Capital Markets

Insider Trading on a “Wink-and-a-Nod”

Former Cubist Pharmaceuticals CEO Scott Rocklage trusted his wife with inside information. That turned out to be a mistake.
Stephen TaubSeptember 6, 2007

In what regulators call a “wink-and-a-nod” case, the wife of a former drug company CEO and two others have agreed to settle civil charges for illegal insider trading.

During a limousine ride home from the airport on December 31st, 2001, the SEC says, Scott M. Rocklage, then the CEO and chairman of Cubist Pharmaceuticals Inc., told his wife he had some bad news, and warned her not to react to what he was about to tell her, nor to discuss it in front of the limousine driver. He then told her that a clinical trial had gone badly for Cidecin, one of Cubist’s most important products.

According to the SEC, his wife, Patricia Rocklage, responded by telling her husband that she intended to signal to her brother, William M. Beaver, that he should sell his Cubist stock.

Scott Rocklage, the SEC says, urged his wife not to tell Beaver and warned her that he would be unhappy with her if she communicated with her brother in any way regarding the results of the trial.

According to the SEC, Scott Rocklage had regularly shared material, nonpublic information with his wife since joining Cubist in 1994, and that she had always kept that type of information confidential.

But in this case, the SEC says, Patricia Rocklage planned to tip off her brother about the trial results, despite her husband’s warning. Unbeknownst to the Cubist CEO, his wife also had a pre-existing understanding with her brother, Beaver, whereby she would give him “a wink-and-a-nod” if she ever became aware of any bad news about Cubist that might affect its stock price.

According to the SEC, on the morning of January 2, 2002, Patricia Rocklage called her brother in North Carolina and said, “[a]s far as Cubist is concerned, I’m giving you a wink and a nod.”

After receiving the signal from his sister, the SEC says, Beaver tipped his best friend and neighbor, Jones, who then sold all 7,500 shares of Cubist stock that he owned.

After the results of the trial were announced two weeks later, Cubist’s stock price dropped by 46 percent. According to the SEC, by selling when they did, Beaver and Jones avoided losses of $99,527 and $133,222, respectively.

The three individuals agreed to settle the charges against them without admitting or denying the allegations contained in the Commission’s complaint. Patricia Rocklage and Beaver were ordered to disgorge $99,527, representing Beaver’s loss avoided, plus $36,643 in prejudgment interest. In addition, Patricia Rocklage, Beaver and Jones were ordered to disgorge $133,222, representing Jones’ loss avoided, plus $49,049 in prejudgment interest. The judgments also ordered Patricia Rocklage to pay a civil penalty of $99,527, Beaver to pay a civil penalty of $232,749 and Jones to pay a civil penalty of $133,222.