UNITED STATES DISTRICT COURT
SECURITIES AND EXCHANGE COMMISSION,
03 Civ. 4087 (E.D.N.Y.)
Plaintiff, Securities and Exchange Commission ("Commission"), for its Complaint against defendant Davi Thomas ("Thomas") alleges as follows:
1. This matter involves illegal insider trading based on the future contents of the Inside Wall Street column ("IWS column") in Business Week magazine. During a two-and-a-half-year period, Thomas, then an employee of the United States Postal Service ("USPS"), read the column when the magazine passed through the Mount Vernon, New York postal sorting facility on its way to subscribers and news stands. Thomas then shared the contents with a friend, Lionel Thotam ("Thotam"), before the column became public. Thotam and Thomas placed pre-publication trades in the securities mentioned in the column, and were thereby able to capitalize on changes in the securities' prices when the information in the column became known to the public the next day. From August 1996 through January 1999, Thotam executed purchase and sale transactions in fifty securities in his own brokerage accounts and fourteen securities in a relative's brokerage account based on material, nonpublic information that he knew, or was reckless in not knowing, had been misappropriated from Business Week by Thomas. Thotam's illicit profits totaled $77,213.38. From June 1997 through January 1999, Thomas executed purchase and sale transactions in thirty-seven securities mentioned in the column in his own brokerage account and forty-one securities from the column in a joint brokerage account based on material, nonpublic information that he knew, or was reckless in not knowing, he had misappropriated from Business Week magazine. Thomas's illicit profits totaled $154,268.61.
2. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78u(d), to enjoin Thomas from violating the antifraud provisions of the federal securities laws. The Commission also seeks a judgment requiring Thomas to disgorge the profits of his fraudulent conduct plus prejudgment interest thereon, and to pay civil penalties pursuant to Section 21A(a) of the Exchange Act, 15 U.S.C. § 78u-1(a), and ordering such other and further relief as the court may deem appropriate.
3. This Court has jurisdiction over this action, and venue is proper, pursuant to Sections 21(d) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d), 78aa. Certain of the alleged transactions, acts, practices, and courses of business occurred in the Eastern District of New York, including, but not limited to, the purchase and sale of securities by telephone.
4. Thomas has engaged in, and unless enjoined, will continue to engage, directly or indirectly, in transactions, acts, practices or courses of business that constitute 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.
5. Davi Thomas, age 42, was a real estate agent in Mount Vernon, New York, where he lived, between August 1996 and January 1999. He also was a full time mail handler at the Mount Vernon, New York postal sorting facility and worked the 4 p.m. to 12:30 a.m. shift.
6. Business Week is a weekly magazine published by The McGraw-Hill Companies, Inc. ("McGraw-Hill") covering current events in business and finance. From 1996 through early 1999, Business Week had an average weekly circulation ranging from approximately 894,000 to 924,000 paid subscribers in the United States. Each issue of Business Week includes the IWS column, which provides information on publicly traded companies.
7. During the period of August 1996 through January 1999, the IWS column's author typically completed drafting the weekly IWS column by Tuesday afternoons or evenings. Business Week editors finished reviewing the column by Wednesday evenings. A limited number of editors and production staff were involved in preparing the column for publication, and sensitive information was stored in a secure part of the Business Week computer network with restricted access.
8. By 11 p.m. on Wednesday nights, the final pages of Business Week had been shipped to Applied Graphics Technology ("AGT"), which prepared the pages for printing. AGT electronically transmitted the contents to printing plants starting early on Wednesdays, and AGT's transmissions and all printing was completed by late Wednesday nights.
9. Business Week was printed at four plants: Old Saybrook, Connecticut; North Bergen, New Jersey; Waterloo, Wisconsin; and Torrance, California. Binding began at the printers at 2 a.m. on Thursdays and copies of the magazine started shipping out of the respective printing plants by 4 a.m. The delivery trucks headed for Mount Vernon, New York departed the Old Saybrook printing plant between 6 and 8:30 a.m. between August 1996 and January 1999, and arrived at the Mount Vernon postal sorting facility approximately two hours later.
10. Business Week magazines were unloaded from delivery trucks at the Mount Vernon postal sorting facility around 1 p.m. on Thursdays.
