Two unique insider trading cases have received a bit of attention recently. One case, brought on December 12, 2011 against a company and its former CEO, alleged that they defrauded shareholders by buying back stock at severely undervalued stock prices – at a time when the company was privately held. The second, brought on January 9, 2012 against the former CEO of company and his friend, alleged that the former tipped the latter about the upcoming acquisition of his company and resulted in a report in the Atlanta Business Chronicle that the CEO took and passed a polygraph test and was then asked by the SEC to take a second polygraph test.
December 2012 Case Against Privately-Held Company and Former CEO. The December action was filed in federal court in Florida against Stiefel Laboratories Inc.(which is now a fully-owned subsidiary of GlaxoSmithKline PLC, but at the time of the events in issue was the world’s largest private manufacturer of dermatology products) and its former chairman and CEO, Charles Stiefel. According to the Commission, the company bought back stock from its own shareholders on three occasions based on low and misleading stock valuations:
• between November 2006 and April 2007, the company purchased more than 750 shares from shareholders at $13,012 a share, even though Mr. Stiefel knew that five private equity firms had submitted offers to buy preferred stock in November 2006 based on equity valuations of Stiefel Labs that were more than 50% to 200% higher than the valuation used for the buybacks;
• between late July 2007 and June 2008, the company purchased more than 350 shares from shareholders under the Company’s employee stock plan at $14,517 a share and more than 1,050 shares from shareholders outside the Plan at an even lower stock price even though Mr. Stiefel knew, not only about the private equity valuations from November 2006, but that another private equity firm had bought preferred stock based on an valuation that was more than 300% higher than the valuation for the buybacks; and
• between December 3, 2008 and April 1, 2009, the company purchased more than 800 shares from shareholders at $16,469 a share, even though Mr. Stiefel knew that equity valuation was low and misleading, because he was negotiating the sale of the Company (resulting in the announcement in April 2009 of the company’s acquisition by Glaxo).
The Commission alleged that the shareholders lost more than $110 million by selling their stock back to Stiefel Labs based on the low and misleading valuations. The company was charged with violating Exchange Act Section 10(b) and Rule 10b-5, while Mr. Stiefel was charged with aiding and abetting those violations.
Both Kevin LaCroix’s D&O Diary Blog and David Smyth’s Cady Bar the Door Blog have excellent discussions regarding the case, both noting that the case presents a cautionary tale. As Mr. Smyth points out, "[t]he SEC regulates securities, not just publicly traded companies."
January 2012 Case Involving Polygraph Test. The second case, brought against Earl Arrowood and Parker H. "Pete" Petit in federal court in Georgia, seems fairly straightforward. The Commission alleges that Mr. Arrowood received material non-public information about the potential sale of Matria Healthcare, Inc. ("Matria") (formerly a NASDAQ-listed company) from his friend Mr. Petit, who was, at the time, the Chairman and CEO of Matria.
The unique twist in this case is detailed in the article in the Atlanta Business Chronicle, which states:
Aaron Danzig, Petit’s attorney with Arnall Golden Gregory, said Petit has passed a polygraph test about the allegations.
"We gave the SEC results of the expert’s polygraph test as specific evidence that Mr. Petit was truthful in stating he did not provide inside information, and that the SEC’s claims are groundless," said [Mr. Danzig].
Danzig said the SEC asked Petit to submit to a second polygraph test that it would conduct. Petit agreed on the condition the SEC decline any enforcement action after he passed the second test. The SEC then sued Petit.
Bruce Carton’s Compliance Week Enforcement Action Blog examines the case and, in particular, Mr. Danzig’s assertion:
I am not surprised that from time-to-time, potential SEC defendants might offer to sit for polygraph tests. I just had no idea that the SEC ever took people up on such offers or actually conducted/supervised such tests. Can any SEC enforcement alumni or current SEC employees shed any light on this? Is taking an SEC-administered polygraph test actually on the menu of options for potential SEC defendants?
The SEC did not comment on the polygraph issue in its Litigation Release.