On Friday, May 30th a Manhattan jury returned a verdict against the SEC in the long-running and high profile insider trading case, SEC v. Obus. One week later on Friday, June 6, 2014 a jury on the other side of the country sitting in Los Angeles returned a verdict against the SEC in an insider trading case, SEC v. Moshayedi, Civil Action No. CV 12-1179 (C.D. Cal). If the swagger was shaken by Obus it must be evaporating after Moshayedi.
Manouchehr Moshyedi is the co-founder and CEO of STEC, Inc., a manufacturer of computer storage devices. The case centered on trading in advance of a secondary offering in which Mr. Moshyedi and his two brothers, who also participated in founding the company, would sell substantial portions of there company stock, yielding them gross proceeds of over $133 million. At the time of the sale the Commission claimed Defendant Moshyedi had material non-public information about one of the firm’s largest customers.
Over a period of eight months beginning in January 2009 STEC stock increased in price over 800%. During the period the company had increasing revenues and sales margins. ,It also announced a unique supply agreement with its largest customer, EMC Corporation of STEC’s flag ship product.
Mr. Moshyedi and his brothers decided to take advantage of the price increase by selling a large block of their shares in a secondary offering, according to the complaint. It was scheduled for August 3, 2009, the same day STEC would announce its revenue guidance for the third quarter.
Shortly before the offering Mr. Moshayedi learned that EMC would never enter into another similar agreement with STEC. This was reflected in an internal e-mail from the firm. He also received an internal report indicating that EMC’s actual demand for the flash drive in the last two quarters of the year would not be sufficient to ensure that STEC would meet guidance or the consensus analyst estimates.
After learning these facts, the Commission claims that Mr. Moshayedi engaged in a cover up so that the planned offering could move forward. He entered into a secret deal with EMC in which they committed to purchase a larger quantity of product in the third quarter than they required at a substantial discount.
Following this deal Mr. Moshayedi announced guidance for the third quarter that met the consensus estimate. That guidance included proceeds from the secret deal which were over twice as much as EMC’s actual forecast demand for the quarter. The guidance numbers were only possible because of the secret deal, according to the complaint.
The offering went forward. Mr. Moshayedi and his brothers each sold 4.5 million shares of STEC stock. Three months later, in connection with the release of its third quarter earnings results, STEC disclosed that EMC might carry inventory into 2010. In a conference call with analysts Mr. Moshayedi stated that the EMC supply agreement was a “one-ff” deal. The price of STEC stock dropped 38.9% from about $23 per share to just over $14. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Section 10(b).
Mr. Moshayedi disputed the Commission’s claims, in a motion filed just before the commencement of trial. There he stated that the initial statements regarding the demand of EMC for the third and fourth quarters were preliminary and, based on past experience, the firm did not view the internal forecast as covering the entire period. Therefore it would have been materially misleading to disclose it. While Mr. Moshayedi knew there was a risk that EMC would accumulate a significant amount of inventory of STEC product and that would negatively impact firm revenues that fact had been disclosed.
Likewise, there is nothing untoward about the claimed secret deal. It was not entered into for the purpose of meeting guidance. Rather, it was an agreement that gave STEC the information needed regarding what EMC would purchase in the third and fourth quarters so that the company could meet its obligations.
Finally, the claim that EMC would not enter into another contact is belied by the fact that at the time Mr. Moshayedi was engaged in negotiations with EMC which went on for a considerable period over another contract. While the e-mail from EMC does state it would not enter into another agreement, that was simply a negotiating tactic used in the context of the then on-going negotiations.
Following trial, the jury rejected the claims of the Commission, finding in favor of Mr. Moshayedi.
Insider trading cases are most difficult to prove absent the kind of wire tap evidence or cooperating witnesses the Manhattan U.S Attorney’s Office was able to secure in its string of insider trading victories. At the same time neither Obus nor Moshayedi were typical, totally circumstantial insider trading cases. In the former the agency litigated for years, based on what appeared to be direct testimony of an illegal tip in addition to other, substantial evidence. It also had very favorable rulings from the Second Circuit when the case was on appeal. Yet the jury could not be convinced.
Likewise, the complaint in Moshayedi is not the typical circumstantial insider trading case. To the contrary, the Commission’s detailed complaint chronicles a tale of greed and lies supposedly built on firm documents. Yet again the jury could not be convinced.
Two losses – even in eight days – don’t make a trend. But these are not the first trial losses in significant or insider trading cases this year. What all of these losses suggest is that the Commission should quickly evaluate its entire process from the Wells, through charging and ultimately the way cases are presented in court. Otherwise the agency will not only continue to suffer trial losses, but more. Ultimately it will suffer a loss of credibility. And, that loss would be much more significant than any courtroom failure.