Insider Trading

Insider Trading 

An Overview

By John Teakell
Attorney-At-Law Dallas, Texas

INTRODUCTION

In a civil enforcement action, "10(B) and 10b-5" are essentially the basic cause of action and the civil "remedy" is provided through the "The Insider Trading and Securities Fraud Enforcement Act of 1988." So, for your case, the prima facie elements of what the SEC must prove come from 10(B) and 10b-5 (given my understanding of the facts of your case). And, if proven, the SEC's authority to impose a civil penalty arises from the "The Insider Trading and Securities Fraud Enforcement Act of 1988."

Please see U.S. v. Causey, (S.D. Tex 2005), which sets forth the prima facie case for 10(B) and 10b-5 before turning to the memo. This memo is a compilation of treatise articles, case excerpts, and case headnotes, which it intended to provide an overview. Please let is know if any specific research questions arise, and we will be glad to track down the specific answer. Also, let us know if you want us to send you any of the cases, statutes, or documents cited herein. (Many of the footnotes from the articles have been omitted in order to shorten the memo-please let us know if you want any of the footnotes or sources cited by the footnotes.)

TABLE OF CONTENTS

• "Insider" element 
• "Material" element
  
•  Treatise Article concerning the Insider Trading Sanctions Act of 1984 
• Treatise Article concerning the Insider Trading and Securities Fraud Enforcement Act of 1988 
• Copy of the Insider Trading and Securities Fraud Enforcement Act of 1988-Pages 
• A cross section of cases that deal with various issues that are raised by the 1988 Act, which appear in the form of Westlaw headnote summaries.
  
• Compilation of recent securities caselaw.
  

IS YOUR CLIENT AN "INSIDER"?

Under the Securities Exchange Act provision concerning manipulative and deceptive devices, "insiders" with a duty to disclose or abstain from trading generally include officers, directors, and majority or controlling shareholders.

Under the Securities Exchange Act provision concerning manipulative and deceptive devices[FN49] and the Securities and Exchange Commission's Rule 10b-5 thereunder, a corporate insider must either disclose information or abstain from trading in the stock of the corporation, as discussed supra § 180. Insider status is normally reserved for officers, directors, controlling shareholders, and those having a special relationship affording access to inside information.[FN50] The test to determine "insider status" is whether the person has access to confidential information intended to be available only for corporate purposes and not for the personal benefit of anyone.[FN51]

The class of insiders generally includes officers,[FN52] directors,[FN53] and majority[FN54] or controlling[FN55] stockholders. However, the class extends also to other persons,[FN56] provided they possess inside information by virtue of their position with respect to the corporation.[FN57] It has also been held that a person is an insider only if he occupies a trusted position in the corporation,[FN58] and that the fact that an employee works with sensitive information does not necessarily make him an insider.[FN59]

An insider trading violation requires proof not only that the defendant traded on the basis of material nonpublic information but also that in doing so he knew or should have known that he was breaching a fiduciary duty. Unifund SAL, 910 F.2d at 1039, citing Dirks v. SEC, 463 U.S. 646, 660, 103 S.Ct. 3255, 3264, 77 L.Ed.2d 911 (1983); Chiarella v. United States, 445 U.S. 222, 230-32, 100 S.Ct. 1108, 1115-17, 63 L.Ed.2d 348 (1980). 79A C.J.S. Securities Regulation § 181

Is the inside information alledgedly known by your client considered "MATERIAL"?

Mooney contends that there was insufficient evidence to prove that he used material nonpublic information in violation of the securities laws. Mooney argues that his case differs from the typical insider trading case. He claims that an inside trader ordinarily knows to a greater degree of certainty how the stock price will be affected by the release of nonpublic information. See, e.g., United States v. O'Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) (defendant knew that price of stock would increase after hostile tender offer announced). He argues that it was not certain that the United stock price would increase because of the merger with Metra. The legal test is not whether the price would certainly rise, however, but whether the inside information used was material. See Basic, Inc. v. Levinson, 485 U.S. 224, 236, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). A fact is material in the securities fraud context if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. Id. at 231-32, 108 S.Ct. 978.

