SEC – USAO Charge Trader In Analyst Insider Trading Case

by Dorsey & Whitney LLP
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Earlier this month the SEC brought an insider trading case against Zachary Zwerko, a financial analyst at a pharmaceutical company identified only as Pharma Co. SEC v. Zwerko, Civil Action No. CV 8181 (S.D.N.Y. Filed Oct. 10, 2014). The Manhattan U.S. Attorney’s Office brought parallel criminal charges. Now the SEC has amended its complaint, adding David Post, who is identified as the person who placed the trades, and additional facts about the scheme. The U.S. Attorney also brought criminal charges against Mr. Post.

Zachary Zwerko was a senior financial analyst at Pharma Co. His job responsibilities included conducting analysis in support of business combination and divestiture opportunities. Accordingly, he had access to a shared drive that contained confidential project folders regarding potential transactions.

Mr. Zwerko’s longtime friend is David Post, a 2008 classmate at business school. The two men have maintained a social relationship since school.

Mr. Post purchased shares of Idemix Pharmaceuticals, Inc. in advance of the June 9, 2014 pre-market announcement that Pharma Co. had agreed to acquire the firm. The take-over deal traces to April 2014 when the two firms entered into confidential, non-public discussions regarding a potential business combination. By mid-May confidentiality and standstill agreements were executed.

Mr. Zwerko did not work on the Idenix transaction. By May 5, 2014, however, he began accessing confidential information about the deal. Those documents referenced the deal by a code name. On May 20 Mr. Zwerko’s supervisor sent him and others an email chain that referenced the deal, noting that a few days earlier a non-binding offer had been made. The lead email referenced the discount rates used for financial modeling and cited Idenix. The chain discussed the acquisition, using the code name.

Minutes after receiving the e-mail, Mr. Zwerko accessed Yahoo Finance for Idenix from his work computer. Later that day he reviewed headlines about the company. That evening he accessed folders relating to the deal at the office. Mr. Zwerko then sent a text to his Mr. Post. Later that evening, the two friends spoke on the phone. Two minutes after the call ended Mr. Post placed an order for 1,000 shares of Idenix. Although it was not executed, starting the next day Mr. Post purchased shares, investing over $219,000.

Mr. Zwerko continued to access confidential material about the deal at work and contact his friend:

  • On May 21, 2014 the analyst accessed a confidential file at work that contained a revised offer and noted the proposed deal would go to the board on May 27;

  • On June 3, Mr. Zwerko accessed another confidential file on the deal;

  • On June 3, a few hours after accessing the file, Mr. Zwerko called Mr. Post; and

  • On June 4, 5 and 6 Mr. Post purchased additional shares.

Following the deal announcement Mr. Post sold his shares, reaping profits of about $579,000.

In 2012 Mr. Zwerko is also alleged to have tipped his friend in advance of another deal. This time it was the April 23, 2012 pre-market open announcement that Ardea Biosciences, Inc. had agreed to be acquired by AstraZeneca PLC. In the months prior to the deal announcement, Aredea engaged in a series of confidential discussions with several companies, including Pharma Co., regarding possible acquisitions. Mr. Zwerko worked on the proposed deal. Although Pharma did not acquire Areda, the firm participated in the negotiations until at least a week prior to the announcement.

During the negotiations Mr. Zwerko and Mr. Post spoke on the phone. For example, on February 27, 2012, there was an internal meeting at Pharma regarding a non-binding offer to Ardea. Hours after the meeting Mr. Zwerko called his friend’s cell phone. The next day Mr. Post began purchasing Ardea securities. Ultimately he purchased 9,800 shares through three brokerage accounts. Following the deal announcement he had trading profits of over $105,000.

During the scheme the two men took a number of steps to conceal their activity. For example, they used burner cell phones. Messrs. Zwerko and Post also used a dummy e-mail account. When one wanted to convey information to the other through the account he would draft an e-mail in code and leave it in the draft folder. After the e-mail was read the other would delete it. The two men also used coded text messages.

The profits from the trading were split. After the Idenix trades Mr. Post gave his friend $50,000 in cash as partial payment for the tips. The cash was handed to Mr.. Zwerko in a shoebox during a visit to Mr. Post’s new home. After the trades in Ardea Mr. Post gave his fried $7,000 as partial payment at his annual Halloween party.

The Commission’s complaint alleges violations of Exchange Act Section 10(b). The criminal case alleges one count of conspiracy to commit 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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