SEC Obtains Freeze Order In Suspicious Trading Case

by Dorsey & Whitney LLP

Suspicious trading cases have become a staple of SEC insider trading enforcement. Typically the cases involve outsized trading in advance of a significant corporate event. The only way for the SEC to avoid the possible transfer of the trading profits out of the account and perhaps the country, is to file a complaint with little more than the account documents, the trading and a sketch of the transaction milestones seeking a freeze order. The request is usually granted. See, e.g., SEC v. Yin, Civil Action No. 17 CV 972 (S.D.N.Y. Filed Feb 10, 2017)(Chinese national trades prior to announcement that Comcast will acquire DreamWorks, yielding over $29 million in profits). In many instances the Commission has been successful in later proving the allegations in these complaints. In others it has not (here).

The SEC’s latest action in this regard involves two Israeli traders, using U.S. brokerage accounts, to generate profits of almost $5 million from trading in advance of a takeover. An asset freeze order was entered at the time the complaint was filed. SEC v. Darvasi, Civil Action No. 17-cv-2088 (S.D.N.Y. Filed. March 23, 2017).

The action centers on the acquisition of Mobileye, N.V. by Intel Corporation, announced before the opening of trading on March 13, 2017. Following the deal announcement the share price increased 28%. Defendant Dr. Ariel Darvasi is a Professor of Genetics at the Center for Research on Pain, Hebrew University of Jerusalem. Defendant Dr. Amir Waldman is a self-employed engineer who earned his Ph.D. at Hebrew University of Jerusalem. Movileye is a Netherlands entity with its principal office in Jerusalem, Israel.

A number of Mobileye’s directors and officers are members of the Hebrew University science community. The firm developed software and technology for Advanced Driver Assistance Systems used for autonomous driving. The technology was commercialized at Hebrew University of Jerusalem while Dr. Waldman was working on his doctorate at the school. The firm’s shares were listed on the NYSE. Intel is a large, well known, U.S. chip maker and technology firm.

Intel began formal discussions with Mobileye in late January 2017. Principals of the two firms met in New York in late January. By the end of January 2017 all the members of Mobileye’s board had discussed the possible transaction. On February 1, 2017 the two firms executed a non-disclosure agreement.

The first meetings that included legal and financial advisers were held on February 9, 2017. The discussions proceeded. A definitive agreement was entered into on March 12, 2017. It called for a tender offer valued at about $15.3 billion or $63.54 per share. That price represented a premium to market of about 34.7%.

Dr. Darvasi had an account at Interactive Brokers LLC. Ten days prior to the execution of the definitive Agreement for the tender offer, he liquidated the only holdings in the account – about 40,000 shares of Teva Pharmaceutical Industries — at a loss of over $600,000. The same day – March 2, 2017 – he purchased 30,000 shares of Mobileye, using all of the cash in the account and margin debt. The stock had a value of $1.4 million.

The Doctor’s only other trade in Mobileye occurred when he purchased shares on January 5, 2016. After the market closed on that date Mobileye announced it was deploying a mapping technology and a new strategic partnership with Volkswagen. He sold the shares the next day at a loss of $4,820.

Dr. Waldman also had an account at Interactive Brokers. Beginning in early November, and continuing through February 2017, he traded Mobileye options. Typically he purchased the options with strike prices that were about 4 to 11% out of the money compared to the share closing price at the time. Dr. Waldman usually held the options for about two weeks and sold them prior to expiration. His bullish trading yield gains.

Beginning on February 1, 2017, the date Intel and Mobileye executed a nondisclosure agreement, Dr. Waldman changed his trading pattern. He began accumulating Mobileye options at strike prices above the firm’s then current performance. By March 10, 2017 he held 5,339 Mobileye call options, purchased for $237,581.

On the day of the deal announcement Dr. Darvasi sold 100 Mobileye shares for a gain of $1,473.45. He had unrealized gains on his remaining 29,900 shares of about $427,000. Dr. Waldman sold 1,697 of his options on the same day, realizing profits of about $1,539,813. As of that date he had unrealized profits of about $2.96 million on his remaining holdings. Dr. Waldman also withdrew $200,000 from his brokerage account on March 13, the maximum amount permitted on any day.

Mobileye has extensive contacts in the science and academic community at Hebrew University, according to the complaint. The defendants are part of that community. Each defendant, on information and belief, possessed inside information at the time of their respective securities transactions, the complaint claims. The complaint alleges violations of Exchange Act Sections 10(b) and 14(e). The case is in litigation. See Lit. Rel. No. 23789 (March 24, 2017).


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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