There was more than enough evidence here for a reasonable jury to find that Mooney's inside information was material. He exercised employee stock options to purchase United stock on April 13 after negotiations with Metra had begun. As soon as he returned home from the May due diligence meetings, he began to purchase call options for United stock. The jury could infer that Mooney sought to capitalize on his nonpublic information and anticipated he could profit by purchasing call options that could later be sold at a higher price. Mooney also had access to information that the acquisition of Metra was likely to present new growth opportunities for United. Because of his participation in high level confidential meetings, Mooney knew that the due diligence review had not derailed negotiations and that United would only proceed with acquisitions that were expected to increase earnings. He also knew that United would grow considerably in size, programs, and projected revenue. All of this information would have been of interest to a reasonable investor, and the jury could have found a substantial likelihood that it would have been considered important in making investment decisions. U.S. v. Mooney, 401 F.3d 940, 944-45 C.A.8 (Minn.), 2005.

More on "Material"

A fact is deemed material if there is "a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). "[T]here must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (expressly adopting the TSC Industries standard for Section 10(b) and Rule 10b-5 violations). The Supreme Court has made clear, however, that the "role of the materiality requirement is not to attribute to investors a child-like simplicity ••• but to filter out essentially useless information that a reasonable investor would not consider significant." Id. at 234, 108 S.Ct. 978 (internal quotation marks and citation omitted). Certain information may be so basic that any investor can be expected to understand its implications. See Levitin v. PaineWebber, Inc., 159 F.3d 698, 702 (2d Cir.1998) ("certain information is 'so basic that any investor could be expected to know it' ") (quoting Zerman v. Ball, 735 F.2d 15, 21 (2d Cir.1984)). S.E.C. v. Happ, 392 F.3d 12, *21 C.A.1 (Mass.), 2004.

TREATISE ARTICLE--Insider Trading Sanctions Act of 1984--Prior to the Insider Trading Act of 1988

The principal purpose of the Insider Trading Sanctions Act is to create an additional remedy that the Commission may seek with respect to insider trading violations: a civil penalty "not to exceed three times the profit gained or loss avoided as a result of such unlawful purchase or sale." [FN1] The civil penalty can be imposed only at the instance of the Securities and Exchange Commission and is payable to the United States Treasury; private parties cannot seek relief based on provisions of the Act. The Commission retains all its other remedies, including ancillary relief in an action for an injunction. The Commission has typically in this context sought disgorgement of profits, a remedy approved in Materia, [FN2] as noted by the House report, such funds can be utilized to compensate those adversely affected by the nondisclosure. [FN3] Courts have discretion as to the amount of the penalty (up to the maximum) based on the "facts and circumstances." Presumably, the mere fact that disgorgement has been sought and granted is no reason in itself to deny the request for a civil penalty since the whole theory of the Insider Trading Sanctions Act is that disgorgement is not a sufficient punishment. The temptation to engage in insider trading may be too strong if all that will be lost is the amount of the gain. Since it is a civil penalty it follows that (1) proof of the violation has to be only by a preponderance of the evidence [FN4] and (2) nonpayment of the penalty will not result in imprisonment. If one fails to pay the penalty, the Attorney General is authorized to bring an action in the appropriate United States district court to recover the amount of the penalty. [FN5] The Act defines "profit gained," or "loss avoided," as the difference between the sales price (or purchase price, as appropriate) and the value (presumably market price) of the security as determined a reasonable period of time after the withheld information is publicly disseminated. [FN6] The First Circuit had previously applied a similar test in a disgorgement context rejecting the Commission's contention that the actual profit, if greater, should be disgorged. [FN7] The Commission must initiate an action to recover such penalty within five years of the date of the appropriate purchase or sale; this does not, however, limit the period of time in which the penalty if imposed can be collected. [FN8]

The Commission is authorized to seek such penalty when any person violates any provision of the Exchange Act or rules or regulations adopted thereunder "by purchasing or selling a security while in possession of material nonpublic information" in a transaction effectuated through an exchange or a broker or dealer and which (except as to standardized options) does not involve a public offering by an issuer. [FN9] The language excludes, without any explanation in the legislative history, face to face transactions, the area in which the law relating to insider trading was initially developed. [FN10] It also excludes a public offering by an issuer (except as to standardized options), presumably because adequate disclosure would be made in the prospectus. In the case of standardized options, however, there will be disclosure about the options but not the underlying securities in the prospectus which probably explains why the penalty provisions are applicable to trading on the basis of inside information with respect to such options.

