The One with the Self-Reporting, Spying Spouse

We’ve seen a few cases of trading on material, non-public information sprouting from spouses working at home. We just got another one, with a twist.

Most recently, we had the case of a BP manager having her spouse spy on the merger activity she was working on for her company. That husband is tied up with criminal charges and a divorce. [The One with the Divorce]

In today’s case, Ms. Perez de Madrid checked out her husband’s computer screen while he was out of the room. He was a lawyer for an international, research-focused biopharmaceuticals private company in connection with its acquisition of global, commercial-stage biopharmaceutical company with ADS shares listed on NASDAQ. She promptly bought shares in the acquisition target. A few weeks later the value of the shares doubled when the acquisition was announced.

What to do with a $300 thousand windfall? Rather than go on a secret spending spree she told her husband. Since he was a lawyer, I assume he immediately knew there was a problem. He knew she could face jail time.

They kept the money in the account and reported the illegal activity to the Securities and Exchange Commission. Clearly, the SEC likes problems to be self-reported. The penalty was only disgorgement of the gains and a small interest payment. No jail time. No penalty.

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The One With the Career Advice Becoming Insider Trading

You’re sitting poolside sipping on margaritas with your buddy. You’ve always wanted to work together and your buddy says that now would be a good time to do so. You ask, what about your current position. Your buddy, with a few margaritas in his gut, tells you that his current position is uncertain because the company is going to get sold.

What should you not do?

(A) Buy you buddy another margarita
(B) Buy some nachos
(C) Buy stock in your buddy’s company

Steven Masterson chose (C) and that was the wrong answer.

His buddy worked at Dover Motorsports, a public company. The information that the company was getting sold is Material, Non-Public Information. He should have known that the information was confidential and he shouldn’t trade on it.

Instead Mr. Masterson called his investment adviser and directed a purchase of $100,000 worth of stock in Dover Motorsports. Two months later the acquisition was announced and Mr. Masterson made a tidy profit.

At least until the Securities and Exchange Commission got involved and accused Mr. Masterson of insider trading. He disgorged his tidy profit and paid a fine equal to that profit.

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Who knows what evil lurks in the hearts of men? The Shadow knows!

It survived motions to dismiss, summary judgment and now has survived a jury. The Securities and Exchange enlargement of insider trading, shadow trading, stuck through the case against Matthew Panuwat.

The SEC alleged that Mr. Panuwat traded in the stock of Incyte Corporation based on highly confidential information. Incyte was in a similar business to his employer, Medication, Inc. Mr. Panaway had learned about an impending announcement of Pfizer Inc.’s acquisition Medivation, Inc. He assumed that the stock price of Incyte would rise based on the valuation Pfizer placed on Medivation for the acquisition.

There is no doubt that knowledge of the Pfizer/Medivation transaction was material non-public information. Mr. Panaway clearly could not buy stock in Medivation ahead of the announcement. He didn’t.

Mr. Panawat took an aggressive approach to the Incyte share price. He purchased out-of-the-money options and lots of them. He purchased a majority of the daily volume of those options. The total purchase price was about half of his annual salary. He had not previously invested in Incyte. It was the biggest trade he had made. I’m sure the trades raised red flags at his brokerage which were reported to the SEC.

The jury decided that

  • Mr. Panuwat had owed a duty of “trust, confidence or confidentiality” to Medivation as a result of his employment.
  • Mr. Panuwat possessed nonpublic information as a result of his employment, that was material to Incyte.
  • Mr. Panuwat purchased the Incyte options on the basis of that nonpublic information.
  • Mr. Panuwat had “acted recklessly” in purchasing the options.

How do you deal with this from a compliance perspective? Would Incyte have been on blocked list for the investment bankers involved in the transaction?

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The One with Baseball and Tacos

Jordan Qsar, Austin Bernard, Chase Lambert and “Finance Person” all played baseball at Pepperdine University. After graduating, Finance Person ended up working at Jack in Box in the strategic finance group. Qsar went on to play for the minor league teams of the Tampa Bay Rays and other teams. Qsar played with Grant Witherspoon in the minor leagues.

Qsar was back in San Diego during a break in the season and went drinking with Finance Employee, Bernard and Lambert. The drinks must have made Finance Employee forget the confidentiality requirements at work. He was working on the acquisition of Del Taco. He told Qsar about it.

Qsar tipped off Witherspoon, Bernard, and Lambert about the transaction. There is a big collection of texts from the baseball players about buying lots of options in Del Taco stock in the SEC complaint. Most of the options were very inexpensive because they were out of the money. Del Taco did not trade above $8.67 during the relevant period. They were buying options with a strike price of $10. The options were inexpensive because they had $0 value if the Del Taco stock price didn’t rise above $10 in a few months.

The transaction was announced with an price of $12.51 for each Del Taco share. The four made ten of thousands of dollars in illegal profits. That’s a lot of tacos.

Those purchases of lots of out of the money options would have set off alerts at the compliance departments of their brokerage accounts. Those alerts ended up in the hands of the Securities and Exchange Commission and the Department of Justice.

