Last week, the SEC continued its focus on insider trading, while two high profile criminal cases moved forward.
This year, the Commission has filed a number of significant insider trading cases involving Wall Street professionals, corporate officers, and spouses and friends – the latter being the so-called “pillow talk” cases discussed in earlier posts (On September 6, the SEC brought an insider trading case against Chauncey Shey, co-founder and former officer and director of UTStarcom, Inc., an Alameda, California-based telecom company. According to the complaint, Mr. Shey obtained inside information about his former company from two sources. First, Mr. Shey learned from a UTStarcom executive that the company was going to caution the market that earnings would fall short of guidance. Second, Mr. Shey learned through a venture capital fund owned in part by his former company that UTStarcom failed to finalize a significant deal. The SEC’s complaint states that after learning this information, Mr. Shey and his wife began liquidating their stock in the company. The last sales were made just prior to the UTStarcom announcement about failing to meet guidance. In all, Mr. Shey avoided losses of over $420,000. To resolve the case, Mr. Shey consented to the entry of a permanent injunction, prohibiting future violations of the federal securities laws. Mr. Shey also consented to the entry of an order requiring him to disgorge over $420,000, pay a civil penalty in an equal amount and prejudgment interest of over $31,000. The SEC’s Litigation Release can be viewed A second insider trading case was brought against a hedge fund manager and the fund in connection with ten PIPE offerings. In its complaint, the SEC claims that Robert A. Berlacher and the fund he manages, Lancaster Hedge Funds, engaged in an illegal PIPE trading scheme over a five-year period. The defendants, according to the complaint, sold short the issuer’s shares after learning of a PIPE offering, but before the resale registration statement became effective, thereby violating the registration provisions of the securities laws. The complaint alleges that, in at least one instance, Mr. Berlacher and the Fund engaged in insider trading by selling the share short, prior to the public announcement of the PIPE. The defendants sought to conceal their illegal trading activities with a variety of false representations. These cases, along with a report in Compliance Reporter on September 7, 2007, should serve to again warn all issuers and executives to carefully review their insider trading compliance programs. The Compliance Reporter article reports that most asset management firms do not perform an insider trading risk assessment. In view of the continuing emphasis by the SEC and the Department of Justice on insider trading, prudent firms are well advised to carefully review their procedures, including those used under so-called Rule 10b5-1 plans under which many executives trade. Two high profile criminal securities cases also moved forward last week. First, Jeffrey K. Skilling, the former Enron chief executive who was convicted on 19 counts of fraud, conspiracy, lying to auditors and insider trading, filed an appeal. Mr. Skilling is the highest raking Enron executive to be convicted in the debacle. Mr. Skilling is seeking a reversal of his convictions, 24-year sentence and the forfeiture of virtually all of his assets. While it is typically difficult to overturn criminal convictions, here Mr. Skilling may have cause for optimism. In an order denying his application for bail pending appeal, the Fifth Circuit noted that its “review has disclosed serious frailties in Skilling’s conviction.”