The Act does not make purchasing or selling a security while in possession of material nonpublic information unlawful, it is only when such purchases or sales violate any of the provisions of the Exchange Act or rules or regulations adopted thereunder that there is a right to seek a civil penalty. [FN11] What constitutes such a violation depends upon the existing law (and further judicial and/or administrative developments). It is, however, broad enough to embrace insider trading that is a violation of Rule 10b-5 and/or Rule 14e-3. The House report assumes in this regard that it would be applicable to persons who misappropriate information. [FN12] International Capital Markets and Securities Regulation Database updated December 2006

TREATICE ARTICLE--Insider Trading and Securities Fraud Enforcement Act of 1988

The Insider Trading Sanctions Act of 1984 authorized the Securities and Exchange Commission to seek civil penalties against any person purchasing or selling a security while in possession of material nonpublic information.[FN1] The 1984 Act applied not only to inside traders but also to "tippers" of material nonpublic information. The 1984 Act also increased the penalties for criminal violations of the Securities Exchange Act of 1934 from a maximum fine of $10,000 to $100,000.

The Insider Trading and Securities Fraud Enforcement Act of 1988[FN2] essentially recodified the Insider Trading Sanctions Act of 1984 as Section 21A of the Exchange Act. In addition to imposing a monetary penalty of up to three times the sum of profit gained or loss avoided by any person purchasing or selling a security while in possession of material nonpublic information,[FN3] the 1988 Act amended the 1984 Act to make penalties applicable to controlling persons.[FN4] It also amended the language of the 1984 Act by providing that a penalty can be imposed against a person not only for purchasing or selling a security while in possession of material nonpublic information but also a person who has violated the Act by communicating such information.[FN5] Thus, the 1988 Act makes it clear that a penalty can be imposed against tippers of material nonpublic information.[FN6] The 1988 Act authorizes the SEC to pay up to 10% of fines to informers as bounty in certain cases.[FN7] The legislation also created an express private right of action for any person who, contemporaneous with the purchase or sale of securities by an insider, has purchased or sold securities of the same class.[FN8]

The 1988 Act increased the maximum criminal fines from $100,000 to $1,000,000, except that a fine of $2,500,000 may be imposed against any person other than a natural person.[FN9] Further, the maximum prison sentence was increased from 5 to 10 years.[FN10] Fletcher Cyclopedia of the Law of Corporations Current through September 2006 update, Chapter 59C

THE STATUTE ITSELF--Insider Trading and Securities Fraud Enforcement Act of 1988

Whenever it shall appear to the Commission that any person has violated any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security or security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) while in possession of material, nonpublic information in, or has violated any such provision by communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products, the Commission.

(A)may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by the person who committed such violation; and

(B) may, subject to subsection (b)(1) of this section, bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by a person who, at the time of the violation, directly or indirectly controlled the person who committed such violation.

(2) Amount of penalty for person who committed violation

The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.

(3) Amount of penalty for controlling person

The amount of the penalty which may be imposed on any person who, at the time of the violation, directly or indirectly controlled the person who committed such violation, shall be determined by the court in light of the facts and circumstances, but shall not exceed the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of such controlled person's violation. If such controlled person's violation was a violation by communication, the profit gained or loss avoided as a result of the violation shall, for purposes of this paragraph only, be deemed to be limited to the profit gained or loss avoided by the person or persons to whom the controlled person directed such communication.

(b) Limitations on liability

(1) Liability of controlling persons

No controlling person shall be subject to a penalty under subsection (a)(1)(B) of this section unless the Commission establishes that--

(A) such controlling person knew or recklessly disregarded the fact that such controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred; or

(B) such controlling person knowingly or recklessly failed to establish, maintain, or enforce any policy or procedure required under section 78o(f) of this title or section 80b-4a of this title and such failure substantially contributed to or permitted the occurrence of the act or acts constituting the violation.

(2) Additional restrictions on liability

No person shall be subject to a penalty under subsection (a) of this section solely by reason of employing another person who is subject to a penalty under such subsection, unless such employing person is liable as a controlling person under paragraph (1) of this subsection. Section 78t(a) of this title shall not apply to actions under subsection (a) of this section.

