Not only does December bring snow flurries but it seems that this year also brings a flurry of insider trading cases. Not exactly in keeping with the holiday spirit but, hey, what's wrong with an unending stream of perp walks set against the background of menorahs, Christmas trees, and Salvation Army Santa Clauses ringing their bells. Almost reminds you of a Hallmark card -- well, okay, sort of.
Sort of Like Tinkers to Evers To Chance (but trying to eliminate any chance)
On December 8, 2010, the Securities and Exchange Commission (SEC) filed a Complaint in the United States Southern District Court of California charging a Baltimore-based business consultant and his uncle with insider trading in the stock of two biotechnology companies based on material, nonpublic information that he obtained from his fraternity brother. Securities and Exchange Commission v. Brett A Cohen and David V. Myers (S.D. CA, 10CV2514 L WMC).
NOTE: THE DEFENDANTS ARE PRESUMED INNOCENT UNLESS AND UNTIL PROVEN GUILTY. ALL CHARGES ARE MERELY ALLEGATIONS AT THIS TIME.
The Complaint summarizes the case as involving:
unlawful insider trading in the securities of two molecular diagnostics companies, Sequenom, Inc. ("Sequenom") and Exact Sciences Corporation ("EXAS"). Tipper A, a patent agent employed by Sequenom, learned material nonpublic information about the development of one of Sequenom's diagnostic products, and separately about Sequenom's proposed acquisition of EXAS, and illegally tipped his brother, Tipper B. Tipper B in turn tipped defendant Brett A. Cohen ("Cohen"), his fraternity brother, who tipped defendant David V. Myers ("Myers"), Cohen's uncle. Myers traded on the basis of Tipper A's material nonpublic information and realized illicit profits of approximately $607,640 on the purchase and sale of EXAS securities, and the purchase and sale of put options on Sequenom, and unrealized profits on 1,000 shares of EXAS stock.
Cast of Characters
SQNM Acquisition of EXAS
Pursuant to Sequenom's interest in acquiring EXAS, in September 2008, Sequenom executives flew to EXAS' headquarters to conduct due diligence. Internal Sequenom documents regarding the potential acquisition were marked "CONFIDENTIAL," and the EXAS acquisition was given a code name to maintain its confidentiality.
Around this time, Tipper A (who worked in Sequenom's legal department on intellectual property matters) began conducting due diligence on EXAS' intellectual property. Other than Sequenom's directors and executive officers, Tipper A was one of the few Sequenom employees aware of the potential acquisition.
October 2008 Activity: Going Hollywood
On October 22, 2008:
On October 23, 2008:
"[a]ny word related to Blu H@rsesh0e? La Jolla says the times are ripe."
In attempting to decipher the alleged concealed content of the "Blu H@orsesh0e" message, the Complaint explains that in the movie Wall Street, the phrase, "Blue Horseshoe loves Anacot Steel," is used as an insider trading code.
The Complaint further notes that Tipper A lived and worked near La Jolla, California. Additionally, we are advised that Cohen's response apparently is referring to his uncle, Defendant Myers, as "Blu H@resh0e" because Myers traveled to see Cohen over Thanksgiving.
Between October 23 and 26, 2008, there were at least 12 telephone calls between and among Tipper A, Tipper B, Cohen, and Myers.
On October 27, 2008, Myers made his first-ever purchases of EXAS securities (these trades also constituted Defendant Myers' first stock purchase in his brokerage account since at least January 2007). Myers bought a total of 15,000 shares at prices between $0.69 and $0.74 per share, at a total cost of $11,025.90.
Between October 28 and October 31, 2008, the defendants, Tipper A, and Tipper B exchanged multiple phone calls, including no less than nine phone calls on October 30 within a two-hour time span. Thereafter, on October 31, 2008, Myers purchased another 5,000 shares of EXAS on October 31, 2008, at a price of $0.50 per share, for a total cost of $2,512.95.
Between November 1 and November 11, the pattern of multiple calls between and among the defendants, Tipper A, and Tipper B continued. On November 12, 2008, Myers purchased another 15,000 shares of EXAS stock, at prices of $0.49 and $0.50 per share, for a total cost of $7,492.95.
