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U.S. Securities and Exchange Commission

UNITED STATES DISTRICT COURT
DISTRICT OF COLUMBIA


SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W
Washington, D.C. 20549,

Plaintiff,

v.

SEAN S. COGHLAN
4100 Opus Court
Flower Mound, TX 75022,

PATRICK S. LAY
2405 Beachview Drive
Flower Mound, TX 75022,

and

CHRISTOPHER W. LAY,
3960 Executive Drive
Palm Harbor, FL 34685-1024,

Defendants.


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Civil Action No. _____

COMPLAINT

Plaintiff Securities and Exchange Commission (the "SEC") alleges:

NATURE OF THE ACTION

1. This matter involves insider trading prior to the March 3, 2003 joint announcement that Kinko's, Inc. ("Kinko's") would be making a cash tender offer to acquire all the outstanding shares of ImageX, Inc.'s ("ImageX") common stock. On February 28, 2003, Sean Coghlan, a Director of Human Resources at Kinko's and a member of the ImageX post-acquisition team, provided Patrick S. Lay with confidential information about Kinko's upcoming acquisition of ImageX before such information was announced to the public. On the next trading day and prior to the acquisition being announced to the public, Patrick Lay purchased 99,000 shares and his brother, Christopher W. Lay, purchased 100,000 shares of ImageX. Immediately after the announcement, both Patrick and Christopher Lay sold all of their ImageX shares, realizing profits of $21,584.71 and $21,444.54, respectively. By engaging in the conduct stated here, Sean Coghlan, Patrick Lay, and Christopher Lay ("Defendants") violated Section 14(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78n(e)] and Rule 14e-3 [17 C.F.R. 240.14e-3] thereunder.

JURISDICTION AND VENUE

2. This Court has jurisdiction over this action pursuant to Sections 21(e), 21A and 27 of the Exchange Act [15 U.S.C. 78u(e), 78u-1 and 78aa].

3. Defendants made use of the means or instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein.

4. Defendants will, unless restrained and enjoined, continue to engage in the acts, practices and courses of business alleged herein, or in transactions, acts, practices and courses of business of similar purport and object.

THE DEFENDANTS

5. Sean S. Coghlan, age 33, a resident of Flower Mound, Texas, was at all relevant times a Director of Human Resources at Kinko's and was a member of the ImageX post-acquisition team.

6. Patrick S. Lay, age 42, a resident of Flower Mound, Texas, was a sales manager at International Paper Company. Patrick Lay, Sean Coghlan and their families were friends.

7. Christopher W. Lay, age 41, a resident of Palm Beach, Florida, is a medical doctor. Dr. Christopher Lay is Patrick Lay's brother.

STATEMENT OF FACTS

8. Kinko's is a privately held Texas corporation with its principal place of business in Dallas, Texas. It operates a chain of retail stores that offer a wide range of printing and business services.

9. Prior to the May 1, 2003 conclusion of Kinko's tender offer, ImageX was a Washington corporation with its principal place of business in Kirkland, Washington. It provided electronic print technology for online management and procurement of branded communication materials. ImageX's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act, and was listed for trading on NASDAQ under the ticker symbol "IMGX."

10. In May 1999, Sean Coghlan began his employment with Kinko's and signed an employment agreement in which he agreed to comply with all provisions in Kinko's Policy and Procedures Manual and Team Member Handbook. Both the manual and handbook outline the company's non-disclosure and insider trading policies.

11. Annually, Sean Coghlan signed a Team Member Agreement which affirmed that he had received, reviewed, and would abide by Kinko's Team Member Handbook. The insider trading and non-public information section of the handbook states that "Kinko's obeys all laws designed to protect the investing public with respect to the disclosure of material information. Information is considered material if a reasonable investor would consider it important to his or her decision to buy, sell or hold Kinko's stock." The section specifically cites a significant acquisition as an example of material information. It also states, "Team members should not disclose material non-public information to anyone outside Kinko's (including family members)."

12. In July 2002, Kinko's entered into discussions with ImageX concerning potential strategic partnerships, including the potential acquisition of ImageX by Kinko's. The discussions were confidential, and both Kinko's and ImageX signed a mutual confidentiality and non-disclosure agreement.

13. In or about August 2002, Sean Coghlan and his family had relocated to the Dallas area. Shortly after arriving, Sean Coghlan's family developed a friendship with Patrick Lay's family. The parents got to know one another through their children's school functions, sporting events, and play dates. On more than one occasion, the families visited one another's homes socially.

14. By early October 2002, in connection with the proposed acquisition of ImageX, Kinko's retained outside counsel and engaged a financial adviser.

15. On November 5, 2002, Kinko's submitted a written, non-binding indication of interest for a tender offer for the acquisition of all of the outstanding common stock of ImageX. In late November, Kinko's began its due diligence review of ImageX.

16. In early February 2003, the Senior Vice President of Human Resources at Kinko's asked Sean Coghlan to participate in an upcoming post-acquisition process by assisting with the integration of the target company's human resources practices with those of Kinko's. At this time, Coghlan was not given any details regarding the acquisition.

17. On February 13, 2003, the Board of Directors of Kinko's unanimously approved a tender offer for the acquisition of all outstanding shares of ImageX and authorized management to finalize negotiations and execute the necessary transactional documents.

18. On or about February 27, 2003, Kinko's Senior Vice President of Human Relations informed Sean Coghlan, in a closed-door meeting, that the acquisition target was ImageX, the announcement of a tender offer was imminent, ImageX was a publicly traded company, Kinko's tender offer would be for considerably more than the current share price, and that the foregoing was confidential inside information that should not be disclosed to anyone. Kinko's Senior Vice President of Human Relations also warned Coghlan that failure to protect this confidential information would likely lead to, among other things, an investigation by the SEC.