(c) Authority of Commission

The Commission, by such rules, regulations, and orders as it considers necessary or appropriate in the public interest or for the protection of investors, may exempt, in whole or in part, either unconditionally or upon specific terms and conditions, any person or transaction or class of persons or transactions from this section.

(d) Procedures for collection

(1) Payment of penalty to Treasury

A penalty imposed under this section shall (subject to subsection (e) of this section) be payable into the Treasury of the United States, except as otherwise provided in section 7246 of this title.

(2) Collection of penalties

If a person upon whom such a penalty is imposed shall fail to pay such penalty within the time prescribed in the court's order, the Commission may refer the matter to the Attorney General who shall recover such penalty by action in the appropriate United States district court.

(3) Remedy not exclusive

The actions authorized by this section may be brought in addition to any other actions that the Commission or the Attorney General are entitled to bring.

(4) Jurisdiction and venue

For purposes of section 78aa of this title, actions under this section shall be actions to enforce a liability or a duty created by this chapter.

(5) Statute of limitations

No action may be brought under this section more than 5 years after the date of the purchase or sale. This section shall not be construed to bar or limit in any manner any action by the Commission or the Attorney General under any other provision of this chapter, nor shall it bar or limit in any manner any action to recover penalties, or to seek any other order regarding penalties, imposed in an action commenced within 5 years of such transaction.

(e) Authority to award bounties to informants

Notwithstanding the provisions of subsection (d)(1) of this section, there shall be paid from amounts imposed as a penalty under this section and recovered by the Commission or the Attorney General, such sums, not to exceed 10 percent of such amounts, as the Commission deems appropriate, to the person or persons who provide information leading to the imposition of such penalty. Any determinations under this subsection, including whether, to whom, or in what amount to make payments, shall be in the sole discretion of the Commission, except that no such payment shall be made to any member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization. Any such determination shall be final and not subject to judicial review.

(f) Definition

For purposes of this section, "profit gained" or "loss avoided" is the difference between the purchase or sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the nonpublic information.

(g) Limitation

The authority of the Commission under this section with respect to security-based swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act) shall be subject to the restrictions and limitations of section 78c-1(b) of this title.

A CROSS-SECTION OF CASES THAT CITE The Insider Trading and Securities Fraud Enforcement Act of 1988--Presented in the form of Westlaw Headnotes

1. Injuctions

Alleged insider trading violations, dating back to 1981, were not so remote that they could not be considered in determining whether grant of injunctive relief under Insider Trading Sanctions Act was appropriate. S.E.C. v. Willis, S.D.N.Y.1991, 777 F.Supp. 1165, on reargument 787 F.Supp. 58. Securities Regulation 134

Permanent injunction barring violations of securities laws would not be imposed upon chief executive officer (CEO) of corporation engaged in radio broadcasting, found to have provided insider information enabling brother and father to acquire stock of proposed targets and realize profits when proposed acquisitions became public information; CEO had not previously leaked insider information, and he did not personally trade in stock of target corporations, precluding conclusion he would engage in further violations in absence of injunction. U.S.S.E.C. v. Ginsburg, S.D.Fla.2002, 2002 WL 1835810, Unreported. Securities Regulation 171

2. Laches

Equitable defense of laches was not available to broker charged with insider trading since Securities and Exchange Commission (SEC) was acting in public interest by attempting to enforce effectively federal securities laws under its statutory mandate and any judgment potentially entered would serve public's interest in assuring compliance with those laws. S.E.C. v. Willis, S.D.N.Y.1991, 777 F.Supp. 1165, on reargument 787 F.Supp. 58. Securities Regulation 134

3. Limitations

Five-year statute of limitations for seeking to impose a civil fine, penalty, or forfeiture did not apply to disgorgement action brought by the Securities and Exchange Commission (SEC). S.E.C. v. DiBella, D.Conn.2006, 409 F.Supp.2d 122. Securities Regulation 134

One-year and three-year statute of limitations under Lampf for implied private causes of action under Securities Exchange Act did not apply in Securities and Exchange Commission (SEC) enforcement action seeking injunctive relief, disgorgement order, and civil penalties. S.E.C. v. O'Hagan, D.Minn.1992, 793 F.Supp. 218. Securities Regulation 134