11. McGraw-Hill released the contents of the IWS column on the Internet no earlier than 6:30 p.m. on Thursdays. Subscribers and newsstands received their copies Friday mornings.
12. The information contained in the IWS column has a material impact on the price of the securities of the companies mentioned in the IWS column ("IWS Securities"). Specifically, securities of companies that are favorably mentioned in the IWS column generally rise in price immediately after the IWS column becomes public. As a result, a person who learns that a company will be discussed favorably in the IWS column can profit by purchasing IWS Securities based on that nonpublic information.
13. Recognizing that Business Week in general and the IWS column in particular contain information that may be material to investors, McGraw-Hill executed formal, written security agreements with AGT to protect the confidentiality of the contents of the publication.
14. McGraw-Hill's agreement with AGT discussed the requirement that the contents of the magazine remain confidential until the information became generally known to the public. In the agreement, AGT "acknowledges that the information contained in [McGraw-Hill]'s publications contain confidential and proprietary information and may constitute material inside information under the United States securities laws." AGT ensured that all its employees were aware of the confidential nature of the contents of McGraw-Hill's magazines, according to the agreement.
15. Between August 1996 and January 1999, the printers also executed formal, written security agreements with McGraw-Hill, and printing employees were instructed as to the confidential nature of Business Week's contents. Truckers were informed of the confidential nature of the pre-publication magazine, and distributors signed a formal security agreement with McGraw-Hill.
16. USPS regulations require that all mail be kept confidential. The USPS's Administrative Support Manual in effect during the relevant time period required the USPS to "preserve and protect the security of all mail in its custody from unauthorized opening, inspection, or reading of contents or covers ... or other unauthorized acts." The manual provided that "[i]n general, no person may open, read, search, or divulge the contents of mail" without a search warrant or other specific authorization. Postal employees who failed to protect the security of mail were subject to discipline, criminal prosecution, or both.
17. The Code of Ethical Conduct for postal employees was designed "to prevent postal employees from securing any pecuniary advantage, however indirect, from their public employment, other than their compensation provided by the Postal Service." To that end, the Code provided that "[e]mployees must avoid any action, whether or not specifically prohibited by this Code, which might result in or create the appearance of ... [u]sing Postal Service office for private gain." In particular, the Code provided that "[n]o employee, whether acting for personal benefit or not, will use, or appear to use, either official position or recorded or unrecorded information obtained as a result of employment, to further any private interest for self or any other person," or "engage in any outside business or activity which reflects discredit upon the Postal Service."
18. Thotam began trading securities in November 1995 in his account at Waterhouse Securities, Inc. ("Waterhouse"). Thotam subscribed to Business Week and read the IWS column. Thotam noticed that the prices of stocks favorably mentioned in the column tended to increase on Fridays, when he received his copy of the magazine.
19. In order to receive the information in the IWS column ahead of the general public, Thotam enlisted Thomas's aid in mid-1996. Thotam explained to Thomas the correlation between a stock being mentioned favorably in the IWS column and its increased price on Friday when the column became public. Thomas agreed to "check into" the possibility of obtaining a copy of Business Week magazine at the Mount Vernon, New York postal facility, where he worked, prior to its delivery to subscribers and news stands on Friday mornings.
20. The first time Thomas obtained an advance copy of Business Week magazine and shared the contents of the IWS column with Thotam, it was too late in the day for Thotam to place a trade order. Thotam explained to Thomas that he needed to receive the information early enough in the day to place a trade before the market closed.
21. In August 1996, Thomas, whose shift started at 4 p.m., started arriving at work early on Thursdays so he could obtain the IWS column and telephone Thotam with the information prior to the close of the market.
22. From August 1996 to January 1999, Thomas called Thotam on Thursday afternoons - before the market closed - and shared the contents of the IWS column. Thotam traded on the information Thomas provided and periodically updated Thomas on the profits flowing from the tips.
23. Thomas told Thotam that he had reservations about providing the tips because he was not supposed to be reading other people's mail.
