UNITED STATES DISTRICT COURT
Plaintiff, the Securities and Exchange Commission ("the Commission"), alleges as follows:
1. Defendants Scott and Linda A. Watson ("the Watsons") realized nearly $160,000 in unlawful profits by purchasing the securities of Clearnet Communications Inc. ("Clearnet") shortly before a public announcement that Clearnet was to be acquired in a tender offer by Telus Corporation ("Telus"). The Watsons learned about the planned acquisition from their brother-in-law, John Maduri ("Maduri"), an insider at Telus. Between August 11 and August 21, 2000, the date on which Telus and Clearnet announced the tender offer, the Watsons accumulated 10,000 shares of Clearnet and 20 Clearnet September 30 call options. Immediately after the announcement, the Watsons sold the positions and realized illegal profits of $159,193.75.
2. At all times while the Watsons were acquiring Clearnet securities in anticipation of the merger announcement, the Watsons knew, or were reckless in not knowing, that information about the merger was material, was non-public and that they had learned of it from an insider at Telus. Three of the four times the Watsons purchased Clearnet securities, they also knew, or were reckless in not knowing, that by using the merger information to purchase Clearnet securities they breached a duty owed to their brother-in-law to keep the information confidential.
3. By virtue of the conduct alleged herein, the defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78n(e)] and Rules 10b-5 and 14e-3(a) thereunder [17 C.F.R. 240.10b-5 and 240.14e-3(a)].
4. The Commission seeks disgorgement of all ill-gotten gains plus prejudgment interest thereon, civil money penalties, and a permanent injunction against further violations of the statutes and rules alleged to have been violated.
JURISDICTION AND VENUE
5. This Court has jurisdiction over this action pursuant to Sections 21(d), 21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e) and 78aa]. The Watsons' acts and practices constituting violations of the Exchange Act occurred within the Northern District of Alabama, where the Watsons resided during the relevant period.
6. The Watsons, directly and indirectly, used the means or instrumentalities of interstate commerce, or the mails, or the facilities of a national securities exchange, in connection with the acts, practices, and courses of conduct complained of herein.
DEFENDANTS AND OTHER RELEVANT PERSONS AND ENTITIES
7. Defendant Linda Watson, 40, had been married to defendant Scott Watson, 44, the brother of Maduri's wife, Wendy Maduri, for nearly four years at the time they engaged in the unlawful trades in August 2000. At all relevant times, the Watsons together ran The Watson Group Inc., a Birmingham, Alabama executive recruitment firm. Scott and Linda Watson divorced in September 2002.
8. Maduri, 41, is a Canadian citizen who resides in Calgary, Alberta. Maduri's current title is Executive Vice-President of Telus and President, Telus Business Solutions. During August 2000, Maduri was a Telus Executive Vice-President and President of Telus Mobility Cellular Incorporated.
9. During the relevant time, Clearnet Communications Inc. was a Canadian corporation headquartered in Scarborough, Ontario. Clearnet engaged in the operation of wireless communications networks in Canada. At all relevant times, Clearnet's securities were registered with the Commission pursuant to Section 12(g) of the Exchange Act and were listed on the Toronto Stock Exchange, and the NASDAQ National Market System. At all relevant times, Clearnet's options were listed on the American Stock Exchange.
STATEMENT OF FACTS
The Tender Offer
10. On July 1, 2000, Telus engaged TD Securities and J.P. Morgan Securities as financial advisors in connection with a possible acquisition of Clearnet. On July 31, 2000, Telus engaged a public relations firm in connection with the proposed acquisition.
11. During the period July 1 through August 20, 2000, Telus and Clearnet took substantial steps to merge the companies. There were numerous meetings throughout this period among senior-level management personnel of both companies. Telus representatives, with Clearnet's cooperation, conducted business and financial due diligence on Clearnet. On August 7, 2000, Telus and Clearnet entered into a confidentiality agreement. On August 20, 2000, Telus executed a commitment letter, Clearnet and Telus entered into a support agreement, and Telus and certain Clearnet shareholders entered into agreements that they would not sell their stock except through the tender offer.