Lambert was not included in the criminal action against the other three. It’s not clear whether he cooperated or the DOJ thought his actions were less egregious.

Finance Employee was not named and not charged. I assume he at least heeded his job requirements of not trading in the stock of acquisition targets. As to whether he kept his job, I would think he was quickly fired.

Of course, all of these are just charges in the SEC complaint and DOJ complaint. The defendants have not had a chance to tell their side of the story and how they came to trading in Del Taco options with little money in their accounts.

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Revisiting Managed Accounts

SEC IA Rule 204A-1 requires all of an investment adviser’s access persons to report, and compliance to review, their personal securities transactions and holdings periodically. Section (3)(I) has an exception for

(3) Exceptions from reporting requirements. Your code of ethics need not require an access person to submit:
(i) Any report with respect to securities held in accounts over which the access person had no direct or indirect influence or control;

Way back in 2015 the Division of Investment Management released Guidance 2015-03 about what it means for an access person to have no direct or indirect influence or control over the account for purposes of relying on the reporting exception.

There are three themes that fail the exception:

  • suggesting purchases or sales of investments to the trustee or third-party discretionary manager;
  • directing purchases or sales of investments; or
  • consulting with the trustee or third-party discretionary manager as to the particular allocation of investments to be made in the account.

Effectively, the SEC asks compliance to do some diligence on the account and the person running the account to make sure the access person is blocked from making investment decisions.

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The One with the Divorce

We’ve seen many insider trading cases involving friends, spouses, domestic partners, and dates. We can guess what the end result would be. I think the Tyler Loudon case is the first one that has taken us all the way to the end.

Tyler and Mrs. Loudon lived in Houston. Mrs. Loudon worked as a mergers and acquisitions manager at BP p.l.c., the big energy company. As many couples did during the pandemic, they worked in home offices and in relatively close proximity to each other. Mrs. Loudon was working on BP’s acquisition of TravelCenters of America.

Apparently, Mrs. Loudon shared some of the acquisition information with Tyler. Of course, she expected that he would not do something stupid with the information.

He did. He did do something stupid.

Tyler bought shares in TravelCenters. That alone of course is illegal. Then he took the stupidity to a higher level. He sold all of his other positions in his brokerage account and Roth IRA and put all of that money into purchasing TravelCenters shares. I’m sure that was flagged by his brokerage firm as suspicious activity.

FINRA opened an investigation. Tyler confessed to his wife. Mrs. Loudon told her BP supervisor about he husband’s trading. BP fired Mrs. Loudon. Mrs. Loudon moved out of the marital home and filed for divorce.

We generally assume that a violation of spousal secrets to do stupid insider trading is going to lead to relationship issues. This is the first SEC complaint I remember that has take us all the way to the end of the marriage.

Besides divorce, Tyler is also facing up to five years in prison and a $250,000 fine with the Department of Justice and possible more in SEC fines. Of course, Tyler also had to forfeit all of the trading profits.

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Shadow Insider Trading Theory Lives On Again

A summary judgment motion in the shadow insider trading case was denied.

The Securities and Exchange Commission brought charges against Matthew Panuwat a business development executive at Medivation. Panuwat had 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.

The Securities and Exchange Commission thinks this should be considered insider trading and brought charges against Mr. Panuwat for his 2016 trade.

Mr. Panuwat brought a motion for summary judgement hoping to dismiss the charges based on the facts. The judge said there were genuine disputes of material fact concerning

The judge had previously ruled at the earlier motion to dismiss phase that information may be material to more than one company and that information does not need to come from the issuer of the security to be material. The SEC charges survived this facial attack on shadow insider trading.

  1. whether Mr. Panuwat received nonpublic information,
  2. whether that information was material to Incyte,
  3. whether Mr. Panuwat breached his duty to Medivation by using its confidential
    information to personally benefit himself, and
  4. whether Mr. Panuwat acted with scienter.

As for materiality:

“Changes in stock price after previously unknown information is disclosed to the market is “strong evidence” of how reasonable investors understand the significance of that information. … The SEC has shown that Incyte’s stock increased by 7.7% after the market learned that Pfizer acquired Medivation. See Oppo. Ex. P. Panuwat responds that Incyte’s stock prices had changed “by at least 7.7% in one day over 400 times during the time Incyte has been a publicly traded company.” … Again, it is possible that the stock price increase was unrelated to the Medivation sale. But a jury could reasonably find that it was further indication of the two companies’ connection in the market, and therefore probative of materiality. There is at least a material dispute whether the information Panuwat received in the Hung Email was material to Incyte.”

The judge found that Mr. Panuwat potential breached at least one of his three separate duties to not use this confidential information. The first was the Medivation insider trader policy that covered “securities of another publicly traded company”. Mr. Panuwat argues that Incyte was not one of the enumerated relationships in the policy. Second, Mr. Panuwat signed Medivation’s confidentiality agreement and the SEC argued that it created a duty with the Incyte information. Third, the SEC argues that there is a common law duty for an employee with regards to company information. The judge ruled that it was up to the jury to rule on potential breach.

