Risk Management

Insider Trading: The SEC’s Friends and Family Project

The regulatory agency settles cases involving close business associates and a father-son team.
Stephen TaubSeptember 28, 2007

Continuing its recent crackdown, on Thursday the Securities and Exchange Commission settled two more complaints involving illegal insider-trading schemes. While former SEC complaints charged husband-and-wife teams, the current settlements involve multiple family members and close friends.

In one case, the SEC had charged that, shortly before the May 5, 2003, public announcement that LendingTree Inc. would be acquired by USA Interactive, an investor named Marlin Hershey was tipped material, nonpublic information by his friend and business associate Brian Paquette, then LendingTree’s vice president of product management. Hershey then purchased LendingTree stock and tipped the inside information directly or indirectly to at least three business associates who also purchased LendingTree stock, according to the complaint.

After the acquisition was announced, LendingTree’s stock price soared, and Hershey and his tippees sold their shares, realizing illegal profits of about $14,078 and $74,516, respectively, the SEC says. Hershey agreed to pay a civil penalty equal to the sum of those two amounts, or $88,594.

This was the sixth insider-trading case the commission has filed related to USA Interactive’s purchase of Lending Tree.

In the second case announced Thursday, the SEC settled civil charges against a father and son for illegal insider trading in the securities of three public companies between December 2001 and December 2002.

The commission alleged that Gregg Smith, a former investment banker with Banc of America Securities, obtained material, nonpublic information about the three companies, which were his clients. He then tipped his father, Elliot Smith, who traded in the securities, according to the SEC. At the time of the trading, the father worked for Broadband Capital Management, a registered broker-dealer through which he placed the trades.

The complaint also alleged that the father, with his son’s assistance, twice presented fraudulent documents in a bid to mislead the SEC as to the reasons for the trades in two of the companies.

The three companies in which they traded were Aspen Technology, Regeneration Technologies, and Triangle Pharmaceuticals. The younger Smith was coordinating private investments in public equities stock offerings, or PIPES, for each of the companies.

Both individuals agreed to disgorge $204,476 plus prejudgment interest of $72,511. In addition, Elliot Smith and Gregg Smith agreed to pay civil penalties of $408,952 and $204,476, respectively.

In a related administrative proceeding, the elder Smith, without admitting or denying the commission’s findings, agreed to be barred from association with any broker-dealer. Gregg Smith agreed to be barred from association with any broker, dealer, or investment adviser for five years.

Earlier this year, there were several so-called pillow-talk cases charging spouses with illegal insider trading. In the most recent one, in July the SEC accused Shane Bashir Suman, a former employee of Toronto-based medical-device maker MDS Inc., of stealing confidential information about the company’s impending tender offer for the shares of Molecular Devices Corp. Along with his wife, Monie Rahman, Suman used that information to trade in Molecular securities before the merger’s public announcement, the commission charged.

In May, the SEC filed charges against former Oracle vice president Christopher Balkenhol. According to the commission, Balkenhol learned about two sets of secret merger negotiations from his wife, who worked at Oracle as the lead executive assistant to the chief executive officer and two co-presidents. Balkenhol allegedly traded on that information.

The previous week, the SEC charged former Morgan Stanley employee Jennifer Xujia Wang and her husband, Ruopian Chen, a former employee of ING Investment Management Services, with insider trading for allegedly buying stocks on the basis of material, nonpublic information culled from confidential merger talks.

The charges against Wang and Chen were handed up on the same day that another former Morgan Stanley executive, Randi Collotta, and her husband, Christopher Collotta, pleaded guilty in one of the biggest insider-trading schemes since the 1980s.

Also at that time, the SEC filed charges against a Hong Kong couple, Kan King Wong and Charlotte Ka On Wong Leung, who allegedly engaged in illegal insider trading before the public announcement of Rupert Murdoch’s $5 billion bid for Dow Jones.

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