking aggressive positions. For some reason he went back to Interactive Brokers and opened a new account in his mother’s name this time. He churned through companies on the Goldman Grey List of companies being advised.

The last trade mentioned in the complaint was at Interactive Brokers in May 2021. Who wants to bet that the compliance people at Interactive Brokers flagged this account and brought it to the attention of the SEC? I’m willing to bet good money that they did the heavy lifting for the SEC of identifying bad behavior. That’s what good compliance people are supposed to do.

I’m sure the SEC did a great job of then tying the companies involved in the account’s trades back to Goldman. They got the IP addresses from the broker showing that Poland was involved. Goldman looked at the last name on the account and the employees in Poland. (How many Spaniards work at Goldman in Poland?)

Boom!

Then they checked Mr. Sanchez’s browser history and noticed Schwab and and Tastyworks (did I earn that Tesla yet?).

Boom! Boom!

They got you Mr. White.

Sources:

• SEC Charges Investment Bank Compliance Analyst with Insider Trading in Parents’ Accounts and Obtains Asset Freeze
• SEC Complaint
• Former Goldman Compliance Analyst Accused of Insider Trading

Matthew Panuwat was a business development executive at Medivation, an oncology-focused biopharmaceutical company. Panuwat learned from Medivation’s CEO that the company expected to be acquired by a major pharmaceutical company, Pfizer, within a few days, at a premium to the then-market price.  Panuwat did not trade in Medivation securities.  Rather, within minutes of hearing the news, Panuwat purchased out-of-the-money call options in Incyte Corporation, another oncology-focused biopharmaceutical company that he believed would increase in value when the Medivation acquisition was announced.

If Panuwat traded in Medivation’s stock or Pfizer’s stock, that clearly would have been insider trading.

But he didn’t trade in the stock in play. He traded in Incyte, a completely unrelated company that happened to be in the same industry and about the same size as Medivation. He bet that there would be increased interest in this space and the merger price of Medivation would float the value of similar companies.

Should this be insider trading?

The Securities and Exchange Commission thinks so. It brought charges against Mr. Panuwat for this 2016 trade. I’m sure your noticing the big time gap. The SEC filed just before the expiration of the statute of limitations.

The SEC seems to be hanging its charges on Medivation’s insider trading policy:

“Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company.”

A company’s definition of insider trading shouldn’t be the standard for a government action. Should it?

The SEC states:

Panuwat’s undisclosed, self-serving use of Medivation’s information to purchase securities, in breach of his duty of trust and confidence, defrauded Medivation and undermined the integrity of, and investor confidence in, the securities markets.

Panuwat did make an aggressive trade. He purchased 578 out-of-the-money call options with less than a month left to expiration. The options had strikes from $80 to $85 when Incyte’s stock was trading at $76. I’m sure that triggered some compliance review at his brokerage and probably got red flagged for further review.

The SEC is claiming that Panuwat used confidential information he acquired from his employer. That seems right. The question is how far should that dome of limiting action should spread. The SEC seems to think it should be a big dome. It should reach out to peer/competitor companies.

Given how long this has been sitting around, there must be some hand wringing at the SEC. The complaint is bit short on facts given that there has been five years to gather information.

In compliance, how do you deal with this potential expansion of the insider trading limits? It sounds like insider trading polices and monitoring would have to include peers of the company. Of course, this all assumes this case comes out in favor of the SEC.

Sources:

• SEC Charges Biopharmaceutical Company Employee with Insider Trading
• SEC Complaint
• An Unusual Insider Trading Case
• Using Inside Information About One Deal to Buy Shares of Another Firm
• Wachtell Lipton Discusses a New Variation in SEC Insider Trading Enforcement

The Dark Web and bitcoin are the tools of the trade for online criminals these days. Apostolos Trovias is alleged to be one of those criminals. He operated online under the pseudonymous online avatar “TheBull”. Mr. Trovias is alleged to have engaged in a deceptive scheme to offer and sell what he called “insider trading tips” on the Dark Web, offering purchasers an unfair advantage when trading securities.

Mr. Trovias claimed that he had order-book data from a securities trading firm that was provided to him by an employee of the trading firm. This would seem to be material, nonpublic information that was supposed to be kept confidential.