12. On August 21, 2000, Telus and Clearnet publicly announced Telus' tender offer for all shares of Clearnet and Clearnet's support of the offer. Telus offered to acquire all shares of Clearnet for approximately $47.50 per share, a premium of almost 42 percent from the closing price of Clearnet the day before the announcement.
Maduri Tips the Watsons
13. Maduri met Linda Watson in approximately 1995 and Scott Watson in approximately 1983. Despite residing in different countries, the Watsons and the Maduris regularly vacationed together. The Watsons and the Maduris had a close familial relationship and had confidence in each other as persons they could trust. Maduri periodically sought Scott Watson's advice with respect to career related issues because Scott Watson was an executive recruiter. During the week of August 3, 2000, the Watsons and Maduris traveled to the gulf shore of Alabama for vacation.
14. As a Telus executive, Maduri participated in discussions related to Telus' potential acquisition of Clearnet. Maduri was a corporate insider with possession of material, non-public information concerning the proposed acquisition.
15. On August 10, 2000, while on vacation with the Watsons, Maduri was informed by a more senior officer of the company that, subject to board approval, Telus' acquisition of Clearnet was going to proceed. Maduri knew that the information was material and non-public until the merger was announced to the public.
16. The same day he was informed of the merger, Maduri also learned that the acquisition of Clearnet would result in his demotion. Maduri and his wife were distraught. They thought the demotion would injure Maduri's career and worried that he might lose his job.
17. Maduri and his wife, together and separately, sought comfort from the Watsons, confiding in them their fears and anxieties about the demotion. In the course of seeking familial solace as well as professional advice from Scott Watson in his capacity as an executive recruiter, Maduri innocently disclosed to Linda and Scott Watson that Telus was acquiring Clearnet. It was clear at that time that the merger had not been publicly announced and that Maduri had learned the information directly from Telus as an employee of the company.
18. On August 11, 2000, Maduri and his wife asked for and received a specific promise from the Watsons that all information about the Telus-Clearnet merger would be treated as confidential until the merger was publicly announced. Although on August 10, 2000, when they were first told about the merger, the Watsons knew the information was non-public and obtained from a source at Telus, on August 11, 2000 they specifically accepted instructions from Maduri and his wife to keep the information confidential.
19. As of August 10, 2000, however, the day the Watsons first learned of the pending tender offer, they were under a duty to refrain from disclosing or trading on this material, non-public information.
The Watsons Buy Clearnet Securities
20. The Watsons knew, or were reckless in not knowing, that Maduri's information about the planned merger was non-public and was delivered to them from an inside source at Telus. Nevertheless, the morning after learning of the merger, August 11, 2000, Linda Watson, acting for herself and her husband, purchased 3,300 shares of Clearnet at $30.125 per share through an account she maintained at A.G. Edwards and Sons, Inc. While the account was held solely in Watson's name, the Watsons considered it to be a joint account and shared equally in any profits or losses of any trades made in the account.
21. On August 16, 2000, five days after specifically acknowledging a duty of trust and confidence obtained from her by Maduri, Linda Watson contacted her A.G. Edwards broker and bought an additional 3,300 Clearnet shares at $30.00 per share in her name, acting for herself and her husband. This time, she entered into a margin agreement so that she could borrow money from the broker to purchase the additional 3,300 Clearnet shares. This was the first time Linda Watson had ever purchased securities on margin.
22. On August 17, 2000, Linda Watson opened a new trading account with Merrill Lynch and purchased 20 Clearnet September 30 call options at $4.00 per share in her name, acting for herself and her husband. This was the first time either she or her husband had ever purchased options. While the account was held solely in Linda Watson's name, the Watsons considered it to be a joint account and shared equally in any profits or losses of any trades made in the account.
