The US Securities and Exchange Commission (SEC) and Department of Justice (DOJ) on June 29, 2023 brought insider trading charges against several defendants in four proceedings. The insider trading cases demonstrate key focus areas for the DOJ and the SEC’s Division of Enforcement: insider trading, data analytics, and the use of sweeps and holding gatekeepers responsible.

The SEC filed four separate complaints in the US District Court for the Southern District of New York alleging insider trading by 13 defendants. Simultaneously, the US Attorney’s Office for the Southern District of New York announced criminal charges in four criminal actions arising from the same conduct. According to the DOJ, the defendants in these cases collectively made more than $30 million dollars from their illegal trading. [1]

The cases themselves are distinct, but all have elements of traditional tipper-tippee relationships involving friends and family members. Notably, the defendants include public company executives and board members, a brokerage firm executive, a chief compliance officer (CCO), and a network of individuals including a police chief.

CASES REINFORCE GOVERNMENT’S FOCUS ON INSIDER TRADING

As we’ve previously discussed with respect to SEC enforcement developments for public companies, the SEC has shown a continued focus on insider trading and brought a number of cases against senior executives, several of whom were public company officers, in 2022 and the first part of 2023. The DOJ has similarly demonstrated an interest in prosecuting insider trading against high-level executives. We’ve also seen a notable increase in sweep investigations, particularly with respect to registered entities, in part as a way for the SEC to proactively highlight and deter recurring issues.

Filing these insider trading cases on the same day (akin to a sweep), and in coordination with the unsealing of the DOJ’s criminal indictments, certainly has a more pronounced effect than filing individual cases throughout the year. The same-day public statements by the SEC’s Director of Enforcement Gurbir Grewal and the US Attorney for the Southern District of New York Damian Williams [2] send a clear message that the government remains committed to pursuing insider trading charges wherever they may exist (and sweeps and coordinated actions where appropriate).

In particular, these actions also reinforce that the SEC and DOJ are continuing to prioritize and enhance their use of data analytics and technology to identify unusual and suspicious trading patterns for potential insider trading actions. The SEC’s use of data analytics has led to several risk-based “sweeps.”

Indeed, Director Grewal specifically referenced the Commission’s use of “data analytics initiatives” and “leveraging all the tools at [its] disposal . . . to investigate [] abusive trading practices” in the press release announcing the four insider trading actions. Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division has similarly lauded the DOJ’s use of data analytics to secure criminal charges, saying that the Department has “embraced the use of data to proactively identify and investigate fraud as we continue to ensure that ordinary investors are on an equal playing field with corporate insiders.”

These cases also target “gatekeepers,” whom the SEC has previously described as those individuals who “are often the first lines of defense against misconduct.” Here, those named as defendants include a CCO, a board member, a veteran registered broker-dealer, and a police chief—all gatekeepers in various public sectors.

In the last year, we’ve seen the SEC bring a number of enforcement actions against individuals and gatekeepers, including auditors, attorneys, and a CCO, with failing to live up to their heightened trust and responsibility. We expect to see even more, and these cases further reinforce the SEC’s focus on gatekeepers and ensuring that those who have been given a heightened level of trust and responsibility are being held accountable for their actions.

Importantly, the simultaneous announcement of the DOJ criminal charges on the day the SEC filed its complaints demonstrates the critical cross-agency coordination between the SEC and DOJ. This type of coordinated effort between the SEC, DOJ, and others, such as the US Department of Homeland Security, emphasizes that the government is willing to allocate significant resources to bring criminal charges in insider trading cases.

These trends should be top of mind for public companies, as well as corporate executives and insiders, particularly when implementing or revising insider trading policies and practices.

INSIDER TRADING ENFORCEMENT ACTIONS ANNOUNCED JUNE 29, 2023

Garelick, Shvartsman, Shvartsman, and Rocket One Capital LLC: Trading and Tipping in Advance of Merger Agreement

This action is a classic case of “friends and family” insider trading and tipping. According to the SEC and DOJ, the defendants collectively generated more than $20 million in illegal profits by trading in securities of Digital World Acquisition Corporation (DWAC) based on material nonpublic information (MNPI) about DWAC’s planned but not yet final merger with Trump Media & Technology Group (TMTG), a media company founded by former US President Donald J. Trump.

