The SEC "Special Ops" of Enforcement: Five cases Identified by Analysis and Detection Center
CNL Securities published an article on June 11, 2020, entitled “Big Data is Watching You.” It begins by portraying a particular type of securities fraud, involving “cherry-picking” by a market professional who allocates the profits from winning trades to his own account, but leaves the losses from losing trades in the accounts of his clients. The article asserts that the U.S. Securities and Exchange Commission (“SEC”) will catch him by using advanced analytics to identify suspicious trading. This is an example, says the article, of how the SEC’s “approach to fighting fraudulent trades, insider trading, and other problems in the investment community is changing.” Previously the SEC was reactive, waiting for notice of possible violative activity, relying “heavily on interviewing the people involved,” and thus inadvertently giving them time to “coordinate their stories.”
“In 2010, things changed,” noted the CNL article. “The SEC reorganized its Enforcement Division and created a Market Abuse Unit to get better at spotting suspicious activity. Within that Unit is an Analysis and Detection Center (ADC), a kind of special-operations team of people with very specific expertise in trading, programming, or white-collar criminal investigations.” This allows the Commission “to be far more proactive, identifying suspicious trading patterns as they’re happening …. The ADC can run analytics that sift through traded data” going back multiple years, and “billions of rows of buy and sell orders – to spot patterns.” The ADC looks to expand its activities in the future as the SEC’s Consolidated Audit Trail initiative is implemented. See my Sept. 8, 2020, Blog “SEC Seeks to Increase the Security of the Data on the Consolidated Audit Trail National Market System.”
The Market Abuse Unit (“MAU”) was headed from its inception by Daniel Hawke, a man well-named for his assignment. Hawke retired in 2015 after 16 years at the SEC. At that time the MAU was “comprised of more than 60 attorneys and industry specialists in eight SEC offices,” according to the SEC’s July 29, 2015 Press Release announcing Hawke’s retirement. He was succeeded by Joseph A. Sansone, who still heads the MAU. Since 2015 the MAU, including the ADC, has grown to be very much the” point of the spear” in SEC enforcement investigations. Indeed, five such cases were announced in the last week of July 2022, many focusing on insider trading.
“Insider trading” has been a principal concern of the SEC since at the least the seminal case of SEC v. Texas Gulf Sulphur Co., 401 F. 2d 833 (2nd Cir. 1968) en banc. That case involved key employees, officers, and directors of the company purchasing Texas Gulf Sulphur stock after the company discovered what turned out to be the largest body of silver ore in the North American continent, BEFORE the public was informed of the find. Your author was an associate in the law firm that represented the company in the litigation and actually had the opportunity to hold a short piece of the drilling core that confirmed the find.
“Insider trading” is usually defined as the trading of a company’s securities by individuals with knowledge of material non-public information about the company. That trading is seen as unfair to other investors who do not know the key information (sellers in the case of positive information about the company, where notionally the price of securities purchased will go up; and buyers in the case of negative information, where the insider trader avoids loss). Insider trading violates Section 10(b) of the Securities Exchange Act of 1934, as amended (the “34 Act”), and Rule 10b-5 thereunder, and can also be the basis for criminal convictions.
The theoretical superstructure of insider trading has expanded since 1968 to include the so-called “misappropriation theory,” which holds that a person commits fraud “in connection with” a securities transaction in violation of Section 10(b) and Rule 10b-5 when that person “misappropriates” material nonpublic information in order to trade, in breach of a duty owed to the source of that information. See U.S. v. O’Hagan, 521 U.S. 642 (1997), where an attorney for an acquirer, with knowledge of a deal, bought securities of the target before the acquisition was announced. On a related front, tippees (persons given material nonpublic information, which they use to trade the security) are guilty of insider trading if aware that the information IS inside information AND that the insider tipper provided the information knowing that it would be used to trade in violation of insider trading laws. The courts have also addressed whether the tipper receives a benefit from giving the tip, holding in Salman v. U.S., 580 v. __ (2016), that the benefit need not be pecuniary, but can be an intangible personal benefit such as that received from giving a” gift” to a family member.
