Risk & Compliance

Friend’s Tip Costs a Bundle, Says SEC

An alleged tip from a friend on an audit committee brought in $400,000 in trading profits...and then SEC penalties of more than twice that.
Tim Reason and Stephen TaubJanuary 18, 2008

In the latest in a series of cases against friends and relatives accused of insider trading (see related articles), the Securities and Exchange Commission settled charges Tuesday with Morris Gad, a friend of a former audit-committee member of NBTY, a nutritional-supplements distributor.

The SEC also brought charges in September against the former audit-committee member, Nathan Rosenblatt. Those charges have not yet been resolved.

Rosenblatt, a former member of NBTY’s three-person audit committee, received a fax on July 20, 2004, from the company’s CFO reminding him of an audit-committee teleconference the following day, the SEC claims. The fax included NBTY’s financial results for the third quarter, which showed a 12 percent decline in net income and earnings per share of $0.37 — well below Wall Street’s consensus estimate of $0.50.

According to the SEC’s complaint, Rosenblatt had several conversations the next morning with Gad, his close friend and an officer and principal shareholder of Almod Diamonds Inc., a family owned jewelry retailer. Immediately after the audit committee’s conference call, the SEC says, Gad called Rosenblatt twice. “Two minutes after the second call” to Rosenblatt, the SEC says, “Gad called his broker” and sold his entire position of 13,290 shares of NBTY. He also sold short 30,000 NBTY shares and purchased 50 put contracts for August 30. He also directed the sale of 105 call contracts for August 20 out of the accounts of his three children. The next day, the SEC says, Gad sold short an additional 10,000 shares and bought an additional 150 put contracts for August 30. The SEC estimates that Gad made about $400,000 in trading profits and losses avoided.

Under the settlement, Gad, who neither admitted nor denied the charges, agreed to disgorge $399,187.40, representing profits earned and losses avoided in trading NBTY shares, to pay prejudgment interest of $97,718.87, and to pay a civil penalty of $399,187.40. “He is pleased to be able to put this matter behind him,” said his attorney, Jeffrey R. Zuckerman of the New York firm Pillsbury Winthrop Shaw Pittman LLP.

The commission is seeking disgorgement of trading profits and losses avoided, prejudgment interest, and civil penalties against Rosenblatt. It also seeks to permanently bar him from acting as an officer or director of a public company. Rosenblatt’s attorney, Thomas Fitzpatrick, declined to comment.

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