In its continued crackdown on illegal insider trading, the Securities and Exchange Commission (SEC) just days ago charged an employee of a credit ratings agency with tipping two friends about the non-public plans of the Sherwin-Williams Company to acquire Valspar Corp., which he learned of through his employment. The SEC also brought a civil enforcement action against his two friends who he tipped with the material, non-public information and who reaped substantial profits from their illicit trading.
The SEC’s complaint alleges that Sebastian Pinto-Thomaz, a credit rating analyst, learned of the impending acquisition when Sherwin-Williams consulted the credit rating agency about the potential effect of the transaction on its credit rating. Shortly thereafter, the SEC contends, Pinto-Thomaz tipped his two friends who purchased Valspar shares prior to the merger announcement. On the public release of the merger, shares of Valspar spiked 23% and the friends dumped their stock and profited.
The SEC charged the credit rating analyst and his two friends with violations of the anti-fraud provisions of the federal securities laws, and are seeking disgorgement of the illegal trading profits, civil penalties and injunctive relief.
In addition to the headache of having to defend against an SEC insider trading lawsuit, the three individuals were charged criminally for the same insider trading.
Lately I have seen a significant uptick in the criminal prosecution of insider trading cases, even where the trading profits realized are relatively small. I surmise that the SEC is increasingly referring to federal prosecutors those insider trading cases where the evidence is compelling and liability is clear (regardless of the amount of profit reaped or losses avoided), and then bringing those cases in parallel proceedings (a simultaneous filed SEC civil case along with a federal criminal case arising out of the same or substantially similar underlying conduct). A defendant facing parallel proceedings is under acute pressure to plea and settle, not only given the inordinate defense costs involved, but also the prospect that even if he prevails in the criminal trial, he will then have to face the SEC in a separate proceeding where it has a much lower burden of proof – preponderance of the evidence, as opposed to beyond a reasonable doubt in a criminal insider trading trial.
In the context of the settlement of parallel proceedings, however, there are certain advantages a defendant can reap in the SEC case. Such advantages include the waiver of disgorgement given the payment of restitution in the criminal case, and the waiver of a civil penalty given the imposition of jail time in the criminal case. The theory being that a SEC civil penalty, which is designed to punish and deter, is unnecessary given that the defendant will be sufficiently punished on the criminal side from the imposition of incarceration or, at the least, a felony conviction.
If you are under investigation by the SEC, it is critical that you immediately protect your legal interests by retaining an experienced SEC defense lawyer. David R. Chase formerly worked for the SEC in its Enforcement Division as a Senior Counsel and understands how the SEC investigates, prosecutes and settles its cases.
The Law Firm of David R. Chase, an SEC law firm located in South Florida, is headed by SEC defense lawyer, David Chase, who represents those under SEC investigations around the country. You may contact SEC defense lawyer Mr. Chase toll-free at: 800-760-0912 for a confidential and no cost initial consultation, or at david@davidchaselaw.com.
