November 15, 2013
In 2010 and 2012, the BrokeAndBroker Blog
reported about the Securities And Exchage Commission's investigations involving Carter's Inc.:"Oshkosh Omigosh! As Feds Expand Charges Against Former Carter's Executives
" (October 20, 2012). Keep in mind that the underlying Carter's case involved the first non-prosecution agreement entered into by the SEC since the announcement of the SEC's new cooperation initiative earlier in 2012. Under the terms of the agreement, Carter's agreed to cooperate fully and truthfully in any further investigation conducted by the SEC.
On October 29, 2013, the Atlanta Office of the SEC announced that it had expanded, yet again, the scope of the case to include a civil action against Dennis Rosenberg, a retired hedge fund consultant and market analyst, who allegedly engaged in trading on inside information and, additionally, acted as a tipper to two investment advisers. See: "Oshkosh Omigosh Again In New SEC Carter's Insider Trading Case
" (November 8, 2013).
On November 14, 2013, The SEC's Atlanta Office dropped yet another shoe with the announcement that insider trading charges were filed against Mark Megalli, 41, New York, NY., who had been a registered representative at broker-dealers from 2003 and July 2009, and associated with former investment adviser Level Global Investors, L.P. from August 2009 through November 2011. The SEC's Complaint alleges that Martin received the information from Richard Posey, who was Carter's Vice President of Operations,
Associate Atlanta Regional Director William Hicks, Assistant Regional Director Peter J. Diskin, Regional Trial Counsel Graham Loomis, Senior Trial Counsel Pat Huddleston, and Staff Attorney Grant Mogan seem to have clamped their jaws down on all things Carter's and the intrepid regulatory bull-dogs are settling in for the long haul. As if things hadn't taken a bad enough turn for the worse for Megalli, the U.S. Attorney's Office for the Northern District of Georgia launched a criminal case against him.
The SEC's Press Release in Megalli is reprinted below in full text:
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Washington D.C., Nov. 14, 2013 -
The Securities and Exchange Commission today announced insider trading charges against a New York-based investment professional who used nonpublic information about youth clothing company Carter's Inc. to give the hedge fund where he worked a $3.2 million trading edge.
The SEC alleges that Mark Megalli obtained the inside information through a consulting agreement he had with the former vice president of investor relations at Carter's, Eric Martin, who the SEC has previously charged among several others in its investigation into insider trading of Carter's stock. Martin, who had left Carter's and started his own consulting firm, maintained contact with at least one company insider and obtained confidential information in advance of market-moving events that he supplied to Megalli so he could trade on it. Megalli enabled hedge fund Level Global Investors L.P. to avoid approximately $2.4 million in losses and make $853,655 in illicit profits by trading shares ahead of positive or negative news.
"The information was hot enough that Megalli sometimes conducted the trades while he was still on the phone with his source," said William Hicks, associate regional director of the SEC's Atlanta Regional Office. "After one profitable trade, Megalli bragged to his colleagues about being ‘max short' in advance of negative news without mentioning his inside source."
In a parallel action, the U.S. Attorney's Office for the Northern District of Georgia today announced a criminal case against Megalli.
According to the SEC's complaint filed in U.S. District Court for the Northern District of Georgia, Megalli joined Level Global as head of its consumer sector in August 2009 and entered into the consulting agreement with Martin's firm a month later. Martin began providing Megalli with confidential information about Carter's anticipated financial results on the same day the consulting agreement was executed, and Megalli began directing and causing Level Global to trade on that nonpublic information.
The SEC's complaint alleges that Megalli directed the purchase of 350,000 shares of Carter's stock from September 14 to 17 based on explicit positive earnings information that he received from Martin. Megalli's very first trade in Carter's shares occurred while he was on the phone with Martin. On October 23, Martin advised Megalli about an unexpected accounting issue that was uncovered at Carter's. While still on the phone with Martin, Megalli immediately ordered the sale of 100,000 shares and instructed Level Global's trader to continue selling the firm's entire position in Carter's. After Level Global sold its entire position, Carter's announced on October 27 that it was delaying its earnings release to complete a review of its accounting. By selling shares prior to the negative announcement, Level Global avoided losses of more than $2.1 million.
The SEC alleges that Megalli also traded ahead of negative news based on nonpublic information from Martin to avoid losses of $268,500 in November 2009. Megalli's trading earned illicit profits of $205,000 in December 2009. During a telephone conversation on July 8, 2010, Martin tipped Megalli that Carter's earnings for the quarter would be below expectations. Megalli immediately caused Level Global to begin accumulating a short position in Carter's, and built up the short position to 300,000 shares by July 19. Carter's issued an earnings release on July 29 that contained negative future guidance, and its stock subsequently declined in price. Level Global covered its entire short position at the lower price, generating profits of $648,655. After the trading, Megalli boasted to colleagues in instant messages about the "max short" on Carter's before the negative announcement. He received hearty congratulations from his colleagues.
The SEC's complaint charges Megalli with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, disgorgement with prejudgment interest, and financial penalties.
The SEC's investigation, which is continuing, has been conducted in the Atlanta Regional Office by Grant Mogan under the supervision of Peter J. Diskin. The litigation will be led by Graham Loomis and Pat Huddleston. The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Financial Industry Regulatory Authority.