Securities and Exchange Commission (SEC), in civil action for injunctive relief based upon violations of insider trader laws, is not bound by any specifically delineated statute of limitations; effect of absence of limitations period is moderated in part by court's consideration of remoteness of defendant's past violations in deciding whether to grant requested relief. S.E.C. v. Willis, S.D.N.Y.1991, 777 F.Supp. 1165, on reargument 787 F.Supp. 58. Securities Regulation 134

4. Amount of penalty

In light of defendant's negative net worth of between $50,000 and $100,000, court would impose a $25,000 penalty for insider trading in securities enforcement action filed by Securities and Exchange Commission (SEC). S.E.C. v. Pardue, E.D.Pa.2005, 367 F.Supp.2d 773. Securities Regulation 149

Civil penalty of $34,758, equal to loss avoided, would be assessed under Insider Trading and Securities Fraud Enforcement Act (ITSFEA), against former director of corporation found by jury to have engaged in insider trading by selling stock with nonpublic knowledge of corporate business difficulties; violation was minor, director had net worth sufficient to absorb penalty, there was no concealment of trading, there would be no other sanctions, and defendant was not employed in securities industry. S.E.C. v. Happ, D.Mass.2003, 295 F.Supp.2d 189, affirmed 392 F.3d 12. Securities Regulation 149

Circumstances justified imposition of civil penalty of $435,687, equal to amount of profit obtained from illegal insider securities trading, in violation of § 10(b); trader entered into series of profitable securities transactions based upon insider information obtained from accomplice, who had access to confidential and sensitive financial information due to his connection with investment banking firm. S.E.C. v. Freeman, S.D.N.Y.2003, 290 F.Supp.2d 401. Securities Regulation 149

District court acted within its discretion when, in civil enforcement action by Securities and Exchange Commission (SEC) for alleged securities fraud, it permanently enjoined company's owner, who was found by jury to have violated Securities Act, Securities Exchange Act, and Rule 10b-5 and to have engaged in insider trading, from committing future violations of federal securities law, and barred him from serving as officer or director of public company and from participating in offer of "penny stock," required him to disgorge profits from his insider trading, and imposed fine of $120,000 and penalty for insider trade in amount of one times his illegal profits. S.E.C. v. Johnson, C.A.3 (N.J.) 2006, 174 Fed.Appx. 111, 2006 WL 869162, Unreported. Securities Regulation 150.1

Civil penalty of $1 million was appropriate, following determination that chief executive officer (CEO) of corporation engaged in radio broadcasting business provided advance insider information regarding proposed acquisitions to brother; while tippees realized profits of approximately $1.8, allowing for maximum statutory penalty of 5.4 million, CEO had not previously leaked insider information, and he did not personally trade in stock of target corporations. U.S.S.E.C. v. Ginsburg, S.D.Fla.2002, 2002 WL 1835810, Unreported. Securities Regulation 149

5. Statutory penalties

Imposition of civil penalties on defendants convicted of securities fraud and tender offer fraud in connection with insider trading scheme was warranted under the Insider Trading and Securities Fraud Enforcement Act (ITSFEA); defendants perpetrated a fraud involving repeated securities law violations, considerable profits, and a high degree of scienter, and their scheme lasted almost four years. U.S. S.E.C. v. Svoboda, S.D.N.Y.2006, 409 F.Supp.2d 331. Securities Regulation 149

In determining whether to assess civil penalty for insider trading, under Insider Trading and Securities Fraud Enforcement Act (ITSFEA), courts are to consider (1) the egregiousness of the violations, (2) the isolated or repeated nature of the violations, (3) the defendant's financial worth, (4) whether the defendant concealed his trading, (5) what other penalties arise as the result of the defendant's conduct, (6) and whether the defendant is employed in the securities industry. S.E.C. v. Happ, D.Mass.2003, 295 F.Supp.2d 189, affirmed 392 F.3d 12. Securities Regulation 149

Statutory penalty under Insider Trading Sanctions Act was warranted in Securities and Exchange Commission (SEC) civil enforcement action, in addition to disgorgement, and equal to amount of loss avoided, given defendant's continued refusal to acknowledge full extent of his knowledge and role in corporation's accounting fraud and given defendant's position as CEO and chairman and his active role in perpetrating fraud. U.S.S.E.C. v. Henke, N.D.Cal.2003, 275 F.Supp.2d 1075, affirmed 130 Fed.Appx. 173, 2005 WL 1060243. Securities Regulation 149