If Mr. Trovias had actually acquired some or all of the tips from actual order-book data or if he had stolen the order-book data himself, then he had engaged in a fraudulent scheme to sell material, nonpublic information that he knew or was reckless in not knowing was obtained in violation of a duty of trust and confidence. That’s illegal.

If Mr. Trovias did not actually have this information, then his statements were materially false and misleading and made in furtherance of a scheme to deceive purchasers who wanted to trade on inside information. That’s also illegal.

What fascinated me about this case is that the Securities and Exchange Commission doesn’t have to prove that Mr. Trovias was actually selling or using insider information. The SEC wins either way.

Sources:

• SEC Charges TheBull with Selling “Insider Trading Tips” on the Dark Web
• SEC Complaint

Part of a private equity fund’s investment strategy is getting a seat at the table for a company they own. When that company’s shares also publicly traded, there are heightened compliance concerns. The fund’s management representative is likely to end up with material non-public information. The compliance challenge is to prove that the information does not make it to the fund’s trading desks.

Ares Management just got an SEC fine for failing to stop the information leak.

Based on the SEC order, Ares had invested several hundred million dollars in a public company and had two representatives on a public company’s board. One of those was a senior member of the investment team. This representative had access to:

• “potential changes in senior management,
• adjustments to the Portfolio Company’s hedging strategy,
• efforts to sell an interest in an asset,
• the Portfolio Company’s desire to sell equity and use proceeds to retire certain debt, and
• the Portfolio Company’s election, as allowed under the terms of the loan agreement, to pay interest “in kind” and not in cash.”

All of that would reasonably be considered material non-public information. Ares compliance group had trades in the company’s stock under special watch. It had the power to impose information walls, but apparently did not do so in this case.

Ares made follow-on purchases of the company’s stock.

Ares’ compliance staff failed, in numerous instances, to document sufficiently that they had inquired with the Ares Representative and the members of the deal team as to whether any of them had received potential MNPI from the Portfolio Company, or to apply a consistent practice to the inquiries made, resulting in ambiguity whether, or if, inquiries were made in certain instances.

This a classic compliance problem of proving that you don’t know something when the information exists within the firm. As a result, the SEC order takes the position that Ares’ compliance staff “failed to document properly whether they had assessed the extent to which Ares deal team members had any information that had the risk of being MNPI.”

Part of this appears to be the unusual circumstance. Ares does not commonly hold director seats on the boards of publicly-listed companies. The compliance policies and procedures didn’t adequately address the issue and the compliance staff did not adequately document an area of heightened risk.

Sources:

• Private Equity Firm Ares Management LLC Charged With Compliance Failures
• SEC Order

I’m going to guess that many of you are using Zoom for some aspects of communicating personally or professionally? I think it’s great. Business meetings work better when you can see each other.

Personally, it’s been great to get together with my cycling teams over Zoom. We aren’t riding together outside. I’m not riding outside at all. We have done some Zoom and Zwift rides. Nothing better than watch each other struggle up virtual bike climbs.

Maybe you like it so much that you think you should buy some stock in the company. You type in “Zoom.” See a quote and description.

Zoom Technologies, Inc., through its subsidiaries manufactures, researches, develops and sells electronic communication products for the mobile phones, wireless communication circuitry, and related software products.

So you hit “buy.”

It seems lots of people are doing this. Enough that the SEC put a trading suspension in place for Zoom Technologies. It’s ticker symbol is ZOOM.

The problem is that you were really interested in Zoom Video Communications. It’s ticker symbol is ZM.

Zoom Technologies also hasn’t filed any public disclosures since 2015 but still has a market value of around $30 million. Zoom Video has a market value of over $30 billion.

Zoom Tech’s price doubled to $20 in late March as we all brought Zoom Video into our personal and professional lives. It’s clear that there were a lot of poorly research trades in the mix

Sources:

• Zoom Technologies
• Zoom Video Communications
• Zoom confusion leads SEC to halt trading for Chinese company

For the first time in 13 years, the Cleveland Brown did not lose on their NFL opening weekend. Being the Browns, they didn’t win either. They had to compete without the help of Mychal Kendricks. The now former linebacker was cut by the Browns after charges of insider trading.

The $1.2 million in insider trading profits cost Kendricks $3.5 million from his Browns contract. Plus he faces a significant civil penalty from the SEC, Plus, the US Attorney’s Office in Philadelphia decided to bring criminal charges which could result in jail time.

