SEC – USAO Charge IR Executive With Insider Trading

by Dorsey & Whitney LLP

The SEC may be developing theme based insider trading cases. In recent weeks the agency brought two insider trading actions centered on golfing friends. SEC v. O’Neill, Civil Action No. 1:14-cv-13381 (D. Mass. Filed August 18, 2014); SEC v. McPhail, Civil Action No. 1:14-cv-12985 (D. Mass. Filed July 11, 2014).

Now it is investor relations professionals. Last month the Commission brought an insider trading case against one investor relations executive. SEC v. McGrath, 14-cv-3483 (S.D.N.Y. Filed July 22, 2014). A second investor relations executive was named in an insider trading case by the agency yesterday. SEC v. Lucarelli, Civil Action No. 14-cv-6933 (S.D.N.Y. Filed August 26, 2014). The Manhattan U.S. Attorney’s Office filed parallel criminal charges. U.S. v. Lucarelli (S.D.N.Y.).

Michael Lucarelli was the Director of Market Intelligence at Lippert/Heilshorn & Associates, an investor relations firm. He began work at the firm in August 2012. Previously, he had been employed at another investor relations firm for a number of years.

When he accepted his new position, Mr. Lucarelli was furnished with the firm’s Code of Conduct. It prohibited insider trading. Mr. Lucarelli acknowledged obtaining the Code in an e-mail to the firm. The firm routinely had material non-public information regarding clients. Mr. Lucarelli’s role was to develop new client relationships for the firm. In that role he did not routinely review drafts of firm press releases.

In January 2008 the executive opened a brokerage account. At the time Mr. Lucarelli did not disclose that he worked for an investor relations firm. Rather, he told the brokerage firm that he was self-employed. He repeated this procedure in subsequent years when he moved his account to other brokerage firms.

Beginning in August 2013 and continuing through at least August 2014, Mr. Lucarelli is alleged to have used his position at the firm to obtain inside information regarding at least 20 clients. In each instance he traded in advance of a corporate event, purchasing securities and making illicit profits. Overall he is alleged to have had profits of almost $1 million by the SEC. The criminal complaint, based on 12 instances of insider trading, alleges illicit trading profits of over $538.000.

On July 24, 2014 the FBI obtained a search warrant for Mr. Lucarelli’s office at the firm. During the search, which was conducted without his knowledge, a locked briefcase was seized. Inside was a draft press release for firm client TREX Company. The press release contained the second quarter 2014 financial results for the company. The search of his office was completed the next day.

As the search was being completed Mr. Lucarelli began purchasing shares of TREX. From July 25, 2014 through August 1, 2014 Mr. Lucareli acquired a net position of 37, 400 shares of TREX. Before the opening of the market on August 4, 2014 the firm announced its financial results. Pre-tax earnings had increased 23%. TREX also announced revenue guidance for the third fiscal quarter of 2014. It was up 27% over the comparable period in the prior year. Within two hours of the announcement Mr. Lucarelli sold 35,058 of the 37,400 shares he had purchased, yielding profits of almost $90,000.

The SEC’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). See Lit. Rel. No. 23074 (August 26, 2014). The criminal complaint alleges 13 counts of securities fraud. Both cases are pending.


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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