SEC Charges Controller in Insider Trading Action

SEC Charges Controller in Insider Trading Action

Insider trading has long been a staple of SEC enforcement. Frequently the actions become complex, requiring an evaluation of elements such as the “personal benefit” obtained by the person with the confidential information or the knowledge of the information recipient about the source of the information and any breach of a duty. When, however, the trader is a finance executive at the company whose shares are traded, the proof difficulties are typically eased. That may be the case with the Commission’s most recently filed insider trading case, SEC v. Loman, Civil Action No. 2:19-cv-06187 (C.D. Calif. Filed July 18, 2019).

Defendant Mark Loman is the former Controller and Vice President of Finance of OSI Systems, Inc., a security, healthcare and optoelectronics company. Through his position with the firm Mr. Loman had access to a stream of confidential company financial information. That included, for example, advance knowledge of OSIS’s revenues and earnings as well as its Commission filed reports. Indeed, he was responsible for compiling internal reports for the firm and others. Under the firm’s insider trading policy, he was obligated to maintain the confidentiality of this information.

Shortly after the beginning of the firm’s 2016 fiscal year in August 2015, OSIS announced its forecasted fiscal revenue. The forecast was based on confidential, internal projections. In October and November 2015 – the first two months of the fiscal year – the financial results were materially below those projected. Thus, in early December the company revised its confidential internal forecast. By month end Mr. Loan and the firm knew that OSIS’ revenues would fall substantially below the revised projections.

On December 28 Mr. Loman purchased 100 put options on OSIS common stock with a strike price of $90. He also sold 100 call options on the firm’s stock with a strike price of $95. One month later, on January 27, 2016, OSIS announced its financial results for the second fiscal quarter which were below projection. The firm also released its forecast for the fiscal year. Following the release, the share price dropped from about $80 to $52. Mr. Loman sold the put options and let the call options expire. Collectively he realized $300,00 in trading profits on the transactions.

The next month Mr. Loman learned that OSIS was in negotiations to acquire publicly traded American Science and Engineering, Inc. On February 16, 2016, he discussed the acquisition with the company CFO who forward him the letter of intent. That letter stated that ASEI would be acquired for $32 to $38 per share.

As the deal negotiations continued Mr. Loman purchased ASEI shares. Specifically, on March 3, 2016 Mr. Loman purchased 10,000 shares at $24.91 per share. The blackout period on the transaction began on April 29, 2016, although Mr. Loman was notified the prior day.

The acquisition was announced on June 21, 2016. The price was $37 per share. The share price of ASEI’s stock rose to $36.96 by June 23, 2016. Mr. Loman sold his ASEI shares early on the morning of June 21, 2016, just prior to the deal announcement. Since the price had been trending up he had profits of over $100,000. In testimony before the staff Mr. Loman invoked his Fifth Amendment privilege. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24540 (July 18, 2019).