A former Zacks biotech analyst and two employees of Chicago–based brokerage firm, LBMZ Securities, were recently charged with insider trading for alleged activity taken by the three between 2012 and 2015.
Background of the Case
The SEC alleges that Jason Napodano, who headed Zacks Small Cap Research, an issuer sponsored unit at Chicago-based independent research firm Zacks, misled investors by representing that he wasn’t trading or holding positions in the companies he was writing about. Secretly, however, Napodano traded in these penny stocks prior to the publication of his research based on nonpublic information he had obtained about the companies.
The SEC’s complaint also charged a pair of investment bankers at brokerage firm LBMZ Securities who, along with Napodano, allegedly traded on nonpublic information that they and Napodano shared about certain small cap issuers. According to the SEC’s complaint, Bilal Basrai and Bryce Stirton, together with Napodano, breached the duties of trust and confidentiality owed to microcap issuers that retained Zacks Small Cap Research to provide sponsored research or LBMZ to act as a financial adviser.
Napodano agreed to settle his case by paying $305,351.83 disgorged profits, penalties and interest. Basrai agreed to settle the charges by paying $83,954.63 in profits, penalties and interest. Stirton agreed to settle the charges without admitting or denying the allegations by paying disgorgement of his insider trading profits totaling $2,218.87 plus prejudgment interest of $257.43 and a penalty of $2,218.87. The settlements are subject to court approval.
Napodano, Basrai and Stirton also agreed to a lifetime ban from trading penny stocks, while Basrai and Stilton have also been barred from working in the securities industry. Stirton does have the right to reapply to work in the securities industry after five years.
Separately, LBMZ Securities agreed to be censured and pay a $240,000 penalty without admitting or denying the SEC’s findings due to its failure to enforce policies and procedures designed to prevent employees from misusing nonpublic information. The SEC argued that LBMZ failed to obtain or review the trading records of many employees, including Basrai, and conducted only a minimal review of employee communications to monitor potential misuse.
It appears that SEC’s case against Napodano is not a traditional insider trading case. Instead, it is based on Napodano misleading clients that he did not hold any financial interest in the companies he covered, while he was in fact buying shares of these companies based on the nonpublic information he obtained while analyzing them, only to sell his holdings after his reports were published and the information became public.
On the other hand, the case against Basrai and Stirton, is a more traditional insider trading case as the two investment bankers allegedly traded on nonpublic information that Napodano provided them about the companies he covered.
This case is interesting as it shows how serious the SEC views maintaining the integrity and truthfulness of research disclosures. It also reveals how easily research analysts can be found guilty of securities fraud if they choose to trade on nonpublic information they obtain as part of their research process before they disclose this information to clients in their research reports or it becomes public in some manner.