19. On February 28, 2003, the Coghlans invited the Lays over for dinner. During the evening, Sean Coghlan informed Patrick Lay, in words or substance, that he would be traveling next week to Seattle because Kinko's was going to acquire ImageX. He stated the name of the company, confirmed the spelling of the company's name, and revealed to Patrick Lay that Kinko's would make a tender offer for a price considerably higher than ImageX's then-current share price.

20. At the time of disclosure, Sean Coghlan assumed Patrick Lay was an active trader, believed the acquisition would positively affect ImageX's stock price, and disclosed to him virtually all of the information that he knew about the ImageX acquisition.

21. Patrick Lay knew or had reason to know that Sean Coghlan had provided confidential, non-public information.

22. Sean Coghlan did not ask Patrick Lay to keep Kinko's acquisition plans in confidence, nor did Coghlan state that Patrick Lay could not trade using the information.

23. During the weekend of March 1 and 2, 2003, Patrick Lay informed his brother, Christopher Lay, of Kinko's acquisition plans. Patrick Lay passed along all of the non-public information that he had received from Sean Coghlan. Christopher Lay knew or had reason to know that his brother was passing along confidential, non-public information acquired from an employee of Kinko's.

24. Patrick and Christopher Lay knew or had reason to know that once Kinko's tender offer for ImageX was announced to the public, the market value of ImageX shares would increase.

25. During the fifteen days before the ImageX acquisition was announced, ImageX shares traded at prices ranging from as low as $0.15 to as high as $0.29 per share, with an average daily trading volume of 32,115 shares per day. On the trading day immediately before the announcement, ImageX shares closed at $0.23 per share on volume of 503,950.

26. On March 3, 2003, Patrick Lay and Christopher Lay purchased 99,000 and 100,000 shares of ImageX common stock, respectively.

27. On March 3, 2003, Kinko's and ImageX executed a Merger Agreement in which Kinko's agreed to make a tender offer of $0.512 per share for all of the outstanding shares of ImageX. After the close of trading, Kinko's and ImageX issued a joint press release announcing that they had entered into a definitive merger agreement whereby ImageX would become a wholly owned subsidiary or unit of Kinko's.

28. On March 4, 2003, the day after the announcement, shares of ImageX closed at $0.50 per share, an increase in price of more than 100%.

29. On March 4, Patrick and Christopher Lay sold all of the ImageX shares that they had purchased the day before for a gain of $21,584.71 and $21,444.54 respectively.

30. Sean Coghlan communicated material, nonpublic information concerning Kinko's proposed acquisition of ImageX to Patrick Lay under circumstances in which it was reasonably foreseeable that Patrick Lay and others might trade in ImageX securities. At the time Sean Coghlan communicated the information to Patrick Lay, Kinko's had taken substantial steps to commence a tender offer for ImageX.

31. Patrick Lay and Christopher Lay each knew or had reason to know that he traded in the securities of ImageX while in possession of material, nonpublic information about Kinko's upcoming acquisition of ImageX, and that the information he possessed had been acquired directly or indirectly from an employee of Kinko's.

CLAIM

Violation of Section 14(e) Of The
Exchange Act and Rule 14e-3 Promulgated Thereunder

32. Paragraphs 1 through 31 are realleged and incorporated herein by reference.

33. Sean Coghlan communicated to Patrick Lay material, nonpublic information relating to Kinko's upcoming tender offer for ImageX under circumstances in which it was reasonably foreseeable that such communication would likely result in a violation of Section 14(e) of the Exchange Act and Rule 14e-3 thereunder.

34. Patrick and Christopher Lay knew or had reason to know the information that they possessed relating to the tender offer by Kinko's for ImageX, as described above, constituted material nonpublic information acquired directly or indirectly from an employee of Kinko's.

35. Patrick and Christopher Lay, while in possession of such knowledge and information, purchased ImageX common stock, as set forth above.

36. By the dates on which Patrick and Christopher Lay began their respective trading in ImageX securities, Kinko's had taken substantial steps toward commencing its tender offer for ImageX securities, including, but not limited to the facts set forth above in paragraphs 12-17.

37. By reason of the foregoing, Sean Coghlan, Patrick Lay, and Christopher Lay, directly and indirectly, violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff SEC respectfully requests that this Court enter a Judgment:

(i) finding that Sean Coghlan, Patrick Lay, and Christopher Lay have engaged in the conduct described above, and that in so doing, they have violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder;

(ii) that permanently restrains and enjoins Sean Coghlan, Patrick Lay, and Christopher Lay from violating Section 14(e) of the Exchange Act and Rule 14e-3 thereunder;

(iii) that orders Patrick Lay and Christopher Lay to disgorge all profits realized from the unlawful trading alleged herein, with prejudgment interest;

(iv) that orders Sean Coghlan, Patrick Lay, and Christopher Lay to pay civil penalties under Section 21A of the Exchange Act [15 U.S.C. 78u-1]; and

(v) that grants such other relief, as this Court may deem just and appropriate.


Lawrence A. West (Bar No. 438103)
James A. Meyers (Bar No. 358737)
Douglas C. McAllister (Bar No. 401370)
Jordan A. Thomas (Bar No. 452886)

SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, DC 20549-0805

Tel.: (202) 942-4712 (Meyers)
Fax.: (202) 942-9581 (Meyers)
Attorneys for Plaintiff

 

http://www.sec.gov/litigation/complaints/comp18633.htm


Modified: 03/24/2004