There is some academic dispute about the underlying theory of this legal regime, including by economists like Professor Henry G. Manne, founder of the School of Law and Economics, and later Dean, of George Mason University School of Law. In his 1966 book “Insider Trading and the Stock Market,” Manne argued that the use of inside information to trade can be beneficial to the economy because it causes adjustments to the market price for securities, so it more accurately reflects the actual value of those securities. This view has not been accepted by the courts or by the SEC.
And now to the five new insider trading cases brought by the MAU with the help of the ADC:
SEC v. Stephen E. Buyer and Relief Defendant, Joni L. Buyer. On Monday, July 25, 2022, the SEC filed a Complaint in the U.S. District Court for the Southern District of New York, charging Buyer, a consultant and the principal of the Steve Buyer Group. Buyer, who graduated from law school and served at one point as a Special Assistant U.S. Attorney, became a Congressman from Indiana in 1993 and held office until 2011. According to the Complaint, he “became familiar with issues related to the VA and the telecommunications industry.” In December 2016, Buyer’s firm signed a consulting agreement with T-Mobile US, Inc., and worked for them until the end of 2019. From March 28 through 30, he attended a golf outing in Miami with a VP of T-Mobile, who told him that T-Mobile planned to acquire Sprint Corporation, expecting Buyer to keep that information confidential. Instead, between March 29 and April 5, he purchased 112,675 shares of Sprint stock for $568,000. Buyer made the purchases in four accounts: a joint account with a cousin; his IRA; his SEP IRA; and in an account in the name of a woman in Florida with whom he had been in a romantic relationship since 2006. Information about the Sprint acquisition “leaked out” on April 10, 2018, resulting in a significant increase in the price of Sprint stock, so by April 11, 2018, Buyer’s accounts had a profit of $107,987.
In 2015 the Steve Buyer Group signed a consulting contract with Guidehouse LLP, a private equity fund, and did work for them over the years. Buyer was to “help Guidehouse establish and grow relationships with key stakeholders at the VA and in Congress.” On June 12, 2019, a Guidehouse executive asked Buyer for information about the VA and certain of its operations, and to get the requested information, Buyer contacted the Chief Counsel of the House Committee on Veterans’ Affairs. According to the Complaint, Buyer deduced from the inquiry that Guidehouse was considering acquiring Navigant Consulting, Inc., a provider of consulting services to the healthcare, energy, and financial industries. Between June 13 and Aug. 1, 2019, Buyer bought 44,654 shares of Navigant stock for over $1 million. This time he used six separate accounts: his IRA; his SEP IRA; a joint account with his son; a joint account with his wife, Joni L. Buyer; an account of Joni L. Buyer; and the account of his Florida female friend. On Aug. 2, 2019, Guidehouse announced the Navigant acquisition, which resulted in a profit of $227,742 for the Buyer accounts.
The SEC, asserting that Buyer had misappropriated material nonpublic information about both Sprint and Navigant, seeks a finding that Buyer violated the federal securities laws; a permanent injunction against future violations of the cited laws; a permanent bar against Buyer serving as a director or officer of a public company; disgorgement of his “ill-gotten gains”; plus prejudgment interest (here $335,729), and payment of a civil money penalty (three times the gain, i.e., $1,007,187). Mrs. Buyer is named as a Relief Defendant in the Complaint, not for any wrongdoing by her, but to require her to disgorge the ill-gotten gains she received, plus prejudgment interest. Her husband also faces criminal charges brought by the U.S. Attorney for the SDNY, with maximum penalties of up to $10 million in fines plus up to 25 years in prison. Finally, he may face other sanctions imposed by his wife for his relationship with, and trading on behalf of, his Florida female friend, who is seven years younger than Mrs. Buyer. According to an article in the July 26 Wall Street Journal (page B 1, col.6), an attorney for Buyer asserted his client is innocent, the trades were lawful, and Buyer “looks forward to being quickly vindicated.”
SEC v. Brijesh Goel and Akshay Niranjan. On Monday, July 25, 2022, the SEC filed suit in the Federal Court for the SDNY against Goel, a former vice president of Goldman Sachs Group, Inc., who allegedly tipped Niranjan, a foreign exchange trader at another “global corporate banking institution,” about four pending acquisitions before the information was publicly available. Niranjan then traded call options on the stock of those companies, using his brother’s brokerage account. The two defendants met at “a business school located in northern California” (presumably Stanford University) and became “close friends.” The Complaint asserts that in “early 2017, Niranjan and Goel began engaging in a scheme to use the information that Goel learned through his employment …[with Goldman Sachs] to engage in trading, and share the profits. Goel regularly received material nonpublic information concerning corporate acquisition transactions in which …[Goldman] was involved. Goel tipped Niranjan…, [who] then used the information to trade call options.” After the deals were announced, Niranjan sold out the option positions and divided the profits with Goel. The Complaint alleges that Niranjan knew that Goel obtained the information through his employment and was prohibited from sharing that information.
