Thomas C. Conradt and David J. Weishaus were brokers at Euro Pacific Capital when they came across a golden source of information. IBM was getting ready to purchase SPSS, Inc. for $50 per share. Now the SEC is charging them with illegally trading on that inside information.
Both are challenging the complaint, so we will need to assume the SEC’s complaint is accurate. It has some bad evidence for the two defendants, like these messages:
Weishaus: we should get [RR3] to buy a f***load
Conradt: jesus don’t tell anyone else
Weishaus: like, [RR3] buy 100000 shares
Conradt: we gotta keep this in the family
Weishaus: dude, no way
i don’t want to go to jail
f*** that
Conradt: jesus christ
Weishaus: martha stewart spent 5 months in the slammer
Conradt: does [a friend] know?
Weishaus: and they tried to f*** the mavericks owner
Unfortunately, the two seemed to have forgotten or not realized that their firm captures email and IM communication. They do so for exactly this purpose.
Conradt purchased a bunch of SPSS stock. He had never traded in the stock before. He must have been short on cash because he only ended up with $2500 of gain.
Weishaus leveraged his bet and purchase call options as well as stock. He ended up with $127,000 in gains. At one point, 99% of his account was in SPSS securities.
The key to the inside information with Conradt’s roommate, an unnamed “Source” who is an Australian citizen. The Source had a friend who worked for the law firm on the IBM side of the merger, the unnamed “Associate.” According to reports, Cravath, Swaine & Moore represented IBM in the acquisition.
The Associate told the Source about the transaction and the merger price. The Source bought some SPSS securities and told Conradt. Conradt told Weishaus. They told three other brokers who are unnamed in this complaint. I expect we will hear more about them in the future.
All the trading activity in SPSS prior to the merger caught the attention of the Securities and Exchange Commission, who contacted Euro Pacific. Of course trading on inside information is a violation of the firm’s policy. When the Source found out about the SEC investigation he apparently exercised his Australian citizenship and returned home instead of facing the SEC inquiry.
The SEC challenge will be push the duty not to trade on Conradt and Weishaus. It seems clear that the Associate had a duty and the knew enough about the source of the information to impute a duty on the Source to not trade. According to the complaint, the Source clearly knew that the information was held in confidence by the Associate and had a duty to keep it confidential.
But did Conradt and Weishaus know of the illicit source? From the IM traffic it seems that they thought is was illegal. That may be enough to convince a jury.
Sources: