UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges the following against defendants Timothy J. Potter and George R. Potter:
1. This enforcement action involves insider trading in securities of Sepracor, Inc. ("Sepracor"), a pharmaceutical company based in Massachusetts. At all relevant times, Timothy Potter was a manager in Sepracor's accounting department. George Potter is his father. Both defendants live in Bedford, New Hampshire.
2. On October 16, 2000, Eli Lilly and Company ("Lilly") representatives informed Sepracor personnel that they intended to recommend termination of an exclusive license agreement with Sepracor concerning a developmental drug. Later that day, the head of Sepracor's accounting department told another member of the department to calculate the impact of termination of the license agreement on Sepracor's revenues and income.
3. Between October 16 and October 18, 2000, at least three members of Sepracor's accounting department who worked closely with, and had offices near, Timothy Potter, learned of Lilly's potential termination of the license agreement. As a result of his close proximity to and interaction with these individuals, Timothy Potter learned of the potential termination no later than the early afternoon of October 18, 2000. He then immediately started making numerous phone calls to his father, George Potter, as well as to other family members and a stockbroker. During one of those phone calls, Timothy Potter tipped George Potter about Lilly's potential termination of the license agreement, breaching his duty of confidentiality to Sepracor. Within thirty minutes, George Potter acted on the tip by purchasing put options on Sepracor common stock - in effect, betting that the price of Sepracor stock would fall.
4. On October 19, 2000 - the very next day - Sepracor publicly announced that Lilly had terminated the license agreement. Sepracor stock closed that day at $87.06 per share, down 28% from the previous day's close of $120.81. Immediately after the public announcement, George Potter sold the put options and realized a profit of $55,172. Several months later, George Potter transferred $55,000 to Timothy Potter.
5. Through the insider trading alleged in this Complaint, Timothy Potter and George Potter 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 George Potter and Timothy Potter from further violations of Section 10(b) and Rule 10b-5; (ii) disgorgement of the profits from their insider trading, plus pre-judgment interest; and (iii) the imposition of civil monetary penalties of up to three times the profits from their insider trading.
JURISDICTION AND VENUE
6. 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 civil monetary penalties pursuant to Section 21A of the Exchange Act [15 U.S.C. §78u-1].
7. 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 both defendants reside here and many of the activities alleged in this Complaint took place here.
8. In connection with the conduct described in this Complaint, Timothy Potter and George Potter directly and indirectly made use of the means or instrumentality of interstate commerce or of the mails.
DEFENDANTS AND RELEVANT ENTITY
9. Timothy J. Potter, age 39, lives in Bedford, New Hampshire. He has been employed in Sepracor's accounting department since May 1998 and is presently Associate Director of General Accounting. He is the son of George Potter.
10. George R. Potter, age 65, lives in Bedford, New Hampshire. He is retired. He previously worked at Compaq Computer Corp. as Manager of Accounting Policy and Business Controls and at Digital Equipment as an accounting supervisor. He is the father of Timothy Potter.
11. Sepracor is a pharmaceutical company based in Marlborough, Massachusetts, which develops potentially improved versions of widely-prescribed drugs. Its securities areregistered with the Commission pursuant to Section 12(g) of the Exchange Act [15 U.S.C. §78k(g)] and are traded on the NASDAQ National Market System under the ticker symbol SEPR. Options contracts on Sepracor common stock are traded principally on the Chicago Board Options Exchange.
STATEMENT OF FACTS
Timothy Potter Obtained Material Non-Public Information about
12. On October 16, 2000, Lilly representatives informed Sepracor's technical team that they planned to recommend termination of an exclusive license agreement with Sepracor concerning (R)-fluoxetine, a new version of Prozac, Lilly's top-selling antidepressant. The head of Sepracor's technical team immediately informed Sepracor's CEO, who then shared the information with several top Sepracor executives who were with him at a charity golfing event. The group of executives included Robert Scumaci, the Senior Vice President in charge of the accounting department.
13. Later on October 16, 2000, Scumaci called Michael Zuccaro, the Senior Director of Financial Planning and Analysis and the person responsible for preparing Sepracor's five-year financial plan. Zuccaro's office was adjacent to Timothy Potter's office, and when he spoke with Scumaci, Zuccaro was in his office with the door open. Scumaci told Zuccaro to re-run Sepracor's five-year projections after eliminating the revenues and costs associated with the Lilly license agreement and to have the results ready by the next morning.
