UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges as follows:
1. This matter involves unlawful insider trading in the securities of Kaye Group, Inc. ("Kaye Group") by two individuals, Rand E. Shapiro ("Shapiro") and John D. Weil ("Weil"), while each was in possession of material nonpublic information concerning an acquisition of Kaye Group by Hub International Limited ("Hub"). Both Shapiro and Weil purchased Kaye Group stock in advance of a January 20, 2001 announcement of the acquisition after speaking with a director of Kaye Group and learning of the possibility that Kaye Group would be purchased.
2. Shapiro and Weil, knowing that the information concerning the acquisition was given to them in the belief thateach would keep the information confidential, each unlawfully misappropriated and used the information for his own benefit.
3. While in possession of material nonpublic information, Shapiro purchased 5,800 shares of Kaye Group stock on four separate occasions in November and December 2000, and realized profits of $35,804 from his unlawful trading.
4. While in possession of material nonpublic information, Weil purchased 7,400 shares of Kaye Group stock on four different occasions in his future wife's brokerage accounts, and realized profits of $46,712 from his unlawful trading.
5. As a result of the conduct alleged in this Complaint, Shapiro and Weil have violated and, unless restrained and enjoined, will continue to violate Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §78j(b), and Rule 10b-5 thereunder, 17 C.F.R. §240.10b-5.
JURISDICTION AND VENUE
6. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d) of the Exchange Act, 15 U.S.C. §78u(d), to enjoin such acts, practices and courses of business, obtain disgorgement and civil penalties, and for other appropriate relief.
7. This Court has jurisdiction over this action pursuant to Section 27 of the Exchange Act, 15 U.S.C. §78aa.
8. Certain of the acts, practices and courses of business constituting the violations alleged herein occurred within the Middle District of Florida and elsewhere, and were effected, directly or indirectly, by making use of the means and instrumentalities of interstate commerce, the mails, or the facilities of a national securities exchange.
9. Rand E. Shapiro, age 54, is a resident of Orlando, Florida. During all times relevant to the conduct alleged herein, Shapiro lived in both Virginia Beach, Virginia and Boca Raton, Florida. He was formerly a real estate attorney. Shapiro retired from the practice of law in 1987, and since that time has managed his personal investments.
10. John D. Weil, age 62, is a resident of St. Louis, Missouri. Weil is the sole shareholder and director of Clayton Management Company, a general partner of Woodbourne Partners, L.P., which in turn held approximately 9 percent of Kaye Group stock. Woodbourne Partners is a family limited partnership created for investment purposes. Clayton Management is also the agent of Forsyth Joint Venture, a joint venture of charitable foundations established by members of the Weil family, which held approximately 1 percent of Kaye Group stock.
11. Kaye Group, which was headquartered in New York, New York, was a holding company which, through its subsidiaries, was engaged in a broad range of insurance brokerage, underwriting and related activities. Its shares were listed on the NASDAQ National Market until June 28, 2001, when it was acquired by Hub and became a wholly-owned subsidiary.
12. Hub, headquartered in Ontario, Canada and Chicago, Illinois, is an international insurance brokerage holding company with operations in Canada and the United States. Its shares are listed on the Toronto Stock Exchange.
13. During all times relevant to the conduct alleged herein, Howard A. Kaye was a member of the Board of Directors of Kaye Group, which his father had established, and the Chairman of Kaye Insurance Associates, Inc., a subsidiary of Kaye Group. Kaye continues to serve as the Chairman of Kaye Insurance Associates. Kaye and defendant Shapiro were close friends.
14. During all times relevant to the conduct alleged herein, Ned L. Sherwood was a member of the Board of Directors of Kaye Group, and owned approximately 6 percent of Kaye Group stock. Sherwood owns and controls the general partner of ZSFund, L.P., which acted as the financial adviser for Kaye Group concerning the Hub transaction.
A Timeline of Events Leading to Kaye Group's Purchase
15. On September 29, 2000, Hub's Chairman and Chief Executive Officer called Kaye Group's President and Chief Executive Officer and expressed interest in meeting to discuss the possibility of Hub purchasing Kaye Group. On October 1, 2000, these individuals met and had preliminary discussions regarding their companies.
