[co-suthors: Tyler Scattolini and Jacob Spicer]

Last week, the U.S. Securities and Exchange Commission brought five insider-trading cases against a slew of individuals. The U.S. Attorney’s Office for the Southern District of New York also announced parallel criminal charges against the defendants in four of the five cases. These cases contain examples of the classical theory and the misappropriation theory of insider trading.

These cases were the result of close coordination with the SDNY and SEC, and they appear to be the result of an enforcement sweep. Increasingly sophisticated data analytics and market surveillance make it highly likely that those who wish to exploit material nonpublic information will be caught, with severe consequences, including disgorgement, criminal restitution, civil penalties, and incarceration.

Below is a brief summary of each SEC filing:

Securities and Exchange Commission v. Bruce Garelick, Michael Shvartsman, Rocket One Capital LLC, and Gerald Shvartsman, No. 1:23-cv-05567 (S.D.N.Y. filed June 29, 2023)

On June 29, 2023, the SEC filed insider trading charges against Michael Shvartsman; his brother, Gerald Shvartsman; his employee, Bruce Garelick; and his venture capital firm, Rocket One Capital LLC, for trading that occurred before Digital World Acquisition Corporation’s (“DWAC”) announcement to acquire Trump Media & Technology Group (“TMTG”). [1] After being invited to invest in DWAC, the defendants signed confidentiality agreements to receive material nonpublic information that DWAC planned to pursue a merger with TMTG. The agreements prohibited the defendants from trading DWAC securities based on this information. The Shvartsman brothers decided to invest in DWAC, whereas Garelick served as a board member. While serving as a board member, Garelick learned about material nonpublic information confirming the merger between DWAC and TMTG.

The SEC alleges Garelick told Michael Shvartsman of the confirmation before the announcement, who in turn told Gerald Shvartsman. Each then purchased DWAC securities based on this information. The defendants sold their positions shortly after the acquisition announcement and collectively realized profits of almost $23 million. In addition to their purchases, the defendants passed on the information to friends, neighbors, and employees. The complaint charges the defendants with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities and Exchange Act of 1934 and Exchange Act Rule 10b-5.  The complaint further charges Garelick with violating the reporting obligations of Section 16 of the Securities and Exchange Act. The complaint seeks permanent injunctive relief, disgorgement of gains, prejudgment interest, civil penalties, and officer and director bars for Garelick and Michael Shvartsman.

Securities and Exchange Commission v. Amit Dagar and Atul Bhiwapurkar, No. 1:23-cv-05564 (S.D.N.Y. filed June 29, 2023)

The same day, the SEC filed insider trading charges against Amit Dagar and his friend, Atul Bhiwapurkar, for trading that occurred prior to Pfizer Inc.’s announcement that a trial of its COVID-19 treatment, Paxlovid, was successful. Dagar was a member of the statistical team that compiled data during the Paxlovid trial. [2] On the day before the announcement, Dagar learned material nonpublic information about the success of the Paxlovid trial and a press release scheduled to be released the next day. The SEC alleges Dagar told Bhiwapurkar of the successful trial before the announcement, who in turn told another friend. Each then purchased Pfizer securities based on this information. The defendants sold their positions shortly after the announcement and collectively realized profits of more than $350,000. The complaint charges the defendants with violating the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5.  The complaint seeks permanent injunctive relief, disgorgement of gains, prejudgment interest, and civil penalties.

Securities and Exchange Commission v. Joseph Dupont, Shawn Cronin, Stanley Kaplan, Paul Feldman, and Jarett Mendoza, No. 1:23-cv-05565 (S.D.N.Y. filed June 29, 2023)

The SEC also filed insider trading charges against Joseph Dupont, Shawn Cronin, Jarett Mendoza, Stanley Kaplan, and Paul Feldman for trading that occurred before the announcement of a tender offer by Alexion Pharmaceuticals Inc. to acquire Portola Pharmaceuticals Inc. [3] As a member of Alexion’s acquisition team, Dupont knew material nonpublic information about the company’s acquisition of Portola. The SEC alleges Dupont told his close friend, Cronin, of the acquisition before the announcement, who in turn told Mendoza and Kaplan. Kaplan then passed the information on to Feldman, and both Kaplan and Feldman told certain family members and friends. Cronin, Mendoza, Kaplan, and Feldman each purchased Portola securities based on this information.