23. On or about that same date, Linda Watson attempted to open yet another options account, this time with Morgan Keegan in Birmingham, Alabama. Morgan Keegan considered Linda Watson to be an unsuitable candidate for an options account and declined to accept her business. One reason for rejecting her application was Linda Watson's apparent disregard for the inherent risk in options trading, as demonstrated by her comments to the brokerage firm when it interviewed her.
24. On August 18, 2000, Linda Watson bought 1,900 Clearnet shares at $30.875 per share and another 1,500 Clearnet shares at $30.8125 per share in a Merrill Lynch account in her name, acting for herself and her husband.
25. The large number and type of securities purchased and the use of a margin account were highly unusual for the Watsons. The Watsons had not previously invested such a large amount of cash into any one company.
26. On August 21, 2000 Telus and Clearnet announced Telus' tender offer for all shares of Clearnet for a price of approximately $47.50 per share. Clearnet's closing price rose almost 42 percent, from $31.00 on the last trading date before the announcement to $44.00 per share.
27. On August 21, 2000, the Watsons placed an order to sell all Clearnet shares in the A.G. Edwards account for a profit of $93,412.50. Linda Watson also placed an order to exercise and sell all her Clearnet call options for a profit of $20,000.00. On that same date, Linda Watson placed an order to sell all Clearnet shares in the Merrill Lynch account, resulting in a profit of $45,781.25. The Watsons' aggregate profit was $159,193.75.
28. The Watsons jointly planned to purchase the securities of Clearnet in Linda Watson's name after both were informed of the pending tender offer for Clearnet securities. Scott Watson admitted to the Maduris that he knew in advance that Linda Watson was going to purchase Clearnet securities in accounts in her name which they treated as joint accounts and Scott Watson subsequently shared in the benefits of the trading in those accounts. Scott Watson also admitted to the Maduris that the purchases of Clearnet securities broke a confidence.
FIRST CLAIM FOR RELIEF
29. Paragraphs 1 through 28 are hereby realleged and incorporated herein by reference as if set forth fully.
30. Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder prohibit (a) employing devices, schemes, and artifices to defraud; (b) making untrue statements of material fact or omitting to state material facts necessary to make the statements not misleading; and (c) engaging in acts, practices, and a course of business which operates or would operate as a fraud and deceit upon any person in connection with the purchase or sale of any security.
31. The Watsons' purchases of Clearnet securities on August 16, 17 and 18, 2000, using material, non-public information that Clearnet was to be acquired by Telus constituted misappropriation of information in breach of a duty of confidentiality owed Maduri and violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
SECOND CLAIM FOR RELIEF
32. Paragraphs 1 through 28 are hereby realleged and incorporated herein by reference as if set forth fully.
33. After Telus had taken a substantial step or steps to commence a tender offer for the common stock of Clearnet, defendants, the Watsons, directly or indirectly, engaged in fraudulent, deceptive or manipulative acts or practices in connection with the tender offer by purchasing the securities of Clearnet while in possession of material information relating to the tender offer, which information they knew or had reason to know was nonpublic and which information they knew or had reason to know was obtained, directly or indirectly, from Telus, or a person acting on behalf of Telus.
34. The Watsons' purchases of Clearnet securities on August 11, 16, 17 and 18, 2000, using material, non-public information relating to Telus' tender offer for the securities of Clearnet violated Section 14(e) of the Exchange Act and Rule 14e-3(a) thereunder.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
Permanently enjoin the Watsons from violating Sections 10(b) and 14(e) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78n(e)] and Rules 10b-5 and 14e-3(a) thereunder [17 C.F.R. §§ 240.10b-5 and 240.14e-3(a)].
Order the Watsons to disgorge all profits realized from the unlawful trading alleged herein, together with prejudgment interest;
Order the Watsons to pay civil monetary penalties under Section 21A of the Exchange Act [15 U.S.C. § 78u-1]; and
Grant such other relief as the Court deems necessary.
Dated: February 6, 2003