16. On October 10, 2000, a special meeting of Kaye Group's Board of Directors was held. During the meeting, which both Sherwood and Kaye attended, the Board was told of Hub's interest in acquiring Kaye Group. That day, Sherwood became involved with the negotiations, and began acting as the financial adviser for Kaye Group.
17. The parties conducted preliminary due diligence between October 26, 2000 and December 22, 2000. As part of the due diligence, on October 26, 2000, representatives of Hub visited Kaye Group's offices in New York and met with Sherwood, Kaye and others to discuss business strategies and Kaye Group's operations. On October 26, 2000, Kaye Group's Board of Directors approved continued negotiations regarding a proposed transaction with Hub. Kaye and Sherwood were both present.
18. On November 14, 2000, Hub's Board authorized management to proceed with the negotiations. On December 13, 2000, representatives of Kaye Group, including Kaye and Sherwood, attended a meeting in Toronto with representatives of Hub's principal shareholder, Fairfax Financial Holdings Limited ("Fairfax Financial"), whose support was necessary for completion of the transaction.
19. From December 11, 2000 through December 22, 2000, Sherwood and Fairfax Financial's Chief Executive Officer had several discussions regarding key aspects of the proposed transaction, including the possible purchase price. On December 22, 2000, the parties agreed on a price of $14 for each outstanding Kaye Group share, and reached an understanding on other key aspects of the proposed transaction. These terms were reflected in a signed offer letter, and were later incorporated into the definitive agreement, signed January 19, 2001.
20. The parties conducted final due diligence from December 22, 2000, until January 19, 2001, just hours before an agreement was signed.
21. On January 3, 2001, Kaye Group's Board of Directors, including Sherwood and Kaye, met and approved the proposed transaction. Hub's Board met on January 15, 2001 to approve the Kaye Group acquisition. Kaye Group's Board conducted special meetings on January 11, 16 and 18, 2001 to review the status ofnegotiations. During the January 18, 2001 meeting, Kaye Group's Board authorized management to enter into a definitive agreement with Hub. Kaye and Sherwood were present at each of these meetings.
22. On January 19, 2001, the parties signed a definitive agreement for the acquisition of Kaye Group by Hub. The following day, January 20, 2001, a press release was issued announcing the proposed acquisition, in which each Kaye Group shareholder would receive $14, consisting of a combination of cash and shares of Hub stock.
23. In April 2001, Hub elected to pay $14 per share in cash for each share of Kaye Group, instead of the combined cash and stock offer. The purchase was completed on June 28, 2001.
24. On January 19, 2001, the last trading day prior to the announcement, the closing price of Kaye Group stock was $7.88 per share. On January 22, 2001, the first trading day following the announcement, Kaye Group stock closed at $11.88 per share on heavy volume, an increase of more than 50 percent from the previous trading day's closing price.
Unlawful Trading by Rand E. Shapiro
25. Prior to the events set forth herein, Shapiro and Kaye had been close friends and business associates for several years. They were neighbors in Boca Raton, Florida, where Shapiro, who is retired, lived for approximately eight months of the year. Although Kaye spent only two or three months of the year in Florida, during the relevant time period he and Shapiro spoke by telephone frequently, often several times a day. In addition, Kaye and Shapiro were passive investors together in several real estate and venture capital investments.
26. During the fall of 2000, in addition to frequent telephone conversations, Shapiro visited Kaye in New York every few months. During these trips, Shapiro spent time with Kaye in his office at Kaye Group, where he sometimes overheard discussions regarding Kaye Group's business.
27. For some months prior to the January 20, 2001 announcement of the purchase, commencing as early as October 2000, Kaye spoke with Shapiro about the proposed acquisition. Initially, Kaye discussed the transaction in general terms and, as the deal moved closer to completion, was more specific about the acquisition by Hub.
28. Kaye's motivation for these discussions was to confide in Shapiro, his close friend, and to seek advice on whether he should sell the company that his father had started, and the affect such a sale would have on his life.
29. During these discussions, Kaye advised Shapiro that what he told him was confidential and that Shapiro should not trade on the information.
