If you think insider trading cases only involve high level executives passing secret information to fellow wealthy businessmen during cigar smoke filled friendly poker games, you’d be mistaken. These cases can follow disclosures by low level employees of law or accounting firms who have no intent to break the law.
A lawsuit filed by the federal Securities and Exchange Commission (SEC) in Pennsylvania, then settled soon thereafter, arose from these humble beginnings: a law firm administrative assistant had to work long hours and her boyfriend asked her why. She said her boss, a law firm partner, needed help with the merger of two insurance companies (Harleysville Group and Nationwide). The story is told in an article in the Legal Intelligencer.
The boyfriend told his father. According to the SEC the father, Joel J. Epstein, then illegally traded on that information in advance of the deal going public. The complaint claims Epstein breached a duty of trust owed to his son by buying shares of Harleysville before the merger was announced and telling four others about the expected merger.
Epstein settled the civil action, according to the SEC. He will pay a total of $495,627, which is how much he and the four other tippees gained from the trading, a civil penalty plus prejudgment interest. No charges were filed against the son, the administrative assistant or the law firm, reportedly Fox Rothschild (the firm didn’t admit or deny it was involved) which has two offices in Los Angeles.
The complaint states the two insurance companies began merger discussions in January 2011, starting the process that resulted in the illegal acts.
- A month later the law firm began advising Harleysville.
- The companies agreed to a price, entered into an exclusivity agreement in August and began the due diligence process.
- Law firm employees began working more hours, including on weekends, after the exclusivity agreement was signed.
- The administrative assistant allegedly told her boyfriend how the expected deal was causing her extra work and stress.
- A final merger agreement was made in September.
Epstein, an active stock trader, understood the value of the information and the fact insider trading was illegal.
- Epstein allegedly told his son “don’t ever mention this again” and “we never talked.”
- He purchased 4,000 shares of Harleysville prior the the merger announcement.
- Afterwards the stock price nearly doubled to $58.96 per share.
- Prior to the merger being made public Epstein, not one to keep good new to himself, told two two sons-in-law and two friends about the expected merger, and they traded on the information as well.
Epstein was charged under the misappropriation theory of insider trading.
- This covers people other than company employees (or their attorneys or accountants acting as fiduciaries) misappropriating insider information and using it to their advantage, if it was the result of a breach of a duty of confidence.
- The SEC alleges Epstein owed a duty of trust and confidence to his son because of their parent-child relationship.
- Epstein violated that duty by misappropriating the information about Harleysville and using it to his advantage, according to the SEC.
As you can see, the SEC can cast a wide net over people who have some connection with some person involved in some way with inside information and profiting from it. If an insider trading investigation has been started against you, or legal action has been filed against you for insider trading, contact our office so we can talk about what’s going on and your options for moving forward.