April 1, 2014
Two, count 'em, two SEC Complaints alleging that husbands overheard their wives' business conversations and used the information to make big bucks on stock trades. Of course, given that there are two SEC Complaints, that sort of suggests that the federal regulator wasn't all that thrilled about the spousal eavesdropping.
SEC v. Hawk
According to the Securities and Exchange Commission ("SEC") Complaint in SEC v. Tyrone Hawk (NDCA, 14-CV-01466, March 31, 2014), around January 14, 2013, the wife of defendant Tyrone Hawk, 46, Los Gatos, CA learned about the potential acquisition of Acme Packet Inc. (previously NASDAQ symbol APKT) by Oracle Corporation (NYSE symbol ORCL). Thereafter, Hawk's wife, an Oracle Corporation finance manager, began working on due diligence for the transaction, which she knew would be announced on February 5, 2013. She also knew that there was a trading blackout restricting Oracle securities for the three-week period culminating with the public announcement of the acquisition.
During periods when his wife was working from home, the Complaint alleges that Hawk overheard some of his wife's work-related telephone calls regarding the acquisition. At all relevant times, Hawk was not an employee of Acme or Oracle. The Complaint alleges that starting on January 17, 2013 and extending over several days, Hawk purchased a total of 22,000 additional Acme shares, which resulted in an accumulated position of 28, 000 shares worth about $669,000.
In accordance with the planned transaction, the acquisition was announced on February 4, 2013 for a $29.95 cash offer per share, resulting in a 22% premium over Acme's prior closing price of $23.93. By February 5th, Acme's stock rose to $29.59. Allegedly, Hawk sold his position for a realized profit of $151,480.
According to the assertion in the Complaint:
14. Each of Hawk's Acme Packet trades was based on inside information misappropriated from his wife in violation of duties of trust and confidence owed to her. Hawk owed a duty of trust or confidence to his wife for purposes of the misappropriation theory of insider trading under Section 10(b) and Rule 10b-5, and he was expected to maintain in confidence the nonpublic information that Oracle would be acquiring Acme Packet.
15. Hawk was aware that his wife, a finance manager at Oracle, owed a duty of trust and confidence to Oracle and its acquisition targets, including Acme Packet. Hawk also knew, or was reckless in not knowing, that he violated the duty of trust and confidence owed to his wife by trading in Acme Packet securities on the basis of material nonpublic information he misappropriated from her.
The SEC sought disgorgement of Hawk's alleged ill-gotten gains plus interest and civil monetary penalties; and an injunction against future securities laws violations.
SEC v. Chen
In SEC v. Ching Hwa Chen (NDCA, 14-CV-01467, March 31, 2014)
, we have another SEC Complaint
alleging insider trading by a husband -- this time by defendant Ching Hwa Chen in Informatica Corporation (NASDAQ symbol INFA with options trading on the Chicago Board Options Exchange). This Complaint
asserts that defendant Chen's wife was the Senior Tax Director at Informatica, and in that role, she was informed around Thursday, June 28, 2012, that the company would not meet its publicly disclosed revenue guidance, a significant event because it constituted the first time in 31 consecutive quarters that the company would miss its revenue guidance.
On Friday the 29th, Chen and his wife took a previously planned vacation day, but she spent virtually all of a four-hour drive to Reno, NV finalizing Informatica's quarterly financial on her telephone - calls that the Complaint alleges the defendant husband overheard. Moreover, upon arriving at Reno, the wife worked through the evening. By the end of this vacation weekend, defendant Chen purportedly "gleaned from his wife's business calls and behavior that Informatica might miss its revenue numbers." (Paragraph 15 of the Complaint).
As asserted in the Complaint:
16. Chen's wife had previously advised Chen that he was not to trade in Informatica securities under any circumstance and she believed he understood her concerns.
17. On July 2 and July 3, 2012, after their return from Reno, Chen sold Informatica short, sold call option contracts, and bought put option contracts in four family brokerage accounts he controlled. These trades were designed to make Chen money if Informatica's stock price fell.
18. Chen hid his trades from his wife as he knew his wife did not have access to any of these accounts and he did not inform her of these trades.
After the market close on July 5, 2012, Informatica publicly announced its failure to meet its revenue guidance, and by the following day, the company's stock price had decreased 27% from the prior day. On July 6, Chen closed out his positions for a realized profit of $138, 068.
As asserted in the Complaint:
21. At all relevant times, Chen and his wife had a history, pattern or practice of sharing confidences such that Chen knew, or reasonably should have known, that his wife expected him to maintain in confidence any nonpublic information relating to Informatica.