24. In February 1999, Thotam paid Thomas $10,000 in the form of two checks made out to cash for $5,000.
25. From August 1996 through January 1999, Thotam traded IWS Securities in his accounts at Waterhouse and later Brown & Company Securities Corp. ("Brown"). Thotam placed those trades shortly before the market closed on Thursdays and, in most instances, sold the stock the next day. Thotam's profit from purchases and sales of IWS Securities in his Waterhouse and Brown accounts amounted to $53,563.68.
26. In July 1997, Thotam's relative opened a brokerage account at Brown. Thotam conducted all of the trading in his relative's account. From August 1997 until January 1999, Thotam placed trades in his relative's account for fourteen IWS Securities. Those trade orders were all placed on Thursday afternoons and in most cases Thotam sold the stock the next day. The profit attributable to purchases and sales of IWS Securities in Thotam's relative's account was $23,650.
27. The total profit from Thotam's purchases and sales of IWS Securities in his own and his relative's accounts was $77,213.38.
28. Thotam knew, or was reckless in not knowing, that these purchases and sales were based on information that had been misappropriated by Thomas in violation of a duty of confidentiality. Thotam also knew, or was reckless in not knowing, that this information was material and nonpublic.
29. Thotam communicated the IWS Securities orders by telephone from his residences in Forest Hills and Elmont, New York.
30. The IWS Securities were listed on the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers Automated Quotation system, and the Pink Sheets.
31. Thomas began trading securities in June 1997 in his account at National Discount Brokers ("NDB"). He opened a joint account in September 1997 at Ceres Securities, Inc. ("Ceres"). He traded in both accounts through January 1999.
32. The securities Thomas traded in his accounts at NDB and Ceres mostly mirrored the securities discussed in the IWS column in the same time period. Thirty-seven of the forty-one stocks Thomas traded in his NDB account, and forty-one of the forty-seven stocks in his Ceres account, were IWS securities. In both accounts, almost all the stock purchases were on Thursdays, followed the next day by sales.
33. Profits from the purchases and sales of IWS securities in Thomas's accounts totaled $154,268.61, including $32,563.60 in his individual account at NDB and $121,705.01 in his joint account at Ceres.
34. Thomas knew, or was reckless in not knowing, that these purchases and sales were based on information he had misappropriated in violation of a duty of confidentiality. Thomas also knew, or was reckless in not knowing, that the information was material and nonpublic.
35. Thomas communicated the IWS Securities orders by telephone from Mount Vernon, New York.
36. The IWS Securities that Thomas bought and sold were listed on the New York Stock Exchange, American Stock Exchange, National Association of Securities Dealers Automated Quotation system and the Pink Sheets.
37. Paragraphs 1 through 36 are realleged and incorporated herein by reference.
38. From at least August 1996 through January 1999, Thomas, directly and indirectly, singly and in concert, by use of the means or instrumentalities of interstate commerce, the mails, or any facility of any national securities exchange, in connection with the purchase or sale of securities: (1) employed devices, schemes, or artifices to defraud; (2) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made in light of the circumstances under which they were made, not misleading; and (3) engaged in acts, practices or courses of business which operated, or would operate as a fraud or deceit upon purchasers of the securities, or any other persons.
39. As part of, and in furtherance of these violations, and as set forth above, Thomas executed purchase and sale transactions in at least thirty-seven securities while in possession of misappropriated, material, nonpublic Business Week information, and tipped Thotam to such information which served as the basis for Thotam's own trading. Thomas knew, or was reckless in not knowing, that he traded on and disclosed this information to Thotam in breach of a duty of confidentiality.
40. By reason of the foregoing, Thomas violated, and unless enjoined will again violate, 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.
WHEREFORE, plaintiff Commission respectfully requests that this Court enter judgment:
Permanently restraining and enjoining Thomas, directly and indirectly, from violating 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;
Ordering Thomas to disgorge the ill-gotten gains derived from the purchase of IWS securities in violation 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, and to pay prejudgment interest thereon;
Ordering Thomas to pay a civil penalty, pursuant to Sections 21(d) and 21A of the Exchange Act, 15 U.S.C. § 78u(d)(3) and § 78u-1; and
Granting such other and further relief as this Court shall deem just and proper.
|Dated:||New York, New York
August 19, 2003
Attorney for Plaintiff
Edwin H. Nordlinger
Mark K. Schonfeld
Caren N. Pennington
Doria G. Bachenheimer
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