Not Much in the Name of Progress: Pequot, Samberg, and Martha Stewart

May 28, 2010

Bill Singer's Comment:  Usually, I put my comment at the end of my column.  However, I've decided to break with tradition and go for the ever-edgy comment at the top of the page.  Moreover, unlike much of my verbose grandiosity, this is going to be short. 

Let me tick off some dates for you:

  • In December 2001, Martha Stewart sold Imclone Systems, Inc. shares in response to an insider trading tip.
  • In 2003, Stewart was indicted for her 2001 insider trading.
  • In March 2004, Stewart was found guilty of conspiracy, obstruction of an agency proceeding, and making false statements to federal investigators. 
  • In July 2004 Stewart was sentenced to serve a five month term in a federal correctional facility and a two year period of supervised release (to include five months of electronic monitoring) and fined $30,000.
  • In August 2006, the Securities and Exchange Commission settled its related civil case against Stewart for a five-year bar from serving as a director, or as the CEO, CFO (or other officer roles in which she would be responsible for preparing, auditing, or disclosing financial results), of any public company.

What sort of got lost in the shuffle was that Stewart's illegal sales helped her avoid about $46,000 in losses.  Not millions in losses. And not millions in profits. Just a measly five-figures in avoided losses. Nonetheless, the dollars were not the point.  Wrong is wrong and illegal conduct is illegal conduct.  Or so we're told that's the way the regulation of Wall Street is supposed to go.


Now, let me tick off a more recent insider trading case.


In May 2010, long after Wall Street crashed and burned, long after Madoff, long after far too many bungled regulatory investigations, and long after Martha Stewart was released from prision, the SEC announces the conclusion of another high-profile insider trading case against Pequot Capital and its CEO Arthur Samberg.  Just like with Stewart, the alleged insider trading happened in 2001.  Unlike Stewart's avoidance of a $46,000 loss, Pequot/Samberg realized about a $14 million gain.  Unlike the government's juggernaut prosecution of Stewart, Samberg (and his firm) got to write out a check for $28 million and he agreed to cease future association with any investment adviser.


So tell me, if Stewart's trading took place in December 2001 and Pequot/Samberg's trading took place eight months earlier in April 2001 -- why was Stewart at trial by 2004 but Pequot/Samberg's case is first resolving in 2010? And given that the fact patterns seem quite similar, why didn't Stewart just get to write out a fat settlement check instead of going to jail?Ain't progress grand?


I mean, seriously, how do you reconcile the two cases in this day and age?


Below, I reprint, verbatim, the material portions of the SEC's Press Releases for the Stewart and the Pequot/Samberg matters. I simply ask you to compare the case against Stewart with the just-announced settlement against Maybe I misunderstood SEC Chair Schapiro's tough talk about putting some bite into securities regulation? 


Bill Singer

SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading

SEC Charges Pequot Capital Management and CEO Arthur Samberg With Insider Trading


Washington, D.C., June 4, 2003 -- The Securities and Exchange Commission today filed securities fraud charges against Martha Stewart and her former stockbroker, Peter Bacanovic. The complaint, filed in federal court in Manhattan, alleges that Stewart committed illegal insider trading when she sold stock in a biopharmaceutical company, ImClone Systems, Inc., on Dec. 27, 2001, after receiving an unlawful tip from Bacanovic, at the time a broker with Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Commission further alleges that Stewart and Bacanovic subsequently created an alibi for Stewart's ImClone sales and concealed important facts during SEC and criminal investigations into her trades. In a separate action, the United States Attorney for the Southern District of New York has obtained an indictment charging Stewart and Bacanovic criminally for their false statements concerning Stewart's ImClone trades.

The Commission seeks, among other relief, an order requiring Stewart and Bacanovic to disgorge the losses Stewart avoided through her unlawful trades, plus civil monetary penalties. The Commission also seeks an order barring Stewart from acting as a director of, and limiting her activities as an officer of, any public company. Stewart has been Chairman and Chief Executive Officer of Martha Stewart Living Omnimedia, Inc.

Stephen M. Cutler, the SEC's Director of Enforcement, said: "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It's worse still when the individual engaging in the insider trading is the Chairman and CEO of a public company."

Wayne M. Carlin, Regional Director of the Commission's Northeast Regional Office, said: "The Commission simply cannot allow corporate executives or industry professionals to profit illegally from their access to nonpublic information. The coordinated action announced today by the U.S. Attorney's Office shows that the consequences for those individuals will be even greater if we uncover evidence that they obstructed our investigation."