14. Zuccaro spent two hours on the afternoon of October 16, 2000 revising Sepracor's five-year plan, which included projected operating results, balance sheet, cash-flow statement,and breakdown of revenue sources. Among other things, he calculated that losing the Lilly license agreement would reduce Sepracor's projected 2001 revenues by $20 million and would reduce its projected net income by $18 million. During that two-hour period, Zuccaro printed several versions of the revised five-year plan and related documents on a shared network printer located outside his office and Timothy Potter's office.
15. On the morning of October 17, 2000, Zuccaro delivered the revised five-year plan to Scumaci, who informed him that Lilly might terminate the license agreement. This discussion took place in Scumaci's office, which was just three doors away from Timothy Potter's office. That afternoon, Scumaci, Zuccaro and Timothy Potter met to discuss the upcoming close of the company's quarterly financial information.
16. On the morning of October 18, 2000, Scumaci told David Aubuchon, the Senior Director of Corporate Finance, that Lilly might terminate the license agreement. Aubuchon was Timothy Potter's direct supervisor, and his office was two doors from Timothy Potter's office. One of Aubuchon's duties was to confer with Sepracor's outside legal counsel regarding preparation of the company's filings with the Commission. Later that morning, Aubuchon called Sepracor's outside law firm and spoke with an attorney about the company's upcoming quarterly filing with the Commission. During that conversation, Aubuchon discussed the fact that Lilly might terminate the license agreement and requested legal advice concerning a possible press release about the termination.
17. Timothy Potter worked closely with, had an office near, and regularly ate lunch with Scumaci, Aubuchon and Zuccaro. As a result of his interaction with and proximity toScumaci, Aubuchon, Zuccaro and others at the company, Timothy Potter learned, no later than 12:48 p.m. on October 18, 2000, about Lilly's potential termination of the license agreement.
George Potter Purchased Put Options on Sepracor Stock
18. Between 12:48 p.m. and 3:36 p.m. on October 18, 2000, Timothy Potter made six calls to his father George Potter, three calls to his brother Mark Potter, one call to his brother Daniel Potter, and one call to a stockbroker in New York. Timothy Potter made the initial calls from his office phone at Sepracor, but then he began making some of the calls from his cell phone. During the same period, Timothy Potter also received one call from his father and one call from his brother Mark, and his brother Mark also made a call to a different stockbroker.
19. The number and pattern of the calls on October 18 was unprecedented. Timothy Potter rarely called family members during business hours and, apart from October 18, his father called him at the office only seven times during all of 2000. The numerous phone calls to a broker and family members, coupled with the fact that he had just learned about Lilly's potential termination of the license agreement, indicate that his purpose was to discuss trading in Sepracor securities based on the non-public information.
20. Most of the phone calls on October 18, 2000 lasted one minute or less, but the phone call between Timothy Potter and George Potter at 3:12 p.m. lasted for 2½ minutes. Less than thirty minutes after that call (3:41 p.m.), George Potter called Fidelity Investments and purchased put options on Sepracor stock for $30,694. Twenty minutes later (4:01 p.m.), George Potter called Timothy Potter at his office.
George Potter Sold the Put Options for a Profit of $55,172
21. At approximately 5:00 p.m. on October 18, 2000, Lilly formally notified Sepracor that it was terminating the license agreement. Early on the morning of October 19, 2000, Sepracor publicly announced the termination, and its stock price began falling rapidly. Sepracor stock closed that day at $87.06 per share, down 28% from the previous day's close of $120.81.
22. At 10:04 a.m. on October 19, 2000, George Potter called Timothy Potter at his office. The call lasted one minute. Less than ninety minutes later, George Potter sold all the Sepracor put options, realizing a profit of $55,172.
George Potter Paid his Trading Profits to Timothy Potter
23. On April 18, 2001, George Potter transferred $55,000 from the Fidelity account in which he had purchased and sold the Sepracor put options to Timothy Potter's account at the same firm.
George Potter Gave Misleading and Implausible
24. George Potter's purchase of put options on Sepracor stock was atypical of his prior trading practices. During the preceding two years, he did not purchase any put options and did not sell any stock short. In addition, he had not purchased Sepracor options within the preceding six months and had not owned Sepracor stock for almost one year.
25. In sworn testimony during the Commission's investigation, George Potter offered various misleading and implausible explanations for his purchase of Sepracor put options on October 18, 2000. For example, he claimed that his decision was influenced by information hehad obtained from the news media (including television appearances by Sepracor's CEO) and from Internet chat rooms. However, he could not recall hearing any specific information about Sepracor or seeing the CEO on television during the weeks preceding October 18, 2000.
