M&A

Did a Warehouse Leak Cause Insider Trading?

Aviall employees, others are alleged by SEC to have gotten early word on a deal in 2006, guessing that suitor "Andre" was really Boeing.
Roy Harris and Stephen TaubJune 18, 2008

Five individuals, including two warehouse employees of aviation-parts maker Aviall Inc., were charged by the Securities and Exchange Commission with insider trading in connection with the Boeing Co.’s 2006 acquisition of Aviall.

The SEC’s complaint suggests that rumors about the $1.7-billion deal were rampant at the target company in the weeks before the deal, and says that at one point, word got out through an accidental E-mail distribution to 122 employees that a company code-named “Andre” was preparing to acquire Aviall.

According to the SEC complaint, Aviall employees Robert Tedder and Brian Carr became aware of material nonpublic information concerning the impending deal for Aviall in the course of their employment at Aviall’s Dallas headquarters. Tedder was a warehouse operations analyst, and Carr a warehouse supervisor.

The complaint alleges that Robert Tedder tipped his father, Joseph Wayne Tedder, and a business associate, Phillip Gunn. Gunn, the complaint alleges passed the information on to his brother, Gregory Gunn, who currently is a branch manager of the Oklahoma City office of Primerica Financial Services Investments, a division of Citigroup, according to the commission.

Phone calls by CFO.com to Robert Tedder’s home and Joseph Tedder’s home were not immediately returned. Dan Waller, an attorney for Gregory Gunn, said he had not yet seen the complaint, but that “Mr. Gunn cooperated fully and very extensively with the SEC.” Waller said that “we are very disappointed the SEC took this action. We intend to pursue this to trial.” Cass Weiland, representing Carr, said in an E-mail response that “the government has yet to send me the complaint, so I cannot comment about any details. Mr. Carr cooperated fully, was interviewed, provided documents, etc. He and I are amazed that the SEC would pursue him.” An attorney for Phillip Gunn, Dinesh Singhal, said he was “a little surprised by the lawsuit,” but did not comment further.

The SEC says that between March 21, 2006, and April 28, 2006, the individuals purchased Aviall common stock and Aviall call option contracts while in possession of nonpublic information related to the acquisition of Aviall. On the day of the merger announcement, Aviall’s common stock closing price of $46.96 was nearly 25 percent higher than the preceding day’s closing price.

As a result of their trading in Aviall common stock and call options, the five individuals collectively reaped hundreds of thousands of dollars in profits, according to the complaint.

The SEC pointed out that shortly after the merger announcement, the Philadelphia Stock Exchange alerted Aviall to suspicious trading in Aviall options. In response, the company conducted an internal inquiry in May 2006, which included interviews of Robert Tedder and Carr. At the end of the inquiry the company terminated Robert Tedder and Carr for violating its code of conduct.

According to the SEC complaint, in the “several weeks prior to the public announcement of the acquisition, a number of internal events occurred that raised expectations among Aviall employees that a significant event involving the company would occur in the near future.” Among them: an extended trading blackout for Aviall’s upper management (not including Tedder or Carr); a tour by Boeing executives of Aviall’s headquarters, including the corporate offices and adjoining warehouse; various closed-door meetings; and unusual requests for documents.

Further, an April 11 E-mail from Aviall’s CEO discussing due diligence and a draft merger agreement “with the purchaser referred to only by the code name ‘Andre,’ was sent inadvertently to 122 Aviall employees across the country, including Dallas warehouse employees,” according to the complaint.

The case, which underscores how broadly leaks can travel during deal discussions, is also reminder to companies of the need to restrict sensitive information, while making sure that all employees know the proper response if they come across information by accident.