According to the government’s allegations, Bruce Garelick, as a DWAC director, obtained MNPI regarding the status of DWAC’s negotiations with TMTG related to a potential merger to take TMTG public. Then, according to the government, Garelick (in violation of the duty of trust and confidence he owed DWAC) [3] tipped the information and purchased DWAC securities prior to the TMTG merger announcement. The SEC also alleges (¶¶ 75-76) that Garelick failed to file SEC Forms 4 and 5 as required for directors. The alleged flow of MNPI regarding DWAC’s merger agreement with TMTG includes the following individuals, each of whom allegedly purchased DWAC securities in advance of the merger announcement (¶¶ 53-69):

Infographic - Datasource Item: Insider Trading Diagram 1

Michael Shvartsman and Garelick were charged with five counts of securities fraud under Title 15, one count of securities fraud under Title 18, and one count of conspiracy. Gerald Shvartsman was charged with three counts of securities fraud under Title 15, one count of securities fraud under Title 18, and one count of conspiracy. Each count of securities fraud under Title 15 carries a maximum sentence of 20 years in prison, each count of securities fraud under Title 18 carries a maximum sentence of 25 years in prison, and each conspiracy count carries a maximum of five years in prison.

Dagar and Bhiwapurkar: Trading and Tipping in Advance of Clinical Trial Announcement

In this action, the SEC and DOJ brought insider trading charges against Amit Dagar, a former Pfizer Inc. employee, and his close friend and business partner Atul Bhiwapurkar for trading in advance of the company’s November 5, 2021 announcement that a randomized, double-blind study of its COVID-19 antiviral treatment Paxlovid was successful.

According to the government, Dagar, a Senior Statistical Programming Lead at Pfizer, was a member of the team that compiled and organized data during Pfizer’s Paxlovid clinical trials. While Dagar was “blinded” to the data during the trials, the SEC and DOJ allege that Dagar learned of the successful Paxlovid clinical trial the day before Pfizer publicly announced the results. According to the government’s allegations, within hours of learning that Pfizer would be announcing the results the following day (November 5), Dagar purchased short-term, out-of-the-money call options in Pfizer stock that were set to expire between November 5 and November 19, 2021.

Dagar also allegedly tipped his friend, Bhiwapurkar, who purchased call options in Pfizer stock and allegedly tipped another friend about the Paxlovid clinical trial. Bhiwapurkar’s friend, while on a WhatsApp call with Bhiwapurkar on November 4 and minutes before the market closed, also purchased out-of-the-money call options in Pfizer stock.

Infographic - Datasource Item: Insider Trading Diagram 2

According to the SEC and DOJ, the defendants collectively made more than $350,000 in unlawful gains. The indictment states (¶ 5) that “Dagar spent approximately $8,380 on options for the right to purchase 66,500 shares of Pfizer stock, and ultimately realized gains of approximately $270,000, for a profit of more than 3,000%; Bhiwapurkar spent approximately $7,426, for the right to purchase 20,000 shares, ultimately realizing gains of approximately $76,000, for a profit of more than 900%.”

Notably, the SEC cited to several Pfizer company policies, including Pfizer’s code of conduct and insider trading policy, to support the SEC’s claim that Dagar was required to maintain the confidentiality of Pfizer’s MNPI and was prohibited from disclosing MNPI to persons outside of Pfizer without prior approval.

Both Dagar and Bhiwapurkar were arrested on June 29, 2023. Dagar has been charged with four counts of securities fraud and one count of conspiracy to commit securities fraud, while Bhiwapurkar was charged with two counts of securities fraud and one count of conspiracy to commit securities fraud.

Dupont, Cronin, Kaplan, Feldman, and Mendoza: Tipping and Trading in Advance of a Tender Offer

The SEC and DOJ brought insider trading charges against five individuals and friends who allegedly traded on the basis of MNPI before an announcement of a tender offer by Alexion Pharmaceuticals Inc. to acquire Portola Pharmaceuticals Inc. in May 2020. The flow of MNPI depicted in the SEC’s complaint is as follows, beginning with Joseph Dupont (Vice President of Business Operations and Commercial Effectiveness at Alexion) who worked on the company’s potential acquisition of Portola (the Alexion-Portola Deal):

Infographic - Datasource Item: Insider Trading Diagram 3

Cronin, Feldman, and Kaplan all allegedly purchased Portal securities ahead of the May 2020 Alexion-Portola Deal announcement and began selling their Portola securities on the day of the announcement. According to the SEC (¶ 7) and DOJ, Cronin, Kaplan, Feldman, and Mendoza collectively profited by more than $2.3 million from their unlawful insider trading. Kaplan and Feldman’s successive tippees profited by approximately $1.7 million.

The complaint cites to Alexion’s policies requiring employees to keep sensitive information confidential and prohibiting insider trading, all of which Dupont allegedly received and acknowledged as an Alexion employee. The SEC also pointed to transaction notices that Dupont received, allegedly informing recipients that they should refrain from trading in Alexion securities and reminding them to continue keeping the Alexion-Portola Deal confidential. While Dupont did not make any trades himself, the SEC has charged him with tipping Cronin, as described above.

Significantly, the DOJ noted that Mendoza has pleaded guilty pursuant to a cooperation agreement. Each of the four defendants—Dupont, Cronin, Kaplan, and Feldman—has been charged with securities fraud under Title 15, securities fraud under Title 18, and tender offer fraud. Cronin, Kaplan, and Feldman have also been charged with a single count of conspiracy to commit securities fraud and tender offer fraud.

