SEC sues New Jersey businessman for fraud
On Wednesday, June 29, 2022, in the United States District Court for the District of New Jersey, the United States Securities and Exchange Commission (“SEC”) sued a businessman (and active investor) from Wrightstown, New Jersey, who from 9:56 a.m. to 10:03 a.m. on September 9, 2020, bought, in three trades, a total of 250 short-term out-of-the-money options to buy the shares of Virtusa Corp. (“Virtusa”). The total cost of these transactions was $27,621. He made these purchases based on non-public information that Virtusa was to be acquired by Baring Private Equity Asia (“Baring”) for approximately $2 billion in cash. This acquisition agreement was publicly announced on September 10, 2020, and Virtusa’s stock price rose from $40.50 to $50.48, a gain of approximately 24.6%. The Wrightstown businessman sold his call options the same day for a gain of $89,904.
The businessman took no market risk (he took the risk of being caught by the authorities for trading in non-public information) on these transactions because his “domestic partner”, who was employed by Virtusa in his marketing department, had told him in advance about the current transaction. She was aware of the impending acquisition because her job included writing press releases announcing the acquisition. In fact, she learned what the SEC complaint calls “highly confidential information” about the acquisition during an 11:32 a.m. phone conversation with a member of Virtusa management. She needed this information to write the public announcement of the deal. Although Virtusa is a Delaware company headquartered in Southborough, Massachusetts, it (perhaps due to the Covid pandemic) was telecommuting from Wrightstown, New Jersey, a home it shared with the businessman.
The September options purchases were the first time the businessman had purchased Virtusa securities, and those purchases accounted for 100% of Virtusa options trading that day. He sold all of the Virtusa options on September 10, “a few minutes after the market opened” and less than 24 hours after buying them. He made the purchases and sales from his business office, not from the house he shared with his “domestic partner”. He didn’t tell her that he had made a 325% gain on the trades. The complaint notes that they had a history during their four-year relationship (including two years together) of sharing confidences, but that he hid his Virtusa trades from her. This explains why she was not indicted by the SEC.
The Commission sued the businessman for violation of the anti-fraud provisions of the Securities Exchange Act of 1934, as amended, and for violation of Rule 10b-5. Without admitting the SEC’s allegations, the defendant consented to the entry of final judgment permanently restraining him from violating securities laws and ordering him to pay restitution of $89,904, prejudgment interest of $3,878.74 and a civil penalty of $89,904. This settlement is subject to Court approval. Neither the complaint nor the related SEC press release discusses the fate of the relationship with his “domestic partner.” The case was brought by the Market Abuse Unit of the SEC’s Philadelphia Regional Office’s Division of Enforcement. The SEC created market abuse units in its various offices beginning in 2010 to take advantage of advances in data analysis tools to detect market manipulation and illegal trading activities.
©2022 Norris McLaughlin PA, All Rights ReservedNational Law Review, Volume XII, Number 262