6. Nominal damages

Nominal damages only would be awarded to Securities and Exchange Commission (SEC) on SEC's motion for disgorgement and penalties in civil enforcement action against securities broker; broker had been convicted on criminal charges under misappropriation theory of insider trading, had no prior criminal history, had consented to entry of final judgment in civil action prohibiting future violations, and had ill-gotten gains of only approximately $5,400 but had spent more than $75,000 on legal fees, and there was no reason to reward SEC for spending large amount of public money to pursue broker. S.E.C. v. Smath, E.D.N.Y.2003, 277 F.Supp.2d 186. Securities Regulation 154.1

7. Interest

Securities and Exchange Commission (SEC) was entitled to prejudgment interest on defendants' illegal gains in enforcement action brought after defendants were convicted of securities fraud and tender offer fraud in connection with insider trading scheme, where scheme extended almost four years, implicated over 20 issuers, and involved numerous forms of deceptive conduct. U.S. S.E.C. v. Svoboda, S.D.N.Y.2006, 409 F.Supp.2d 331. Interest 39(2.20)

Prejudgment interest would be assessed on amount of loss of stock value former corporate director avoided by trading on nonpublic adverse material information; director acted with scienter, deliberately having use of money in question for considerable period of time. S.E.C. v. Happ, D.Mass.2003, 295 F.Supp.2d 189, affirmed 392 F.3d 12. Interest 39(2.20)

RECENT SEC ENFORCEMENT CASES THAT PROVIDE INSIGHT INTO THE AMOUNT OF PENALTIES PAID BY VIOLATORS IN RECENT YEARS

SEC v. Eric I. Tsao

Litigation Release No. 18889 (September 17, 2004)

http://www.sec.gov/litigation/litreleases/lr18889.htm

On September 17, 2004, the Commission announced that it has reached a settlement of its pending insider trading charges against Eric I. Tsao, a former executive at MedImmune, Inc., a biotechnology company based in Gaithersburg, Maryland. The Commission's complaint, originally filed on June 2, 2003, alleged that Tsao engaged in three separate episodes of insider trading between September 1999 and December 2001, from which he realized aggregate illicit profits of $146,850. The Commission's Complaint also alleged that when Tsao testified before the SEC staff during the investigation of this matter, he falsely denied having placed or authorized any of the relevant trades in two of the three separate instances of insider trading -- and provided a false alternative explanation for the trading.

Without admitting or denying the allegations of the Complaint, Tsao consented to the entry of a Final Judgment against him that (1) permanently enjoins him from future violations of the federal securities laws; (2) bars him from acting as an officer or director of a public company; (3) requires him to disgorge $146,850 in illicit profits, and $24,758.30 in pre-judgment interest thereon, and (4) orders him to pay civil money penalties in the amount of $220,275 and a Remedies Act penalty of $110,000. The Final Judgment allows Tsao to offset his payment of disgorgement and civil penalty by the corresponding amounts, if any, of restitution and criminal fine, respectively, he pays in connection with the parallel criminal proceeding described below. The Final Judgment is subject to the approval of the United States District Court.

The Commission's complaint alleged that on each of three occasions, within days after learning that MedImmune was involved in confidential negotiations concerning a possible business combination with another public company -- the first being U.S. BioScience Inc., the second ImClone Systems, Inc., and the third Aviron -- Tsao bought stock in the other company (and, in the case of ImClone, MedImmune stock as well). On each occasion, according to the complaint, Tsao bought the stock over the Internet in a securities account that, although nominally held by his parents in Taiwan, Tsao had opened, controlled, treated as his own, funded with his own assets, and used to pay his household expenses. The complaint also alleged that, after Tsao learned that NASD Regulation, *793

(Cite as: 1517 PLI/Corp 609, *793)

Inc. (NASDR) was investigating trading in one of the stocks at issue, he took steps to distance himself from this account, and later provided a false explanation of his trading to the SEC staff.

SEC v. Derrick S. McKinley

Litigation Release No. 18832 (August 13, 2004)

http://www.sec.gov/litigation/litreleases/lr18832.htm

On August 13, 2004, the Commission announced that it filed a complaint against Derrick S. McKinley (McKinley), a former vice president and medical director of Gliatech, Inc. (Gliatech). Gliatech was a pharmaceutical company located in suburban Cleveland. The complaint alleges that McKinley sold Gliatech stock while in possession of material, non-public information concerning problems with Gliatech's primary product, Adcon-L Adhesion Barrier Gel (Adcon-L), a gel used to reduce scarring in patients following back surgery.

