SEC Charges Ring of High School Buddies with Insider Trading in Health Care Stocks
The Securities and Exchange Commission today charged three health care company employees and four others in a New Jersey-based insider trading ring of various high school friends generating $1.7 million in illegal profits and kickbacks by trading in advance of 11 public announcements involving mergers, a drug approval application, and quarterly earnings of pharmaceutical companies and medical technology firms.
The SEC alleges that Celgene Corporation's director of financial reporting John Lazorchak, Sanofi S.A.'s director of accounting and reporting Mark S. Cupo, and Stryker Corporation's marketing employee Mark D. Foldy each illegally tipped confidential information about their companies for the purpose of insider trading. Typically the nonpublic information involved upcoming mergers or acquisitions, but Lazorchak also tipped confidential details about Celgene's quarterly earnings and the status of a Celgene application to expand the use of its drug Revlimid. The trading was carefully orchestrated so there was usually someone acting solely as a non-trading middleman who received the nonpublic information from the insider and tipped others. They hoped to avoid detection with no direct connection between the insiders and the traders, and the insiders were later compensated for the inside information with cash payments made in installments to avoid any scrutiny of large cash withdrawals.
The SEC alleges that Cupo's friend Michael Castelli along with Lawrence Grum, who attended high school with Castelli, were the primary traders in the scheme. Among the ways that Castelli and Grum tried to hide their illegal conduct was by compiling binders of research to serve as a false basis for their trading. They actively traded in Celgene securities to create a pattern of long-standing positions in the stock. Grum reassured Cupo that discovery of the scheme and consequent legal action was unlikely due to limited government resources to police insider trading activity. Grum said, "At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."
Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit and Director of the Philadelphia Regional Office, said, "This is yet another case where wrongdoers believed they could outsmart investigators by creating an elaborate smokescreen to hide their insider trading. Such tactics as using middlemen to pass inside information and compiling research to falsely justify illegal trades will not prevent lawbreakers from getting caught."
The other two traders charged are Lazorchak's high school friends Michael T. Pendolino and James N. Deprado, who now live in New Hampshire and Virginia respectively. The others live in New Jersey. In a parallel criminal action, the U.S. Attorney's Office for the District of New Jersey today announced criminal charges against Lazorchak, Cupo, Foldy, Castelli, Grum, and Pendolino.
According to the SEC's complaint filed in U.S. District Court for the District of New Jersey, the scheme began in late 2007 when Lazorchak and Cupo, who were friends and colleagues at Sanofi, discussed Lazorchak's new position at Celgene where he'd have access to nonpublic information about mergers and acquisitions. Lazorchak told Cupo that he was initially working on Celgene's possible acquisition of another pharmaceutical company, Pharmion. Cupo discussed Lazorchak's position with Castelli, a friend with whom he attends winemaking club meetings. Castelli brought in Grum, who he considered a sophisticated trader with knowledge of the securities industry. Castelli and Grum devised the scheme in which Lazorchak tipped Cupo with nonpublic Celgene-related information. Cupo, as the middleman, tipped Castelli and Grum so they could illegally trade. Castelli and Grum paid Cupo for his tips, and gave Cupo money to pass along to Lazorchak for the initial tips. Lazorchak never knew the identities of Castelli or Grum, but was aware that Cupo was passing confidential Celgene information to other traders.
The SEC alleges that Lazorchak's high school friend Foldy entered the scheme in 2007, when Lazorchak tipped him with confidential details about the impending merger between Celgene and Pharmion, and Foldy illegally traded on the information prior to the public announcement of the deal. Lazorchak and Foldy devised and used code phrases while conversing to identify instances when Lazorchak was passing inside information or Foldy was seeking more details. After the illegal trading occurred and Foldy obtained illicit profits of $14,500, Lazorchak repeatedly demanded that Foldy compensate him for the inside information. Foldy ultimately paid Lazorchak at least $500 and later returned the favor with illegal tips of confidential information about a tender offer involving his employer, Stryker Corp. Lazorchak acted as a middleman and did not trade, instead tipping Pendolino so he could trade on the nonpublic information. Pendolino in turn tipped Deprado, who also traded. Lazorchak additionally tipped Cupo, who did not trade but acted as a middleman and tipped Castelli and Grum, who both traded.
The SEC alleges that Cupo began tipping inside information about his employer in late 2009, when he learned that Sanofi was planning to announce a tender offer to acquire another pharmaceutical company, Chattem Inc. Cupo learned of the imminent tender offer a few days prior to the public announcement, he tipped Castelli and Grum with the confidential details, and they both traded on the nonpublic information.
The SEC alleges that each of the defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder and that Castelli and Grum violated Section 17(a) of the Securities Act of 1933. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and officer and director bars for Lazorchak, Cupo, and Foldy.
The SEC's investigation, which is continuing, has been conducted by Colleen K. Lynch, David W. Snyder and John S. Rymas, who are members of the Market Abuse Unit in the SEC's Philadelphia office. G. Jeffrey Boujoukos and Catherine E. Pappas are handling the litigation.
The SEC brought this enforcement action in coordination with the U.S. Attorney's Office for the District of New Jersey. The SEC also appreciates the assistance of the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.