UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges the following against defendant Timothy P. Horne ("Horne"):
1. This enforcement action involves Horne's misappropriation of material non-public information about Central Sprinkler Corp. ("Central Sprinkler") and his undisclosed, self-serving use of the information to purchase Central Sprinkler stock for his personal benefit. 2. Horne is the chairman and CEO of Watts Industries ("Watts"), a company based in Massachusetts. On May 11, 1999, a representative of an investment bank, Schroders & Co. ("Schroders"), called Horne to inquire confidentially whether Watts would be interested in acquiring Central Sprinkler. Horne responded that Watts might be interested and agreed to receive a confidentiality agreement concerning the proposed transaction. The confidentiality agreement arrived the next day, but Horne did not inform Watts' board of directors about the potential acquisition. Instead, on May 13, 1999 - without informing anyone at Watts and inblatant disregard for Watts' policy against insider trading by its officers, he began buying Central Sprinkler stock in his personal brokerage account, acquiring a total of 30,000 shares in three days for approximately $17 per share.
3. Horne's insider trading in Central Sprinkler stock was very profitable. On June 16, 1999, Central Sprinkler announced that it was going to be acquired by Tyco International Ltd. ("Tyco") for $30.00 per share. The price of Central Sprinkler stock immediately jumped 26%. Three weeks later, Horne sold all his Central Sprinkler stock for approximately $28 per share, realizing a profit of approximately $318,000.
4. Through the insider trading alleged in this Complaint, Horne engaged in fraud in the purchase and sale of securities, in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. Accordingly, the Commission seeks: (i) entry of a permanent injunction prohibiting Horne from further violations of Section 10(b) and Rule 10b-5; (ii) disgorgement of his the profits from his insider trading, plus pre-judgment interest; (iii) the imposition of a civil monetary penalty of up to three times the profits from his insider trading; and (iv) entry of an order barring Horne from serving as an officer or director of a public company.
JURISDICTION AND VENUE
5. The Commission seeks a permanent injunction and disgorgement pursuant to Section 21(d)(1) of the Exchange Act [15 U.S.C. §78u(d)(1)]. The Commission seeks the imposition of a civil monetary penalty pursuant to Section 21A of the Exchange Act [15 U.S.C. §78u-1]. The Commission seeks an officer and director bar pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. §78u(d)(2)].
6. This Court has jurisdiction over this action pursuant to Sections 21, 21A and 27 of the Exchange Act [15 U.S.C. §§78u, 78u-1, 78aa]. Venue is proper in this District because Horne resides here and the acts and practices alleged in this Complaint primarily occurred here.
7. In connection with the conduct described in this Complaint, Horne directly and indirectly made use of the mails or the means or instruments of transportation or communication in interstate commerce.
DEFENDANT AND RELEVANT ENTITIES
8. Horne, age 64, is a resident of Andover, Massachusetts. Since 1978, he has been the chairman and CEO of Watts.
9. Watts is a manufacturer of flow control products for plumbing, heating and water quality markets. Its principal place of business is in North Andover, Massachusetts.
10. Central Sprinkler is a manufacturer of fire protection systems. Prior to its acquisition by Tyco on August 26, 1999, its common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U.S.C. §78k(g)] and was traded on the NASDAQ National Market System.
11. Schroders was, at all relevant times, an investment bank located in New York. In 2000, Schroders sold its investment banking business to Salomon Smith Barney.
STATEMENT OF FACTS
Central Sprinkler's Retention of Schroders
12. In late March 1999, Schroders informed Central Sprinkler's chairman and CEO that Tyco was interested in acquiring Central Sprinkler. On April 15, 1999, Tyco executed aconfidentiality agreement with Central Sprinkler. Central Sprinkler thereafter provided Tyco with certain confidential financial information.
13. On April 29, 1999, Tyco told Central Sprinkler that it was willing to acquire the company for $28 per share of its common stock. On May 5, 1999, this information was communicated to Central Sprinkler's board of directors. The board formally engaged Schroders to advise it with respect to the potential sale of the company. The board then directed Schroders to get comparative bids from other potential buyers and, if a potential buyer expressed interest, to send a confidentiality agreement for the buyer to execute.
Horne's Receipt of Inside Information about Central Sprinkler
14. On May 11, 1999, Peter Hicks, a Senior Adviser at Schroders, telephoned Watts as part of Schroders' effort to obtain comparative bids for Central Sprinkler. Hicks spoke with Horne, who had authority to decide whether to present an acquisition opportunity to Watts' board of directors.
15. At the time of his conversation with Hicks, Horne as chairman and CEO owed a fiduciary duty of loyalty to Watts. In addition, he was subject to Watts' "Insider Trading Policy", which stated, "All officers, directors or employees of Watts [are] prohibited from engaging in insider trading involving securities of other companies." The policy defined "insider trading" as "the use of any material, non-public information to trade in securities" and specified that proposals involving acquisitions were likely to be material.
16. At the time of his conversation with Hicks, Horne was already familiar with Schroders, because Watts had worked with the firm on at least three prior occasions, and he had previously received confidential information from Schroders in connection with other potentialacquisitions. Based on his prior dealings with Schroders, Horne knew or was reckless in not knowing that the information he received from Schroders about a potential acquisition candidate was confidential and should be kept confidential. Horne was also familiar with Central Sprinkler, because Watts was a major supplier of products to Central Sprinkler and had taken preliminary steps to acquire the company in 1997.