Goel got the information in Goldman deal memoranda with headers warning “FOR INTERNAL USE ONLY – DO NOT FORWARD EXTERNALLY,” and which cautioned, in footers that cited legal restrictions and Goldman policies, that misuse “could have serious consequences … including potential criminal liability.” Goldman also prohibited its employees from buying or selling securities of a Goldman client considering a transaction OR disclosing the information to anyone else. Goel received “periodic compliance training” which reinforced these policies. Niranjan received similar training from his employer. But neither policies nor training deterred defendants from effecting their scheme four times: the February 2017 acquisition of Lumos Networks Corp. by EQT AB, yielding a $600 profit; the May 2017 acquisition of Pantheon N.V. by Thermo Fisher Scientific, Inc., yielding a $40,900 profit; the August 2017 acquisition of PharMerica Corporation by KKR & Co., Inc., and Walgreens Boots Alliance, Inc., which began in May 2017, so the call options Niranjan purchased expired out of the money before the deal was announced, yielding no profit; and the September 2017 acquisition of Calgon Carbon Corporation by Kuraray Co., Ltd, yielding a $250,235 profit.
The SEC seeks a permanent injunction against the two defendants from any future violation of the insider trading laws, disgorgement of their ill-gotten gains together with prejudgment interest, and payment of a civil penalty of $875,205. Goel and Niranjan also face criminal charges brought by the U.S. Attorney for the SDNY. One suspects the two defendants will find it difficult, when the litigation is resolved and the judgments met, to obtain positions like those they once held.
SEC v. Amit Bhardwaj, et al. (Defendants Dhirenkumar Patel, Srinivasa Kakkera, Abbas Saeedi, and Ramesh Chitor, and Relief Defendants, Gauri Salwan, The Kakkera Family Trust, All US Tacos Inc., and Janya Saeedi). On Monday, July 25, 2022, the SEC filed charges in the Federal Court for the SDNY for insider trading using material nonpublic information that Bhardwaj misappropriated and tipped to four of his friends, resulting in collective gain of more than $5.2 million of what the SEC’s July 25, 2022 Press Release calls “illicit profits.” Bhardwaj was Chief Information Security Officer of Lumentum Holdings Inc., a public Delaware corporation headquartered in California, which provides optical and photonic products. Bhardwaj’s responsibilities included overseeing Lumentum’s information security and risk management, as well as insuring proper information technology audit and compliance controls. He was subject to the company’s insider trading and confidentiality restrictions, which prohibited his disclosing material nonpublic information (including about “potential mergers or acquisitions”) to anyone not an authorized Lumentum person.
Beginning in fall 2019, Lumentum began acquisition discussions with Coherent, Inc., a public “provider of laser solutions and optics.” After a break, discussions resumed in late 2020, and Coherent signed a merger agreement on Jan. 18, 2021, although the agreement was subsequently terminated and Coherent merged with another company. Between Dec. 30, 2020, and Jan. 15, 2021, Bhardwaj, and his friend and tippee, Dhirenkumar Patel, bought Coherent stock and, in Bhardwaj’s case, also Coherent call options. When the stock price rose after the Jan. 19, 2021 announcement of the signed merger agreement, they realized a gain of $462,000. Bhardwaj made some of the purchases in an account of his wife, Relief Defendant Guari Salwan. Patel knew Bhardwaj was violating Lumentum policies in giving him the information, and agreed to share some of his profits with the tipper. Patel was a manager of technical marketing for a software company.
