SEC Settles Another Expert Network Insider Trading Case

by Dorsey & Whitney LLP
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The Commission filed another settled insider trading case tied to its long-running expert network investigation. This time the action traces to the source of tips regarding Nvidia Corporation, Chris Choi. SEC v. Choi (S.D.N.Y. Filed April 23, 2014). It also names as relief defendants others from the expert network investigation including Diamondback Capital Management Capital, LLC, Level Global Investors, L.P., and Sigma Capital Management, LLC along with employees at those firms.

Chris Choi was employed at Nvidia as an accounting manager. He was friends with Hyung Lim who in turn was friends with Danny Kuo, a hedge fund manager at Whittier Trust Company. On three instances in 2010 and 2011 Mr. Choi furnished his friend inside information regarding a pending earnings announcement for his company. In each instance that information was passed to Mr. Kuo who caused the hedge fund employing him to trade. In one instance Mr. Kuo distributed the information not just to those at his fund but also on one occasion to others involved in the expert network investigation that traded.

The first tip involved the earnings announced by Nvidia, issued after the close of the market on May 7, 2009. At that time the results for the first quarter of 2010 were released. Beginning in early April 2009 Mr. Choi tipped his friend Mr. Lim about the upcoming financial results. The tip indicated that results might be substantially worse than expected.

Mr. Choi updated the tipped information later in the month. Indeed, as the time for the quarterly earnings announcement drew near, Mr. Choi continued to update the information. As a result Whittier sold shares of Nvidia and established a short position.

Mr. Kuo forwarded the information to others including Jesse Tortora at Diamondback, Spyridon Adondakis at Level Global and Jo Horvath at Sigma Capital. Each caused their firm to trade based on the information.

Following Nvidia’s announcement that its financial results were worse than had been expected it share price fell. Each of the four funds had loses avoided and profits made of: Whittier, $144,000; Diamondback, $73,000; Sigma Capital, $500,000; and Level Global, $15.6 million.

The second tip concerned the financial results for third quarter 2010, announced November 5, 2009 after the close of the market. In this instances Mr. Choi tipped his friend Mr. Lin regarding the then pending financial results the day before the announcement. This time the information was positive – the results would be good. The day of the announcement Whittier, to whom the information had been passed, purchased a block of Nvidia’s stock.

Nvidia announced results which exceeded expectations. The share price closed up substantially the next day. Whittier had trading profits of over $44,000.

The third tip involved the financial results for the third quarter of 2011, announced after the close of the market on November 11, 2010. Beginning nine days before the announcement Mr. Choi told Mr. Lim that the firm’s results would be better than expected for the quarter. Later, prior to the announcement, he reconfirmed the information. That information was transmitted to Messrs. Adondakis and Tortora.

Whittier purchased Nvidia shares while in possession of the inside information. Following the earnings announcement the shares of the company increased significantly. Whittier had profits of $105,000.

Mr. Lim was paid $15,000 by Mr. Kuo who also provided him with inside information on another stock. Trading on that tip yielded him $11,000.

The complaint, which charges that Mr. Choi is responsible for the trading by Whittier and each of the other funds that traded, alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). Mr. Choi resolved the charges, consenting to the entry of a permanent injunction prohibiting future violations of each of the Sections cited in the complaint. He also agreed to pay a civil penalty of $30,000 and to the entry of an order barring him from serving as an officer or director of a public company for five years.

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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