17. During the call, Hicks asked Horne if Watts might be interested in acquiring Central Sprinkler, and Horne responded affirmatively. Hicks offered to send a confidentiality agreement to Watts, and Horne agreed to receive it. Horne asked Hicks if there was a particular timetable for the potential acquisition, and Hicks responded that the process was moving quickly and that if Watts was interested in acquiring Central Sprinkler, it would need to act quickly.
18. On May 12, 1999, Horne received the confidentiality agreement by fax from Schroders. He wrote a memorandum to Watts' in-house counsel, Tom White, asking him to review the agreement and return it with any suggested changes. White returned the agreement with his written suggestions the same day. White's memo instructed Horne to sign the confidentiality agreement in the space indicated so that White could forward it to Central Sprinkler.
Horne's Purchase of Central Sprinkler Stock
19. Horne did not sign or return the confidentiality agreement. Instead, on May 13, 1999, he sent a letter to Schroders stating that Watts was not interested in acquiring Central Sprinkler. Nevertheless, at 9:05 a.m. on May 13, 1999 - before his letter to Schroders left his office and without informing anyone at Watts - he called his brokerage firm and placed an orderto purchase 15,000 shares of Central Sprinkler stock at a maximum price of $17.25. Due to the price limit, the order was executed for only 7,500 shares.
20. On May 14, 1999, Horne purchased 12,500 shares of Central Sprinkler stock through a second price limit order.
21. On May 17, 1999 - the next trading day - Horne purchased 10,000 shares of Central Sprinkler stock through a third price limit order.
22. Altogether, Horne purchased 30,000 shares of Central Sprinkler stock for approximately $520,000. He did not inform anyone at Watts that he had bought Central Sprinkler stock after receiving confidential information from Schroders that Central Sprinkler was an acquisition candidate and after telling Schroders that Watts might be interested in acquiring Central Sprinkler.
Horne's Sale of his Central Sprinkler Stock for a Large Profit
23. Before the stock market opened on June 16, 1999, Central Sprinkler announced that its board had agreed to sell the company to Tyco in a transaction whereby Central Sprinkler shareholders would receive $30 per share. That day, the price of Central Sprinkler stock rose 26% - from $22.375 per share to $28.1875 per share. The stock price remained at approximately the same level for the next several weeks.
24. On July 7, 1999, Horne sold all his 30,000 shares of Central Sprinkler stock for $28.0104 per share. The sale proceeds were approximately $840,000, netting Horne a profit of approximately $318,000.
Horne's Misleading and Implausible Explanations
for his Purchase of Central Sprinkler Stock
25. During the Commission's investigation, Horne offered various misleading and implausible explanations for his purchase of Central Sprinkler stock in May 1999. For example, he testified that he bought the Central Sprinkler stock simply because he believed that the company was a likely candidate for an acquisition. When asked to identify the information which had led him to that conclusion, Horne listed several events that had taken place in 1998. Horne could not explain why, given that he was aware of those events in 1998, he had waited until the middle of May 1999 to purchase Central Sprinkler stock.
26. Horne also testified that he followed Central Sprinkler's earnings reports and that the company reported favorable quarterly results in April 1999. However, Central Sprinkler did not announce its favorable quarterly results until May 27, 1999 - ten days after Horne completed his purchase of 30,000 shares of Central Sprinkler stock.
27. Despite these misleading and implausible explanations for his trading, Horne did concede in his testimony that the call from Schroders on May 11, 1999 had confirmed his impression that Central Sprinkler "stood a good chance of being sold." As a result, Horne's own sworn testimony supports the inference that he used the confidential information he received on May 11, 1999 when deciding to purchase Central Sprinkler stock on May 13-17, 1999.
FIRST CLAIM FOR RELIEF
(Violation of Section 10(b) of the Exchange Act and Rule 10b-5)
28. The Commission repeats and incorporates by reference the allegations in paragraphs 1-27 of the Complaint as if set forth fully herein.
29. As set forth above, Horne misappropriated material non-public information about Central Sprinkler from Watts and from Schroders and made undisclosed, self-serving use of the information to purchase Central Sprinkler stock for his personal profit.
30. By reason of the foregoing, Horne, directly or indirectly, acting intentionally, knowingly or recklessly, by use of the means or instrumentalities of interstate commerce or of the mails, in connection with the purchase or sale of securities: (a) employed devices, schemes or artifices to defraud; (b) made untrue statements of material fact or omitted to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices or courses of business which operated as a fraud or deceit upon certain persons, including purchasers or sellers of Central Sprinkler stock.
31. As a result, Horne violated Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5].
PRAYER FOR RELIEF
WHEREFORE, the Commission requests that this Court:
A. Enter a permanent injunction restraining Horne and each of his agents, servants, employees and attorneys and those persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, including facsimile transmission or overnight delivery service, from directly or indirectly engaging in violations of Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5];
B. Require Horne to disgorge the profits from his insider trading, plus pre-judgment interest;
C. Order Horne to pay a civil monetary penalty of three times the amount of the profits from his insider trading, or such other amount as the Court finds to be appropriate, pursuant to Section 21A of the Exchange Act [15 U.S.C. §78u-1];
D. Enter an order, pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. §78u(d)(2)], barring Horne from serving as an officer or director of any issuer required to file reports with the Commission pursuant to Sections 12(b), 12(g) or 15(d) of the Exchange Act [15 U.S.C. §§78l(b), 78l(g), 78o(d)];
E. Retain jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and
F. Grant such other and further relief as the Court deems just and proper.
Dated: August 15, 2002