Meadow and Teixeira: Theft of Information on a Laptop

In the fourth action, the SEC and DOJ brought insider trading charges against Jordan Meadow, a registered representative for a New York–based broker-dealer, and Steven Teixeira, the CCO of an international payment processing company, in connection with their trading based on MNPI that Teixeira obtained from his girlfriend’s laptop while she was working from home at their shared apartment during the COVID-19 pandemic.

Teixeira’s girlfriend worked for a New York–based investment bank as an executive assistant to several investment bankers and was responsible for scheduling meetings related to potential mergers and acquisitions of public companies. The government alleges that, on the basis of the information Teixeira obtained from his girlfriend’s laptop while she was out of the room or apartment, Teixeira then bought call options on numerous securities with potential upcoming M&A activity.

The DOJ and SEC also allege that Teixeira shared the MNPI that he misappropriated from his girlfriend’s laptop with friends, including Meadow (a broker at an investment firm). Meadow allegedly made personal trades based on the information received and shared the information regarding certain securities with a colleague at his brokerage firm. The flow of MNPI alleged in the complaint is as follows:

Infographic - Datasource Item: Insider Trading Diagram 4

Meadow and his colleague also allegedly used Teixeira’s information to recommend profitable trades to brokerage customers. According to the government, Meadow earned more than $730,000 in illicit profits from his trades, in addition to commissions earned by his customers making trades. [4] While certain of Teixeira’s options expired out of the money, he allegedly realized approximately $28,000 in illicit profits. [5] The government also alleges that Meadow agreed to compensate Teixeira and Teixeira’s friend for the information by buying them Rolex watches. [6]

Meadow was arrested last Thursday morning and charged with six counts of securities fraud under Title 15, one count of securities fraud under Title 18, and one count of conspiracy to commit securities fraud. Charges against Teixeira were also unsealed; Teixeira pled guilty pursuant to a cooperation agreement.

KEY TAKEAWAYS AND PRACTICAL IMPLICATIONS

• Insider trading continues to be a priority for the SEC and DOJ, and these cases only add to a growing list of actions aimed at holding bad actors accountable for the misuse of MNPI.
• The SEC cited several public company policies and procedures as evidence that the defendant insiders misused MNPI. This should serve as a general reminder for public companies—as well as broker-dealers and investment advisers [7] —to consider revisiting their insider trading policies and procedures in light of the SEC and DOJ’s ongoing focus on insider trading and compliance more generally.
• Companies should also be conducting routine training to educate insiders and employees on the nuances of insider trading policies and monitoring for potential violations.
• The SEC and DOJ have sophisticated data analytics tools at their disposal to assist in bringing enforcement actions, and those tools will likely only increase in efficiency and precision.
• Gatekeepers are not immune from liability, and the SEC remains focused on holding gatekeepers and those in positions of trust accountable for their actions.
• Small profits do not deter the SEC or DOJ from pursuing insider trading charges. While the SEC alleges that the defendants collectively (in all four actions) made more than $40 million in ill-gotten gains, some of the defendants’ alleged illicit profits were relatively low.
• As many companies and employees are still operating in a hybrid work-from-home environment, it is important to remind employees of their responsibilities to safeguard confidential information while working outside of the office.
• Several of the allegations are based on text messages and other chat apps, including WhatsApp instant messages. This serves as a good reminder to companies and corporate insiders, particularly in light of the ongoing “off-channel communications” sweeps related to broker-dealers and investment advisers and the DOJ’s recent focus on off-channel and ephemeral communications, that text messaging and other “off-channel communications” are not immune from SEC or DOJ collection and review during investigations.

[1] According to the SEC, these defendants collectively generated more than $40 million in ill-gotten gains.

[2] In the DOJ Press Release, US Attorney Williams is quoted as saying “[i]nsider trading is not a quick buck. It’s not easy money. It’s not a sure thing. It’s cheating. It’s a bad bet. It’s a ticket to prison. Because my Office, the Southern District of New York, is watching. And we’re working quickly to investigate and prosecute anyone who corrupts our financial markets. And we’ll keep at it as long as it takes. You can bet on that.”

[3] The SEC also alleges that Garelick and the Shvartsman brothers assumed a duty to keep MNPI confidential through signing confidentiality agreements with DWAC in summer 2021 related to a potential investment in DWAC.

[4] See SEC’s Complaint ¶ 7.

[5] Id. ¶ 4.

[6] Id. ¶ 51.

[7] Specific SEC rules require that broker-dealers and investment advisers establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the firm’s business, to prevent the misuse of MNPI by the broker-dealer, investment adviser, or their associated persons. See Section 15(g) of the Securities Exchange Act of 1934, 15 USC § 78o(g); Section 204A of the Investment Advisers Act of 1940.

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