IR Executive Settles SEC Insider Trading Charges

by Dorsey & Whitney LLP
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The SEC filed a settled insider trading case against a partner in an investor relations firm who traded securities based on information he obtained from draft press releases he worked on for firm clients. The settled action alleges that the executive was a “temporary” insider and breached a duty to his firm. It was resolved with a conduct based injunction and monetary payments. SEC v. McGrath, Civil Action No. 14 CV 5483 (S.D.N.Y. Filed July 22, 2014).

Kevin McGrath has been with Cameron Associates since 1996 and a partner since 2003. Previously, he worked for an investment advisory firm and had been a registered representative.

Cameron is an investor relations firm whose clients are primarily small, publicly traded companies. Two of its clients are Misonix, Inc. and Clean Diesel Technologies, Inc. Misonix, a developer and manufacturer of medical devices and laboratory equipment, became a firm client in 2008. Clean Diesel, a global manufacturer of emissions and control systems and products, became a firm client at the end of 2010.

Mr. McGrath worked on a number of press releases for Misonix. In April 2009 he purchased 10,000 shares of Misonix stock. Later that same month he began communicating with the company on an Earnings Release.

On May 6, 2009 Mr. McGrath sent an e-mail to a Misonix employee regarding the date the Release would be issued. He was told that it would be issued in May. The next morning he received a draft of the Release. The drafts stated that the company had significant declines in revenue from the prior nine-month period. A comment by the CEO stated that difficult times were ahead. Later that afternoon a Misonix employee confirmed in an e-mail to the executive that the Release would be finalized on Friday, the next day. About forty minutes later Mr. McGrath sold all of his Misonix shares.

On Monday Mr. McGrath submitted the Release to the PR Newswire for issuance. By the time of the market close the stock price had dropped 36%. By selling his shares the prior week Mr. McGrath avoided losses of $5,400.

Mr. McGrath began providing investor relations services to Clean Diesel in January 2011. He frequently received non-public information from the firm.

In May 2011 Mr. McGrath was involved in drafting a May 25 release in which the company announced it had received a significant amount of orders in connection with a recently announced program by the State of California. On May 24, 2011 a Clean Diesel employee sent Mr. McGrath an e-mail stating that the release would be issued the next day. Fourteen minutes later the account executive purchased 1,000 shares of Clean Diesel.

The next day the release was issued after the close of the market. By the close of the market on the following day the share price had increased about 95%. Mr. McGrath sold his shares, realizing profits of $6,376.

The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. McGrath resolved the matter, consenting to the entry of a “conduct-based injunction” which prohibits future violations of the Sections cited in the complaint. It also permanently requires Mr. McGrath to abstain from trading in the stock of any issuer for which he or his firm has performed any investor relations services within a one year period. His employer is also required to provide written notice to a client upon any intent to sell shares received as compensation for services performed and must receive written authorization for the sale from the company management. In addition, he agreed to pay disgorgement of $11,776, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23049 (July 22, 2014).

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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