New York, NY – Last week various federal authorities brought three more insider trading cases – one against a former employee of Raj Rajaratnam’s hedge fund, the second against a Denver insurance executive, and the third against a former employee at J. Crew.
Another Galleon Employee Gets Hit
Former Galleon employee and CFO of publically traded technology firm Xilinx, Inc., Chris Chellam, reportedly agreed to pay a fine of $1.75 million and to be barred from being an officer or director of a public company for five years in order to settle civil insider trading charges brought by the SEC.
The SEC alleged that in December 2006, Chellam tipped Rajaratnam that San Jose-based Xilinx would miss its quarterly revenue projections. The government claims that Rajaratnam made nearly $1 million in profit by shorting Xilinx stock as a result of this information. The SEC also claimed that Chellam personally had more than $1 million invested in Galleon funds at the time.
At the same time, Chellam was purportedly in discussions with Galleon about a job, which came to pass in May 2007. Chellam continued to work at Galleon until April 2009. During that period, the SEC alleged that Chellam continued to obtain confidential information about Xilinx’s financial performance and pass it along to his colleagues at Galleon.
During Mr. Rajaratnam’s trial, prosecutors played a wiretapped conversation with Mr. Chellam where Rajaratnam received material nonpublic information from Chellam. During that call Rajaratnam told Chellam to create an “e-mail trail” that would make it appear that Galleon had bought the stock on fundamentals rather than an illegal tip.
Insurance Exec Indicted
Former CEO of Van Gilder Insurance, Michael Van Gilder, was indicted last week by a federal grand jury in Denver on five counts of insider trading in a case brought by the U.S. attorney’s office in Denver. In a parallel action, the SEC also filed a civil insider trading complaint.
The U.S. attorney’s office said that Mr. Van Gilder “allegedly traded based on inside information regarding a Denver oil and natural gas company called Delta Petroleum Corp.” The government says that Van Gilder traded on material nonpublic information obtained from an executive at Delta on a number of occasions.
In one such instance in November 2007, Van Gilder learned from his source that Tracinda, a California investment firm controlled by the billionaire investor Kirk Kerkorian, was planning to acquire a 35% stake in Delta.
As a result of this information, Van Gilder purchased both stock and options in the firm. In addition, Van Gilder tipped several others, encouraging them also to invest in Delta. According to the SEC, Van Gilder made approximately $109,000 in illegal profits, while the others he tipped made approximately $52,000 in profits from this tip.
J Crew Employee Settles with SEC
Last week the Securities and Exchange Commission accused Frank LoBue, a former director of store operations for clothing retailer J. Crew, Inc., of using nonpublic information he obtained about the company’s financial condition, to trade ahead of the company’s earnings announcements in 2009.
The SEC alleged that LoBue obtained nonpublic information about the company’s sales and expenses to purchase 2,300 shares of J. Crew common stock ahead of the company’s May 2009 earnings release, which announced better-than-expected results. LoBue is alleged to again have obtained confidential information about the company’s financial performance to purchase 11,680 shares ahead of J. Crew’s August 2009 earnings announcement.
Though LoBue neither admitted nor denied the SEC’s allegations, he agreed to pay $128,000 in fines to settle the charges, including $60,735 in disgorged profits; $60,735 in penalties; as well as $6,749 in interest.
Last week’s three insider trading cases, while not high profile like other cases seen in the past few years, suggests that neither the U.S. Attorney’s office, nor the SEC are losing their appetite to prosecute new insider trading cases. Consequently, we would not be surprised to see the U.S. government bring additional insider trading cases against corporate insiders or hedge fund executives in the months to come.