Why did Kendricks do this? In the complaint, the SEC published a text message from Kendricks to Damilare Sonoiki.

I’m at a messed up place as far as my money is concerned I have enough money to live and to support myself but not enough money to avoid taxes … I don’t have enough money to buy a business and get the tax breaks I need.

How did they do this? Sonoiki worked at investment bank. It’s unnamed in the complaint, but based on the transactions it looks like it was Goldman Sachs. Sonoiki met Kendricks at a party. Sonoiki got information on M&A deals from work and passed them on to Kendricks. Kendricks gave him football tickets and cash in exchange for the inside information.

How did they get caught? Kendricks opened a trading account, but tried to have Sonoiki make the trades directly.  The firm flagged the account for having a mismatched IP address. Then the trades were just options with big short-term gains. I’m sure the brokerage account flagged the account and alerted the SEC.

It’s a very brazen case of insider trading. The only question is why it took so long to get caught.

Sources:

• SEC Charges NFL Player and Former Investment Banker With Insider Trading
• SEC Complaint
• Insider Trading: NFL Player Takes “Brownsing” to Next Level
• The insider trading case against an NFL linebacker and a former Black-ish writer, explained
• Mychal Kendricks released by Browns after admitting to federal charges of insider trading

In a startling announcement, the Department of Justice and the Securities and Exchange Commission filed charges against Congressman Christopher Collins from New York.

There has long been controversy around lawmakers and their staff trading on information obtained during their government service. That resulted in the passage of the Stop Trading on Congressional Knowledge (STOCK) Act in 2012.  That law prohibits the use of non-public information for private profit, including insider trading by members of Congress and other government employees. Members of Congress are no longer allowed to use information garnered through official business for personal reasons

That is separate from Congressman who gain material non-public information outside the scope of their governmental jobs. They are still bound by the complex web of what is illegal insider trading.

Congressman Collins, a U.S. Congressman representing, the 27th Congressional District of New York sat on the board of Innate Immunotherapeutics, Ltd. Innate was developing a drug to treat multiple sclerosis. The results of the drug’s clinical trial were to be released between June 5 and July 11 and the board members were instructed not to trade during this period. On June 22, the CEO told the board there was bad news. The results indicated a clinical failure.

According to the SEC complaint, the email with this news came as Congressman Collins was attending an official event on the south lawn of the White House. While still at the event, he began calling his son, Cameron Collins. He knew his son had invested in millions of Innate shares. That night Cameron, his girlfriend, and his girlfriend’s parents all entered orders to sell shares in Innate. Their selling volume accounted for more than half of the trading volume that day and exceeded the 15-day average trading volume by more than 1,454%.

It’s a very clear cut case of trading on material non-public information. Christopher Collins, as a member of the board of directors clearly knew he was not supposed to share this material non public information.

Was the trading illegal insider trading?

Under Newman the U.S. Court of Appeals for the 2nd Circuit said that the insider must “also receive something of a ‘pecuniary or similarly valuable nature’ to prove illegal insider trading. The US Supreme Court, in Salman v. US, made it clear that the passing material non public information to a friend or relative is still illegal insider trading.

“In these situations, the tipper personally benefits because giving a gift of trading information to a trading relative is the same thing as trading by the tipper followed by a gift of the proceeds. Here, by disclosing confidential information as a gift to his brother with the expectation that he would trade on it, Maher breached his duty of trust and confidence to Citigroup and its clients—a duty acquired and breached by Salman when he traded on the information with full knowledge that it had been improperly disclosed.”

That leaves the case against Collins as being clearly illegal insider trading, assuming the SEC and DOJ have the evidence to back up their complaint and indictment.

Congressman Collins would not be the first sitting Congressman to be indicted. There have been been more than two dozen indicted since 1980. Looking back at charges, Cogressman Collins may be the first indicted on insider trading.

Sources:

• US v collins
• SEC v Collins
• New York Congressman Chris Collins Arrested on Insider-Trading Charges
• More than two dozen members of Congress have been indicted since 1980
• List of American federal politicians convicted of crimes
• A Brief History of Members of Congress Breaking the Law
• The Supreme Court Weighs in Insider Trading