22. Chen was aware that his wife, as a Senior Tax Director at Informatica, owed a duty of trust and confidence to Informatica. Chen knew, or was reckless in not knowing, that he violated the duty of trust and confidence owed to his wife by trading in Informatica securities on the basis of material nonpublic information he learned from her and her behavior.
The SEC sought disgorgement of Chen's alleged ill-gotten gains plus interest and civil monetary penalties; and an injunction against future securities laws violations.
According to an SEC Litigation Release (Lit. Rel 22957, March 31, 2014); Hawk agreed to the entry of a judgment enjoining him from future violations of the relevant provisions of the Exchange Act, and to pay $154,134,50 disgorgement and prejudgment interest, and an additional penalty equal to his profits of $151,480.00. According to an SEC Litigation Release (Lit. Rel 22958, March 31, 2014), Chen agreed to the entry of a judgment enjoining him from future violations of the relevant provisions of the Exchange Act, and to pay $142,365 disgorgement and prejudgment interest, and an additional penalty equal to his profits of $138,068.
The SEC Press Release
The SEC has brought other insider trading cases involving individuals who traded on material, nonpublic information misappropriated from spouses. For example, last year the SEC charged a Houston man with insider trading ahead of a corporate acquisition based on confidential details that he gleaned from his wife, a partner at a large law firm that was consulted on the deal. In 2011, the SEC charged an Illinois man who bought the stock of an acquisition target of a company where his wife was an executive despite her requests that he keep the merger information confidential. In a different 2011 case, the SEC charged the spouse of a CEO with insider trading on confidential information that he misappropriated from her in advance of company news announcements.
Bill Singer's Comment
In Paragraph 11 of the Hawk Complaint, line 11, it is alleged that Hawk's wife "knew that the acquisition would be announced on February 5, 2013;" however, Paragraph 13, line 24, asserts that before "the market open on February 4, 2013, Oracle and Acme Packet publicly announced the acquisition . . ." As such, the actual date of the announcement wasn't what the wife thought but turned out to be a day earlier on February 4th. Not a particularly material discrepancy but one that shows how expectations aren't always confirmed by subsequent events.
The SEC Complaints allege that both husbands Hawk and Chen owed a duty of trust or confidence to their respective wives for purposes of the misappropriation theory. Do you agree? Do you think that in this day and age, spouses owe a "duty of trust or confidence" to each other? I am not arguing the point but merely posing it as a thought question. Assuming that you concur with the SEC's position, do you also think that this duty of trust and confidence should extend or does extend to civil unions or mere cohabitations?
Now let's add another wrinkle. If, for example, someone cleaning the pool at the house of an Oracle finance manager or an Informatica Senior Tax Adviser overheard the same telephone calls, does a duty of trust or confidence also arise from that individual under the insider trading laws? If not, why not?
Howasabout just one more. Imagine you are at the airport waiting for your flight and married to someone who has just had the same type of telephone conversation as attributed to the wives above, and sitting on her other side is a woman whose eyes are now wide open and her mouth agape - and she quickly enters a trade to purchase thousands of shares of the to-be-acquired public company on her cellphone via her online brokerage account. Does she owe a duty of trust or confidence to your wife? On what basis do we or should we distinguish between conversations overheard by a spouse versus a stranger?
Consider the relevant statute:
17 CFR 240.10B5-2 - DUTIES OF TRUST OR CONFIDENCE IN MISAPPROPRIATION INSIDER TRADING CASES.
Preliminary Note to § 240.10b5-2: This section provides a non-exclusive definition of circumstances in which a person has a duty of trust or confidence for purposes of the "misappropriation" theory of insider trading under Section 10(b) of the Act and Rule 10b-5. The law of insider trading is otherwise defined by judicial opinions construing Rule 10b-5, and Rule 10b5-2 does not modify the scope of insider trading law in any other respect.
(a) Scope of Rule. This section shall apply to any violation of Section 10(b) of the Act (15 U.S.C. 78j(b)) and § 240.10b-5 thereunder that is based on the purchase or sale of securities on the basis of, or the communication of, material nonpublic information misappropriated in breach of a duty of trust or confidence.
(b) Enumerated "duties of trust or confidence." For purposes of this section, a "duty of trust or confidence" exists in the following circumstances, among others:
(1) Whenever a person agrees to maintain information in confidence;
(2) Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality; or
(3) Whenever a person receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling; provided, however, that the person receiving or obtaining the information may demonstrate that no duty of trust or confidence existed with respect to the information, by establishing that he or she neither knew nor reasonably should have known that the person who was the source of the information expected that the person would keep the information confidential, because of the parties' history, pattern, or practice of sharing and maintaining confidences, and because there was no agreement or understanding to maintain the confidentiality of the information.