30. Shapiro knew that Kaye was a director of Kaye Group and that, consistent with their pattern and practice of sharing confidences, Kaye was confiding in him as a close friend when Kaye discussed the acquisition with him on numerous occasions.
31. Nevertheless, on four occasions between November 15, 2000 and December 12, 2000, in breach of a duty of trust and confidence he owed to Kaye, Shapiro misappropriated material nonpublic information concerning the possible acquisition for his own use.
32. On November 15, 2000, Shapiro purchased 1,000 shares of Kaye Group stock at $7.63 per share. Two days later, on November 17, 2000, Shapiro purchased another 2,000 shares at $7.88 per share. Subsequently, on December 8, 2000, while visiting Kaye in New York, Shapiro purchased 2,000 additional shares of Kaye Group stock at an average price of $7.79 per share. Shapiro purchased another 800 shares on December 12, 2000 at $7.88 per share. He held all of these shares until they were purchased for $14 each when the acquisition was completed. Shapiro realized profits of $35,804 on these transactions.
Unlawful Trading by John D. Weil
33. Weil was the largest outside shareholder of Kaye Group stock, owning approximately 10 percent. In his position as a major shareholder, Weil would call Sherwood, who he knew to be aKaye Group director, three to four times a year to obtain an update on the status or direction of the company.
34. Weil's relationship with Sherwood was limited to these telephone conversations. In particular, Weil, who had held Kaye Group stock for approximately seven years and who believed it to be undervalued, was interested in efforts being made by the company to "realize value" through a possible sale of the company.
35. In approximately mid-2000, Weil telephoned Sherwood who informed him that an investment banker that had been retained by Kaye Group to find a buyer for the company had failed to do so.
36. In late November or early December 2000, Weil again called Sherwood who told Weil that there was a company interested in acquiring Kaye Group.
37. Sherwood provided information to Weil for the purpose of keeping a large shareholder up to date on important corporate developments. Weil told Sherwood that he was treating their conversations as confidential, and Sherwood himself intended them to be confidential.
38. Nevertheless, on four occasions between December 28, 2000 and January 17, 2001, in breach of a duty of trust and confidence he owed to Sherwood, Weil misappropriated materialnonpublic information concerning the possible acquisition of Kaye Group for his own use.
39. Weil purchased Kaye Group stock on four occasions in two of his future wife's brokerage accounts, an IRA and an individual account. On December 28, 2000, Weil purchased 3,700 shares of Kaye Group stock at $7.44 per share. Five days later, on January 2, 2001, Weil purchased 300 shares at a price of $7.88 per share. On the following day, January 3, 2001, Weil purchased 900 shares of Kaye Group stock at $7.94 per share. Subsequently, on January 17, 2001, Weil purchased an additional 2,500 shares at $7.94 per share. He held all of these shares until they were purchased for $14 each when the acquisition was completed. Weil realized profits of $46,712 on these transactions.
Violations of Section 10(b) of the Exchange Act
40. Paragraphs 1 through 39 are realleged and incorporated herein by reference.
41. As a result of the conduct alleged herein, defendants Shapiro and Weil, in connection with the purchase or sale of securities, directly or indirectly, by use of the means or instrumentalities of interstate commerce, or the mails, or the facilities of a national securities exchange: (i) employed devices, schemes, or artifices to defraud; (ii) made untruestatements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and (iii) engaged in acts, practices, and courses of business which operated as a fraud and deceit upon other persons.
42. By reason of the foregoing, defendants Shapiro and Weil violated Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. §240.10b-5 thereunder.
WHEREFORE, the Commission respectfully requests that this Court:
Issue an injunction permanently enjoining defendants Shapiro and Weil from violating Section 10(b) of the Exchange Act and Rule 10b-5, thereunder.
Order defendants Shapiro and Weil to disgorge the unlawful profits realized in connection with their actions, as described in this Complaint, together with prejudgment interest thereon.
Order defendants Shapiro and Weil to pay civil penalties pursuant to Section 21A of the Exchange Act, 15 U.S.C. §78u-1, of up to three times the amount disgorged.
Order such other and further relief as the Court may deem just and appropriate.