I've gotten a number of queries from readers about the Department of Justice's criminal case and the Securities and Exchange Commission's ("SEC's") insider trading case against Donald L. Johnson, a former managing director of The NASDAQ Stock Market.
The SEC alleges that Johnson traded on confidential information that he stole while working in a market intelligence unit of NASDAQ where he was able to communicate with companies in advance of market-moving public announcements. The Complaint asserts that he traded in advance of such public announcements as corporate leadership changes, earnings reports and forecasts, and regulatory approvals of new pharmaceutical products. More troubling are the allegations that he traded directly from his work computer through an online brokerage account in his wife's name.
The SEC alleges that Johnson obtained illicit trading profits of more than $755,000 from August 2006 to July 2009.
Paragraphs 3, 15 and 16 of the SEC Complaint allege:
3. Over a three-year period, from August 2006 through July 2009, Johnson traded in advance of nine announcements of material nonpublic information involving Nasdaq-listed companies. Johnson concealed his illicit trading by using an online brokerage account held in the name of his wife, Dalila Lopez (the "Lopez account"), that Johnson did not disclose to Nasdaq in violation of Nasdaq policy. Johnson frequently placed the orders for his illegal trades from his office computer at Nasdaq's offices in New York.
15. Nasdaq also required its employees to disclose all securities accounts and holdings in which they maintained control, effected transactions, or had a financial interest.
16. In violation of Nasdaq's policy, Johnson never disclosed the existence of his wife's brokerage account to his employer, even though he was solely responsible for effecting trades in that account. Moreover, he periodically certified falsely to Nasdaq that he had disclosed all securities accounts in which he maintained control, may effect transactions, or had a financial interest.
Among the more common questions many of you have asked me is how could Johnson have:
Frankly, those are two very fair questions and issues that NASDAQ itself will need to publicly answer. These obligations to disclose are imposed upon members of the securities industry and, as such, the problem is well known to those who work on the Street. See this for some samples of FINRA disciplinary cases involving "Away Accounts."
On March 31, 2011, Street Sweeper featured an article about how the FDA monitored and caught an employee who was allegedly misusing his inside role at the organization in order to benefit from insider trading. Former FDA Chemist Named in Insider Trading Cases
In that article, I noted:
Apparently, on Jan. 6, 2011, the Department of Health and Human Services, Office of the Inspector General (HHS-OIG) installed software on Cheng Yi Liang's work computer that took screen shots from that computer. That data revealed Liang's use of DARRTS to review information related to a pending drug application submitted by Clinical Data Inc. for an anti-depressant drug called Viibryd.
On Jan. 18, 2011, the software showed Liang had reviewed an internal FDA document recommending approval of Viibryd. Allegedly, within minutes after such access, several accounts controlled by Liang and his son purchased 4,875 shares of Clinical Data - ultimately the Liangs acquired 48,875 shares of Clinical Data before Viibryd's approval was announced on Jan. 21, 2011. Thereafter, the Liangs sold their entire position for at least a $379,000 profit.
It will be interesting to learn whether NASDAQ - home to some of the most famous tech firms and software developers - had installed similar monitoring software in its offices. I'm also wondering what, if any, routine, unannounced steps NASDAQ and other securities markets take to monitor possible insider trading abuses by their employees. If it's nothing more than the honor system, well, you know, I'm not sure that "honor" is necessarily the best approach when it comes to Wall Street.
On May 25, 2011, Johnson, 56, a resident of Ashburn, Va., pleaded guilty before U.S. District Judge Anthony J. Trenga in the Eastern District of Virginia to one count of securities fraud. In pleading guilty, he admitted that he purchased and sold stock in NASDAQ-listed companies based on material, non-public information, or inside information, on several different occasions from 2006 to 2009.
Johnson admitted that he made illegal purchases and sales of stock in NASDAQ-listed companies on at least eight different occasions, generating gains totaling more than $640,000. The companies whose securities he traded were
In November 2007, Johnson used inside information related to successful trial results for United Therapeutics' drug Viveta (now called Tyvaso) to purchase shares of United Therapeutics before the trial results were announced. Following the announcement, he sold the shares and gained more than $175,000 in profits.
In July 2009, Johnson used inside information about the approval of its drug Tyvaso to purchase shares of United Therapeutics before the approval was announced. After the announcement, he sold the share for more than $110,000 in profits.
Johnson is scheduled to be sentenced on Aug. 12, 2011. The maximum penalty for securities fraud is 20 years in prison and a fine of $5 million.