Stewart's Dec. 27, 2001, ImClone sales came as ImClone and the market anxiously awaited an imminent decision from the Food and Drug Administration on one of ImClone's key products, a cancer treatment called "Erbitux." Bacanovic's unlawful inside tip was that other Bacanovic clients - ImClone's CEO, Samuel Waksal, and Waksal's daughter - had just placed orders to sell all the ImClone stock they held at Merrill Lynch. At the time, Waksal secretly knew that the FDA was about to reject ImClone's Erbitux application. Information about the Waksals' efforts to sell was confidential under Merrill Lynch policies, which prohibited employees from disclosing client transactions or effecting client trades on the basis of other client transactions. Had information about the Waksals' efforts to sell been known publicly, it would have signaled insider pessimism at ImClone about the FDA decision, the prospects for Erbitux, and the future of the company, according to the complaint.

The Commission alleges that, during the morning of Dec. 27, 2001, Bacanovic instructed his assistant, Douglas Faneuil, to tell Stewart that Waksal and his daughter were selling all the ImClone stock held in their Merrill Lynch accounts. During a subsequent telephone call, Faneuil conveyed that information to Stewart, who promptly instructed Faneuil to sell all 3,928 shares of her ImClone stock. The next day, Dec. 28, 2001, ImClone announced that the FDA had decided not to accept ImClone's Erbitux application for filing. By the close of the next trading day, Monday, Dec. 31, 2001, the price of ImClone stock dropped 16% to $46 per share. By selling when she did, Stewart avoided losses of $45,673.

The Commission alleges that Stewart and Bacanovic went on to lie when the Commission staff and criminal authorities questioned them about the facts surrounding Stewart's sale of ImClone stock. Stewart and Bacanovic fabricated an alibi for Stewart's trades, stating that she sold her ImClone stock because she and Bacanovic had decided earlier that she would sell if ImClone's stock price fell below $60 per share. In addition, Stewart told the government that she did not recall anyone telling her that day that any of the Waksals were selling their ImClone stock.

Pursuant to a separate Commission order issued this morning, the Commission has barred Faneuil from association with a broker, dealer, or investment adviser. The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in the investigation of this matter.




Washington, D.C., May 27, 2010 - The Securities and Exchange Commission today charged Connecticut-based hedge fund manager Pequot Capital Management, Inc., and its Chairman and CEO Arthur Samberg with insider trading in Microsoft Corporation securities. The SEC separately brought an enforcement action against a former Microsoft employee who later worked at Pequot for allegedly tipping the firm and Samberg with nonpublic information about Microsoft's earnings.

Pequot and Samberg agreed to pay nearly $28 million to settle the SEC's charges. The SEC Division of Enforcement's case against the tipper, David Zilkha, will continue in an administrative proceeding before the Commission. 

"The cases have two particularly troubling aspects - a hedge fund manager trading on illegal insider information, and his tipper source who withheld crucial information about the scheme during an SEC investigation," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Both are high-priority targets for SEC Enforcement."

The SEC's complaint against Pequot and Samberg, filed in U.S. District Court in Connecticut, alleges that amid rumors in April 2001 that Microsoft would miss its earnings estimates for the quarter that had just ended, Samberg sought information from Zilkha, a Microsoft employee who had just accepted an offer from Samberg to work at Pequot. Zilkha quickly reached out to a Microsoft colleague, who sent him an e-mail stating that the company would meet or beat its earnings estimates for the quarter.

According to the SEC's complaint, Zilkha then conveyed to Samberg his understanding that Microsoft would meet or beat its earnings estimates. Samberg thereafter traded in Microsoft on behalf of funds managed by Pequot. On April 19, after the market had closed, Microsoft announced that it beat its earnings estimates, driving up the price of Microsoft's stock. As a result of the illegal trading by Pequot and Samberg, the Pequot funds made more than $14 million.

Pequot and Samberg agreed to settle the SEC's charges without admitting or denying the SEC's allegations against them. Pequot and Samberg agreed to pay a total of nearly $18 million in disgorgement of trading profits and prejudgment interest as well as $10 million in penalties. With the exception of certain activities aimed solely at winding down Pequot, Samberg also has agreed to be barred from association with an investment adviser.

In the insider trading enforcement action against Zilkha, the SEC Division of Enforcement also alleges that during a prior investigation into his conduct, Zilkha concealed from the SEC staff that he had received inside information about Microsoft's earnings and then recommended that Samberg buy Microsoft securities on the basis of this information. The Enforcement Division alleges that in 2005 and 2006, Zilkha did not produce nor disclose the existence of the e-mail he had received from a Microsoft colleague concerning Microsoft's earnings, despite subpoenas and direct questions that required him to do so.

In January 2009, the SEC staff first received direct evidence that Zilkha had material, nonpublic information about Microsoft - when staff was provided copies of e-mails that had been located on a computer hard drive that was then in the possession of Zilkha's ex-wife.