26. George Potter also claimed that his decision to buy Sepracor put options on October 18, 2000 was influenced by risk disclosures in the company's public filings with the Commission. However, he could not recall any specific disclosures and could not recall when he had actually read them. He also admitted that any risks he read about were general, ongoing risks inherent in the pharmaceutical industry. Also, Sepracor's most recent public filing, a quarterly report on Form 10-Q, was filed more than two months before October 18, 2000.
27. George Potter also claimed that his decision to buy Sepracor put options on October 18, 2000 was influenced by his impression that Timothy Potter appeared troubled and was not acting like his "normal self". However, he could not recall anything specific that Timothy Potter had said or done which supported this impression. He also admitted that he did not ask Timothy Potter whether anything was wrong, and he could not cite a single previous instance when he had based an investment decision on his son's demeanor or mood.
George Potter Purchased the Sepracor Put Options After
28. The facts set forth above - (i) Timothy Potter's close proximity to members of Sepracor's accounting department who learned between October 16 and October 18, 2000 that Lilly might terminate the license agreement and who calculated the significant negative effect of such a termination on Sepracor's financial performance; (ii) Timothy Potter's unusual and numerous telephone calls to George Potter, other family members, and a stockbroker starting at12:48 p.m. on October 18, 2000; (iii) George Potter's conversation with Timothy Potter at 3:12 p.m. on October 18, 2000 followed less than thirty minutes later by his unprecedented purchase of Sepracor put options; (iv) George Potter's sale of the put options on October 19, 2000, less than ninety minutes after another call to Timothy Potter; (v) George Potter's subsequent transfer to Timothy Potter of $55,000 - almost exactly the amount of profit he had realized from buying and selling the put options; and (vi) George Potter's misleading and implausible explanations for his purchase of Sepracor put options - indicate that George Potter actually purchased the put options because he had just obtained material non-public information about the potential Lilly termination from Timothy Potter. Although Timothy Potter himself owned Sepracor stock - whose price was likely to fall once Lilly's decision to terminate the license agreement was made public - he was prohibited from selling the stock due to a "black-out" period applying to trading by Sepracor personnel.
Timothy Potter Breached His Fiduciary Duty to Sepracor When
29. At all relevant times, Timothy Potter was an insider of Sepracor who had a fiduciary duty to the company's shareholders not to trade, or direct others to trade, in the company's securities while in possession of material non-public information about the company. He acknowledged his fiduciary duty in May 1998, when he signed an employee confidentiality agreement, and again in July 2000, when he signed a form confirming his review of Sepracor's Employee Resource Guide, which contains the company's policy prohibiting insider trading.
30. When Timothy Potter disclosed the material non-public information concerning the potential termination of the licensing agreement to George Potter on October 18, 2000, he violated his fiduciary duty to Sepracor.
31. Based on Timothy Potter's position as a manager in Sepracor's accounting department and based on his own prior business experience, George Potter knew or was reckless in not knowing that, when Timothy Potter disclosed the material non-public information to him, the disclosure was in breach of a duty that Timothy Potter owed to Sepracor.
CLAIM FOR RELIEF
(Violation of Section 10(b) of the Exchange Act and Rule 10b-5)
32. The Commission repeats and incorporates by reference the allegations in paragraphs 1-31 of the Complaint as if set forth fully herein.
33. As set forth above, Timothy Potter obtained material non-public information about Sepracor and then, in breach of his duty of confidentiality to Sepracor, tipped his father, George Potter, who bought and sold options on Sepracor stock at a profit and later transferred the profit to Timothy Potter and who knew or was reckless in not knowing that Timothy Potter's disclosure of material non-public information was in breach of a duty that Timothy Potter owed to Sepracor.
34. By reason of the foregoing, Timothy Potter and George Potter, 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 thecircumstances 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 Sepracor stock and options on Sepracor stock.
35. As a result, Timothy Potter and George Potter 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 Timothy Potter, George Potter, their 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 Timothy Potter and George Potter to disgorge the profits from their insider trading, plus pre-judgment interest;
C. Order Timothy Potter and George Potter each to pay a civil monetary penalty of up to three times the amount of the profits from their insider trading, pursuant to Section 21A of the Exchange Act [15 U.S.C. §78u-1];
D. Retain jurisdiction over this action to implement and carry out the terms of all orders and decrees that may be entered; and
E. Grant such other and further relief as the Court deems just and proper.
Dated: January 30, 2003