SQNM Announces Planned Acquisition of EXAS
After the markets closed on Friday, January 9, 2009, Sequenom publicly announced its planned acquisition of EXAS. At the close that day, EXAS stock traded at 99 cents per share.
On Monday, January 12, 2009, EXAS announced that it had rejected Sequenom's offer. At the market close on January 12th, EXAS stock traded at $1.50 per share.
On January 13, 2009, Defendants Myers and Cohen and Tipper B engaged in phone calls between and among themselves, and, thereafter, Defendant Myers undertook the following EXAS sales resulting in the net proceeds after commissions as noted (NOTE: the sales left Defendant Myers with 1,000 EXAS shares in his portfolio):
The Complaint alleges that the above sales resulted in a total illegal profit in excess of $35,000 to Defendant Myers.
Bulls, Bears and Hogs?
The Complaint alleges that on March 27, 2009, two separate money orders totaling $1,900 addressed to Tipper A were purchased from a post office in the same zip code as Tipper B's Harley-Davidson dealership. Tipper A eventually deposited one money order into his bank account in April 2009, and deposited the second one in May 2009.
SQNM Down Syndrom Test Problems
Beginning in June 2008, Sequenom publicly announced that its diagnostic screening test, which could detect whether a fetus had Down syndrome using only a maternal blood draw (the "Down Syndrome Test," or the "Test"), was close to 100% accurate, and that the company planned to launch the product in June 2009.
In response to the announcements, Sequenom's stock price had increased dramatically over the course of several months. On June 2, 2008, SQNM closed at $7.75 per share. On September 26, 2009, SQNM closed at $27.74 per share.
Unfortunately, in April 2009, as Sequenom was preparing for the June 2009 Test launch, certain Sequenom employees discovered that the Test did not perform as well as had been publicly reported. Sequenom's board of directors launched a formal investigation into the matter on Sunday, April 26, 2009, and the scientists who had worked on the Test (the "Scientists") were put on administrative leave on the same day. Moreover, after the Scientists were put on administrative leave, Sequenom disabled their e-mail accounts and an error message responded to any incoming messages.
Monday, April 27, 2009, Tipper A was directed by Sequenom's general counsel to collect and account for all of the Scientists' lab notebooks. On the following day, Tipper A had additional conversations with the general counsel and the vice president of quality control and regulation concerning the notebooks.
Sequenom did not make a public announcement regarding problems with the Test until after the markets had closed on April 29, 2009, and only a handful of Sequenom employees were aware of the problems with the Test prior to the company's public announcement. The April 29th announcement, made at approximately 4:30 p.m., announced that the Test would not be launched in June 2009 due to "mishandling" of Test data
On April 29, 2009, SQNM opened at $14.75 per share. On April 30, 2009, SQNM closed at $3.62 per share.
Here We Go Again
On the evening of April 27, 2009 (the day on which Tipper A was directed to collect the notebooks) and then again on April 28th, Tipper A made calls to Tipper B, and, thereafter, Tipper B communicated with Defendant Cohen.
On April 29, 2009, Defendants Cohen and Myers exchanged eight text messages between 6:11 and 6:36 a.m. That same day, at 12:31 p.m., Sequenom sent an e-mail to all employees regarding a mandatory meeting that would occur that afternoon at 4:30 p.m.
Shortly thereafter, at 12:54 p.m., Tipper A sent Tipper B an e-mail the subject of which was "Swine flu." In the e-mail, Tipper A informs Tipper B that he will "act quickly at the first signs of any symptoms... ." Subsequently, Tipper A and Tipper B engaged in a number of short phone calls, after which, Tipper B called Defendant Cohen, who thereafter telephoned Defendant Myers.
Less than ten minutes after completing a 3:49 p.m. call on April 29th with Defendant Cohen, Defendant Myers began buying put options on Sequenom. In the 12 minutes before the market closed on April 29th, Myers purchased the following SQNM Puts ("Quantity", "Date of Expiration" and "Strike Price"):
The total net cost of the above SQNM May Puts was $40,474.35. 33.
On April 30, 2009, by 9:45 a.m., Defendant Myers had sold all of his SQNM May Puts for gross proceeds of $612,500.00. The Complaint further alleges that Myers made illegal profits of approximately $572,540.
SEC Seeks Relief
The Complaint charges Defendants Cohen and Myers with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties against them.