In September 2020 Lumentum entered acquisition discussions with NeoPhotonics Corporation, a San Jose-based California company that develops “silicon photonics and advanced hybrid photonic integrated circuit-based lasers and subsystems for telecommunications networks,” says the Complaint. Those discussions were put aside due to the then-pending Coherent deal, but resumed in spring 2021, culminating in an acquisition agreement announced Nov. 4, 2021. Bhardwaj was involved in October 2021 in evaluating NeoPhotonics’ data security system as part of Lumentum’s due diligence. In October 2021, Bhardwaj tipped the following: i) his long-time friend Srinivasa Kakkera, Head of Engineering and Artificial Intelligence at a California public software company; ii) Abbas Saeedi, Bhardwaj’s accountant, and the proprietor of a tax preparation firm; and iii) his friend Ramesh Chitor, the Director of Alliances at a California public data security firm, about the NeoPhotonics deal. Using their own accounts and accounts in the names of the Kakkera Family Trust, All US Tacos (owned by Saeedi), and Janya Saeedi, Saeedi’s wife, each gained a total of almost $4.8 million. Kakkera transferred some $300,000 and Saeedi sent a check for $100,000 in each case to Bhardwaj’s wife, Guari Salwan, in respect of the tip. Chitor sent Indian rupees equal to “tens of thousands of U.S. dollars” to one of Bhardwaj’s relatives in India in respect of the tip.
The SEC seeks a finding that all five defendants violated securities law, especially Section 10(b) of the 34 Act and Rule 10b-5 thereunder, and requests a permanent injunction against each of them against future violations of the cited law, disgorgement of their ill-gotten gains plus prejudgment interest, and payment of civil penalties totaling more than $15.6 million. The Relief Defendants are to disgorge all ill-gotten gains they received, plus prejudgment interest. In addition, each defendant faces criminal charges for insider trading…
SEC v. Seth Markin and Brandon Wong. Also, on the busy Monday of July 25, 2022, the SEC filed suit in the Federal Court for the SDNY against Seth Markin of Washington Crossing, Pennsylvania, and Benjamin Wong of New York, New York, for trading on material nonpublic information about the planned tender offer for all the shares of Pandion Therapeutics, Inc., by Merck & Co. Inc. Markin, who had been a trainee to become an FBI agent and was now a compliance analyst for a federal contractor, was in “a close romantic relationship” (said the Complaint) with a woman who was an associate in the law firm representing Merck. On Jan. 31, 2021, she became part of her firm’s team on the Pandion deal, continuing in that role through the deal announcement on Feb. 29 and beyond. Due to the pandemic, she worked from her apartment. Markin stayed there “for extended periods in January and February 2021” as part of their relationship, which ended in May 2021. Despite express understandings that he would “treat information related to …[her] work as confidential and not … trade on it … or share it with others,” he did BOTH. He made a point of paying attention to her telephone calls on the Pandion deal, and then on multiple occasions when she was not in sight, he “reviewed …[her] binder of documents concerning the…deal.”
Between Feb. 1 and 23, he bought 2,270 shares of Pandion stock, knowing he had obtained information about the deal from a lawyer representing Merck, essentially an agent of that company. That same month, Markin also tipped Wong, his friend of four years, with the information he had “misappropriated” from Merck (through his romantic partner), telling Wong how he had secretly reviewed her binder. The two used encrypted and disappearing messages to communicate. The Complaint alleges Markin “obtained personal benefits” from tipping Wong “including the benefit of making a gift … to a close friend, and a quid pro quo from Wong, including the expectation of receiving a lavish thank-you gift.” Wong bought 35,382 shares of Pandion stock. Additionally, both Markin and Wong tipped others, who may be subjects of future SEC action. Markin made over $82,000 on his Pandion stock, and Wong over $1.3 million. After Merck announced the tender offer, Wong bought Markin a Rolex watch and paid some of Markin’s expenses on a vacation they took together to Hawaii.
The SEC asserts the defendants violated Section 10(b) of the 34 Act and Rule 10b-5 thereunder. It further asserts defendants violated Section 14(e) of the 34 Act and Rule 14e-3 thereunder for trading on material nonpublic information concerning a tender offer (as Merck elected to acquire Pandion by means of a tender offer). In consequence, the SEC requests the Court to permanently enjoin defendants from future violations of the cited securities laws and to order the defendants: i) to disgorge their ill-gotten gains plus prejudgment interest and ii) to pay civil money penalties, $246,000 in the case of Markin and $3.9 million in the case of Wong. In addition, both defendants face federal criminal charges brought by the U.S. Attorney for the SDNY. It is sadly noteworthy that the most grievous breach of trust in this case is that suffered by the associate in the firm representing Merck, and no Court can redress that.