The case is far from over. The question is whether Mr. Panuwat wants to continue fighting and has the financial resources to keep fighting the SEC charges.

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Insider Trading to Make your Ex-Girlfriend Hate You, Lose your Job, and Go to Jail

Seth Markin stumbled across a sure thing for investing his money. Pandion Therapeutics was going to be acquired by Merck & Co. He knew the acquisition price per share was going to be over twice what the shares were currently trading. He made $82,000 in trading profits in February 2021.

In June 2021 he got a phone call from his ex-girlfriend. (I have to assume it was a very angry phone call.) Mr. Markin’s name had shown up on an inquiry from by the Financial Industry Regulatory Authority. His ex-girlfriend was a lawyer working on the Pandion-Merck transaction. FINRA had asked her whether she knew any of the names on a list of people who bought Pandion stock leading up to the transaction announcement.

She, FINRA, the SEC, and the DOJ all assume that Mr. Markin had come across the transaction information while they were dating. He lied to her and told her that he had not traded in Pandion stock. (I don’t think they got back together.)

At this time, Mr. Markin was training as a new agent at the FBI Academy. He was interviewed the FBI agents about the Pandion trading, and Mr. Markin lied to them. (I don’t think he kept the job at the FBI.)

Clearly the FBI didn’t believe him. He was arrested in July 2022. Earlier this week he plead guilty to securities fraud based on that insider trading. Now He’s facing jail time.

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The One with the Girlfriend’s Laptop

The Securities and Exchange Commission actually uses the term “romantic partner”, not girlfriend in this complaint. I guess the SEC doesn’t want to impose labels on the relationship. Based on this case, I assume the relationship is over. The COVID pandemic was hard on a lot of relationships with couples isolated at home. Stealing information from your “romantic partner” seems likely to end the relationship.

That’s just what Steven Teixeira did. While working at home during the pandemic, Teixeira would access her laptop while she was out of the room or outside their Queens apartment.

She was an executive assistant at an investment bank. She was responsible for scheduling meetings of the investment bank’s valuation and fairness committees concerning potential transactions involving the investment bank’s clients. She had access to material nonpublic information relating to dozens of the investment bank’s transactions.

Teixeira had a friend who knew a guy who was a stock trader, Jordan Meadow. The three met and Teixeira offered up his access to the information to Meadow. The three plotted an insider trading scheme, with Meadow offering to buy Teixeira and the third friend Rolex watches. Teixeira and Meadows began trading on the flow of transaction information that Teixeira was snooping from his romantic partner’s laptop.

Their aggressive trading caught the attention of the regulators and Meadow’s compliance department. The scheme came to an end in January 2023 when the romantic partner returned to working in the office rather than from home.

Teixeira pled guilty in a cooperation agreement. The DOJ and SEC are pursuing more serious charges against Meadow.

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The One with Insider Trading, Pharma and the Police Chief

Joseph Dupont was a senior executive at Alexion Pharmaceuticals and reserve officer with the Dighton police force. (Dighton’s most notable attraction is Dighton Rock, covered in petroglyphs.) Dupont worked on Alexion’s acquisition of Portola Pharmaceuticals.

Dupont knew he couldn’t trade in the stock of Portola with all of the inside information he had. But that apparently didn’t stop him from leaking the information to his buddy, Shawn Cronin, who was a sergeant on the Dighton police force. (He has since become Chief.) Cronin then told two other mutual buddies, Stanley Kaplan and Jarett Mendoza. Kaplan then told a colleague, Paul Feldman, who spread the information even further.

The SEC Complaint and US Attorney Indictment have some compelling facts. Dupont had Alexion meeting to hammer out the details of the acquisition on April 8. That night Dupont had a long conversation with Cronin. Cronin texted Kaplan that night:

“Good evening, sir. If you need something to take your mind off of the everyday battle, remember that stock I told you about? Good time to buy.”

Cronin then opened a new brokerage account and placed an order to buy shares in Portola. Kaplan did the same. They continued to buy more shares in the following weeks.

The criminal indictment has a bunch of incriminating messages among the defendants:

“I need more inside information.”
“Knowing of a buyout or an news beforehand is gol[d].”
“Let’s hope our golden goose will continue laying golden eggs!”

When the acquisition was announced the stock price of Portola jumped 130%.

All of this suspicious trading caught the attention of the regulators after the merger and launched an inquiry. Alexion was forced to ask its employees whether they knew any of the names on the list of suspicious traders. Cronin lied and said he didn’t know any, even though Cronin, Kaplan and Mendoza were on the list.

The gains they made:

  • Cronin – $72,000
  • Mendoza – $39,000
  • Kaplan – $472,000
  • Feldman – $1.73 million (He put the most money in)

All are facing disgorgement of the gains, civil penalties and significant jail time. Mendoza has already plead guilty.

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