SEC Sues Former Investment Bankers Over Insider Trading Ahead of Utility Acquisition
Commentary by Steven Lofchie
Two former investment bankers face SEC charges over insider trading in the stock of a utility holding company ahead of its acquisition announcement.
In a complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that one of the individuals served as the co-head of an energy and utility group at a New York investment bank that advised the target company on its potential sale. The SEC alleged that the banker tipped material non-public information about the target's potential acquisition to a longtime business colleague and close friend, who was also a former investment banker.
The Commission alleged that the colleague bought more than 2.2 million shares of the target company's stock before the deal was announced on February 24, 2022, and held approximately $18.5 million in unrealized profits after the stock price rose roughly 40 percent on the news. The SEC further alleged that the colleague tipped three friends and business associates who traded on the information, generating an additional $515,000 in unrealized profits.
The SEC charged both individuals with violating Exchange Act Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") and Exchange Act Rule 10b-5 ("Employment of manipulative and deceptive devices").
The Commission asked the court for permanent injunctions, civil monetary penalties, and officer-and-director bars against both individuals, disgorgement with prejudgment interest against the trading defendant, and an order permanently barring the tipper from associating with any broker or dealer. The SEC also named eight entities allegedly used to facilitate the trading as relief defendants, seeking disgorgement and prejudgment interest from them.
Commentary
It seems that a profit that large should trigger immediate regulatory inquiries. Interesting that it takes nearly five years from the trade date to the charges.