Risk Management

Brother, Can You Spare a Tip?

The strange story of a day trader's alleged pilfering of inside deal information at a family weekend is at the center of an SEC settlement.
Stephen TaubApril 17, 2008

A day trader who traded on information about Ryan’s Restaurant Group — information allegedly obtained illegally from his brother-in-law — settled civil insider trading charges by the Securities and Exchange Commission.

The brother-in-law, according to the SEC, was a director of the private equity firm advising a potential Ryan’s acquirer.

The commission alleged that Michael A. Stummer traded in Ryan’s common using fraudulently obtained non-public information about the impending acquisition of the restaurant chain by Caxton-Iseman Capital Inc., now called CI Capital Partners. It had been founded in 1993 to invest private capital on behalf of Caxton Associates, a hedge fund found by billionaire Bruce Kovner.

One of Caxton’s principals is Stummer’s brother-in-law. And Caxton’s current portfolio of companies includes Buffets Holdings Inc., which affiliates of Caxton acquired in October 2000. Stummer’s brother-in-law is also a director of Buffets.

On July 25, 2006, Buffets announced an agreement to acquire Ryan’s and a plan to merge Ryan’s into Buffets.

According to the complaint, on July 21 Stummer and his family spent an annual weekend gathering at the New York home of his brother-in-law, at the time in the director position for the private equity firm advising the acquirer of Ryan’s.

During the visit, Stummer allegedly sneaked into the brother-in-law’s bedroom office and, without permission, accessed his brother-in-law’s computer. By correctly guessing the password, Stummer deceptively gained unauthorized access to the private equity firm’s computer network and read several confidential and nonpublic emails relating to the Ryan transaction, according to the SEC.

The SEC’s complaint also alleged that Stummer used the information to buy 5,500 shares of Ryan’s on July 21 and July 24. Shortly following the public announcement of the acquisition of Ryan’s on July 25, Stummer sold his entire position at a total profit of $22,351.17.

Without admitting to or denying the commission’s allegations, Stummer agreed to a judgment requires him to pay $46,386.66, representing the disgorgement of his illegal trading profits, prejudgment interest, and a civil penalty in an amount equal to the profits.