The four defendants sold their positions shortly after the acquisition announcement and collectively realized profits of more than $2.3 million. The others who received the information from Kaplan or Feldman saw additional profits of $1.7 million. The complaint charges the defendants with violating Exchange Act Sections 10(b) and Rule 10b-5 and the tender-offer provisions of Section 14 of the Exchange Act. The complaint seeks permanent injunctive relief, disgorgement of gains, prejudgment interest, civil penalties, and officer and director bars against each defendant.

Securities and Exchange Commission v. Jordan Meadow and Steven Teixeira, No. 1:23-cv-05573 (S.D.N.Y. filed June 29, 2023)

On June 29, 2023, the SEC filed insider trading charges against Steven Teixeira and Jordan Meadow. [4] Teixeira allegedly misappropriated material nonpublic information relating to potential mergers and acquisitions of public companies from his girlfriend’s laptop, who was an executive assistant at a well-known New York investment bank, while she was working from home during the COVID-19 pandemic. The SEC claims that Teixeira shared the information with his friends, including Meadow, who traded securities based on this information.  These trades allegedly garnered profits of approximately $29,000 for Teixeira and more than $730,000 for Meadow.

Additionally, the complaint alleges that Meadow, a former registered representative of a broker-dealer, used this information to advise his brokerage customers on trades, generating millions of dollars of profit for his clients and hundreds of thousands in commissions for Meadow. The complaint charges the defendants with violating the antifraud provisions of Section 10(b) and Exchange Act Rule 10b-5, as well as the tender-offer provisions of Section 14 of the Exchange Act. The complaint seeks permanent injunctive relief, disgorgement of gains, prejudgment interest, civil penalties, and officer and director bars against each defendant.

Parallel Criminal Prosecutions

In all four of these cases, the SDNY announced criminal charges against the defendants in a parallel action. [5] It will be interesting to see how these cases play out.  Frequently, but not always, the SEC’s civil case will be stayed pending resolution of the criminal charges. If the DOJ obtains a conviction, the SEC will move for summary judgment based on principles of estoppel.  Most notably, the criminal defendants face potential lengthy sentences of incarceration of up to 20 years and 25 in some cases.

Securities and Exchange Commission v. Juan Roman, No. 1:23-cv-11470 (D. Mass. Filed June 30, 2023)

The SEC brought an additional case on June 30, 2023, charging Juan Roman with insider trading in advance of public announcements concerning two drugs under development at Acceleron Pharm Inc. [6]More specifically, the SEC’s complaint alleges that Roman, who was Acceleron’s Senior Director of Market Access at the time of the trading, used material nonpublic information about Acceleron’s progress relating to two different drug candidates to trade Acceleron securities during blackout windows and generate approximately $98,000 in profits. Roman has neither admitted nor denied these allegations, but he has agreed to settle the charges and pay more than $200,000. This final judgment is still subject to court approval but would permanently enjoin him from violating the antifraud provisions of Exchange Action Section 10(b) and Rule 10b-5; order him to disgorge his total trading profits, pay prejudgment interest, and pay a civil penalty; and bar him from serving as a director or officer of a public company for five years.

Conclusion

While insider-trading cases have historically comprised roughly ten percent of the SEC’s inventory of enforcement actions, these examples illustrate that both the SEC and the DOJ are being vigilant in enforcing insider-trading violations.  It was extraordinary to see this many filings over two days, but we expect the enforcement focus on insider trading by corporate insiders and other market participants to persist.

[1] See SEC Litigation Release, SEC Charges Former Dwac Board Member and Others for Insider Trading in Dwac Securities, available at https://www.sec.gov/litigation/litreleases/2023/lr25760.htm.

[2] See SEC Press Release, SEC Charges Former Pfizer Statistician with Insider Trading Ahead of COVID-19 Announcement, available at https://www.sec.gov/news/press-release/2023-123.

[3] See SEC Press Release, SEC Charges Police Chief, Four Others in Connection with Insider Trading Before Pharmaceutical Merger, available at https://www.sec.gov/news/press-release/2023-122.

[4] See SEC Litigation Release, SEC Charges Stockbroker and Friend with Insider Trading, available at https://www.sec.gov/litigation/litreleases/2023/lr25765.htm.

[5] See DOG Press Release, U.S. Attorney Announces Charges in Four Separate Insider Trading Cases Against 10 Individuals, Including Drug Company Employees, Investment Firm Executive Director, and SPAC Investors, available at https://www.justice.gov/usao-sdny/pr/us-attorney-announces-charges-four-separate-insider-trading-cases-against-10.

[6] See SEC Litigation Release, SEC Charges Former Pharma Employee with Insider Trading, available at https://www.sec.gov/litigation/litreleases/2023/lr25765.htm.