SEC v. Mark Klein, Eduardo Rubinstein, and Pablo Rubinstein. On Thursday, July 28, 2022, the SEC brought suit in the Federal Court for the SDNY against the three named defendants for selling the stock two of them held in Ampio Pharmaceuticals, Inc., before the public learned that the U.S. Food and Drug Administration (“FDA”) had concluded that the clinical studies of one of Ampio’s “flagship developmental drugs was not adequate and well-controlled.” The drug, Ampion, was “designed to treat inflammatory conditions, such as osteoarthritis of the knee.” Dr. Pablo Rubinstein of New York, New York, had served as a member of Ampio’s Scientific Advisory Board since November 2013. Eduardo Rubinstein of Aventura, Florida, is Dr. Rubinstein’s brother, and Mark Klein of Edgewater, New Jersey, is Eduardo Rubinstein’s son-in-law. Ampio, a public Delaware biopharmaceutical corporation headquartered in Englewood, Colorado, focuses on developing drug therapies to treat inflammatory conditions.
The Complaint sets out in detail Dr. Rubinstein’s involvement with the FDA on behalf of Ampio, including specifically the work-up concerning Ampion and preparing the Ampio CEO for his appearance at a dispute resolution meeting with the FDA Director to attempt to resolve FDA concerns about the clinical studies of Ampion, which the company was using as the basis for a Biologics License Application. The Complaint also details the close relationship between the Rubinstein brothers, as well as Eduardo Rubinstein’s close relationship with his daughter’s husband. On Friday Aug. 3, 2018, Ampio received a follow-up letter from the FDA Director rejecting the company’s appeal of the FDA’s refusal to accept the proffered clinical data, meaning Ampio would not get a Biologics License for Ampion. Within 30 minutes, the Ampio CEO sent the letter to Dr. Rubinstein. Dr. Rubinstein and his brother were then in recurring telephone communication over the weekend. On Monday morning, Aug. 6, Eduardo Rubinstein sold all his Ampio holdings (directly and in a joint Roth IRA) of 103,226 shares. He then called Klein and tipped him, so he forthwith sold his 100,000 shares. On Tuesday Aug. 7, 2018, Ampio announce the receipt of the FDA letter, and the stock price fell from $2.86 a share to $0.61. So Rubinstein and Klein had avoided losses of $225,902 and$206, 974, respectively.
The SEC asserts that each of Dr. Rubenstein and Eduardo Rubinstein received a personal benefit from the tip, including providing a gift of material nonpublic information to a close family member. Therefore, the SEC claims each of the three defendants violated the prohibition on insider trading under Section 10(b) of the 34 Act and Rule 10b-5 thereunder. The Complaint also alleges their actions violated Section 17(a) of the Securities Act of 1933, as amended (the “33 Act”), namely making fraudulent sales while in possession of material nonpublic information. It is not necessary to prove scienter (i.e., intent to defraud) to obtain a judgment for a violation of the 33 Act. The SEC seeks a permanent injunction against each defendant forbidding future violations of the cited securities laws, and an order that they pay civil penalties totaling almost $1.3 million. According to the SEC’s July 28, 2022 Press Release, Dr. Rubinstein has consented to the entry of a judgment against him that permanently enjoins him from violating the cited securities laws and orders him to pay approximately $226,000. While not stated in the public record, it is possible the U.S. Attorney for SDNY did not decide to bring criminal charges against the defendants because: i) Dr. Rubinstein did not sell any Ampio stock holdings, so his actions appear motivated exclusively by concern for his family; and ii) Eduardo Rubinstein and Klein acted defensively without any quid pro quo beyond family affection and thankfulness for the timely gift of the information.
One cannot help but ponder the busy activities of the SEC and of the U.S. Attorney for the SDNY in the last week of July. Indeed, the number of insider trading enforcement actions in the four days from Monday to Thursday has been the subject of articles in the financial press like the Wall Street Journal, as well as in the business pages of metropolitan dailies such as The Philadelphia Inquirer. It seems a bit Orwellian, but in securities transactions, the MAU’s ADC is, like Big Brother, “watching you.”