Most insider trading cases center on news about a corporate event such as an acquisition or an earnings announcement that has not become public. In SEC v. Lawson, Civil Action No. 3:14-cv-02157 (N.D. Cal. Filed May 12, 2014) the Commission brought an action against three company founders who traded on inside information that press rumors driving the price of Lawson Software Inc. shares up were false.
Defendants Herbert Richard Lawson, William Lawson and John Cerullo founded Lawson Software, a leading provider of business software, in 1975. By the first quarter of 2011 Richard’s brother William Lawson and John Cerullo had retired. Richard remained as co-Chairman of the Board of Directors.
In early January 2011 Infor, a privately held software company, approached Lawson Software about a possible acquisition. By January 11, 2011 the two firms had entered into a non-disclosure agreement. Two days later the CEO of Lawson Software informed the board, including Richard Lawson, of the then continuing discussions. By mid-February an offer was on the table at $11.25 per share.
In late February, while Infor was conducting due diligence, Lawson Software began a “market check” to evaluate interest in the firm. By early the next month IBM, Hewlett-Packard, SAP and Oracle expressed a lack of interest.
As the discussions continued, Reuters reported on March 8 that the firm had retained a financial adviser to explore a possible sale of the company. The article identified potential acquirers as IBM, Hewlett-Packard and SAP. The share price increased by 13%, closing on the date of the article at $11.19. Speculation in the press continued and the share price increased.
On March 11, 2011 Lawson Software issued a press release confirming that Infor had made an offer at $11.25. The release noted that the firms were engaged in discussions about the proposal but there was no assurance that a deal would be consummated. Press speculation about other possible suitors continued. The share price increased, closing at $12.24 on March 14.
On Saturday March 12, Richard Lawson called his fellow company founders, brother William and John Cerullo. This was the first time in 2011 that Richard had telephoned either man. On Monday, William began selling company stock. Later that day Richard called again. William sold more company stock that day after the call. By the end of the day Richard had sold 980,000 shares of Lawson Software. Amid conversations with his brother, William also spoke with Party A, recommending that he sell his company shares without explaining the reason. Thirty minutes later Party A sold 420,000 shares, about 40% of the family holdings in the stock.
By late April 2011 the two companies had worked out the final details of the merger agreement. The Lawson Software board was scheduled to consider the final agreement on April 25, 2011. Richard spoke with the CEO on the morning of the board meeting, obtaining the final details. Minutes later he called William. Two minutes after the conversation concluded William sold another 241,045 shares of the company.
That same morning John Cerullo heard an internet news report of a draft press release apparently inadvertently posted on Infor’s website. It discussed the merger but omitted the price. Mr. Cerullo spoke with his broker about the release but did not give instructions. After a conversation with Richard for twenty minutes, however, he instructed his broker to sell company shares in amounts that would not impact the share price. The broker sold about 176,243 shares at prices above $12 per share. The stock closed at $12.125.
The next day Lawson Software announced the deal at $11.25 per share. The company share price dropped, closing at $11.06 per share. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b)
Each defendant settled with the SEC. Each consented to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. Richard Lawson also agreed to pay a penalty of $1,557,384.57, the amount of the ill-gotten gains received by the two men he tipped. In addition, he agreed to be barred from serving as an officer or director of a public company. William Lawson agreed to pay disgorgement of $1,853,671.28, prejudgment interest and a penalty equal to the amount of his disgorgement. His disgorgement included the ill-gotten gains of Trader A. John Cerullo agreed to pay disgorgement of $178,481.29, prejudgment interest and a penalty equal to the amount of his disgorgement. See Lit. Rel. No. 22989 (May 12, 2014).