From August 1999 to August 2000, McKinley sold short 221,000 shares of Gliatech stock in a series of transactions, reaping profits of approximately $1.6 million. From the outset of his trading, McKinley was aware of three major problems involving Adcon-L. By August 1999, McKinley (1) knew that a study of Adcon-L clinical trials (Adcon-L Study) submitted by Gliatech to the U.S. Food and Drug Administration (FDA) suffered from defects that undermined its reliability; (2) knew of sterility problems resulting from defective packaging by the overseas contractor Gliatech hired to manufacture Adcon-L; and (3) knew of complaints of cerebral spinal fluid leaks (CSF leaks) in patients following surgeries in which Adcon-L had been used. In October 1999, the FDA issued an import ban that prevented shipments of Adcon-L from entering the U.S. The ban resulted from unresolved FDA concerns that included the defective packaging and sterility problems. In March 2000, news of complaints about the CSF leaks became public. In August 2000, news of an FDA investigation challenging the integrity and results of the Adcon-L Study became public. When each of these adverse developments became publicly known, the price of Gliatech stock dropped.

McKinley profited from each of these three declines in the price of Gliatech stock. The Commission is seeking an order that permanently enjoins McKinley from violating the antifraud provisions of the federal securities laws and that requires McKinley to disgorge his profits from his illegal trades and to pay a civil penalty.

SEC v. Guillermo Garcia Simon, et al.

Litigation Release No. 18763 (June 24, 2004)

http://www.sec.gov/litigation/litreleases/lr18763.htm

A Massachusetts federal court has entered a final judgment against Guillermo Garcia Simon, a former FleetBoston Financial Group employee residing in Buenes Aires, Argentina, in connection with his trading in the securities of FleetBoston in advance of the announcement of its acquisition by Bank of America Corporation. Under the terms of the final judgment, entered by consent, Simon was ordered to pay approximately $525,000 in disgorgement, interest, and a penalty. He was also enjoined from further violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

The Commission filed an emergency enforcement action against Simon on Monday, October 28, 2003, only hours after Bank of America announced its acquisition of FleetBoston, and less than three days after Simon purchased FleetBoston securities. In its complaint, filed in the United States District Court for the District of Massachusetts, the Commission alleged that Simon engaged in illegal insider trading when he bought FleetBoston securities late on Friday, October 24, while in possession of material, non-public information about the acquisition that was announced the next trading day. The day it filed its complaint, the Commission also sought a temporary restraining order and asset freeze against Simon. Judge Nancy Gertner granted the order freezing Simon's trading account and prohibiting him from transferring or disposing of the securities or any trading proceeds. The Commission obtained the order before the transaction was concluded and as a result, was able to freeze the account before any profits could be removed or dissipated.

Specifically, the Commission's complaint alleged that Simon, a former employee at FleetBoston's Buenos Aires office, purchased 1100 November FleetBoston call options during the last hours of trading on Friday, October 24, 2003, at a cost of about $11,000. The complaint alleged that Simon's options purchase represented over 50% of the total trading volume in that series of call options that day. The complaint alleged that before the market opened on Monday, October 27, FleetBoston's acquisition was announced. In the wake of the announcement, the price of Fleet-Boston's stock and call options rose dramatically, with Simon's call options increasing in value by $473,000 as of the close of the day. The complaint alleged that Simon's conduct violated Section 10(b) of the Securities Exchange Act and Rule 10b-5.

Without admitting or denying the allegations in the Commission's complaint, Simon consented to the final judgment entered by the court on June 9 in this matter. The judgment permanently enjoined him from future violations of the antifraud provisions of the Securities Exchange Act of 1934. Simon was also ordered to pay disgorgement of $473,000, prejudgment interest of $1,576.67, and a civil penalty of $51,842.36, representing the entire proceeds frozen by the court.

In its complaint, the Commission had also named Simon's wife and brother, who shared the account through which Simon traded, as codefendants. The Commission dismissed the claims against them with prejudice. Corporate Law and Practice Course Handbook Series, PLI Order No. 6063