UNITED STATES DISTRICT COURT
Plaintiff, the United States Securities and Exchange Commission (the "Commission") alleges:
NATURE OF THE ACTION
1. This insider trading case involves unlawful purchases of securities of BetzDearborn Inc. ("BetzDearborn") by defendants Patricia A. Bugenhagen ("Bugenhagen"), James L. Shisler ("Shisler"), Estate of Timothy P. Gallagher ("Tim Gallagher"), Richard J. Merman ("Merman"), John P. Dougherty ("Dougherty"), and Fred D. Shapiro ("Shapiro") before a July 30, 1998 announcement that BetzDearborn and Hercules Inc. ("Hercules") agreed to merge.
2. Bugenhagen, an executive assistant at BetzDearborn, learned of the impending merger around June 30, 1998, at which time she reallocated a portion of her retirement account to purchase BetzDearborn securities. At the same time, Bugenhagen tipped her brother-in-law, Shisler, who purchased BetzDearborn securities. Bugenhagen subsequently purchased BetzDearborn securities for herself on July 17 using her brother-in-law's account.
3. Bugenhagen tipped her close friend defendant James R. ("Bob") Gallagher ("Bob Gallagher") about the impending merger, and he in turn tipped his brother, Tim Gallagher. Tim Gallagher purchased BetzDearborn stock and call options, and in turn tipped three friends who belonged to his informal weekly investment group about the impending takeover of BetzDearborn by Hercules. These three individuals, Merman, Dougherty, and Shapiro, purchased BetzDearborn securities in advance of the merger announcement.
4. In total, the defendants reaped illegal profits of $270,200.
5. By virtue of the conduct alleged above, defendants violated the antifraud provisions of the federal securities laws. The Commission requests that the Court enjoin each defendant against further violations of these laws (except for the Estate of Timothy P. Gallagher), impose a substantial civil penalty on each defendant (except for the Estate of Timothy P. Gallagher), and require the defendants (except Bob Gallagher) to disgorge all profits realized from their unlawful tipping and trading, plus prejudgment interest on those amounts.
JURISDICTION AND VENUE
6. Defendants engaged in acts, practices, and courses of business that violate Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act")[15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5], through the means or instrumentalities of interstate commerce, the mails, or the facilities of a national securities exchange.
7. This Court has jurisdiction under Sections 21(e), 21A(d)(4), and 27 of the Exchange Act [15 U.S.C. §§ 78u(e), 78u-1(d)(4), and 78aa]. Certain of the defendants' transactions, acts, practices, and courses of business occurred within this District, and venue is proper pursuant to Section 27 of the Exchange Act.
8. Patricia A. Bugenhagen, age 47, resides in Skippack, Pennsylvania. From 1991 to June 1999, Bugenhagen worked at BetzDearborn, and from 1996 through October 15, 1998, she worked as an executive assistant in the executive suite.
9. James L. Shisler, age 54, resides in Buffalo, New York, and works as a self-employed land surveyor. Shisler is Bugenhagen's brother-in-law.
10. James R. ("Bob") Gallagher, age 57, resides in Flourtown, Pennsylvania. In 1998, he was a close personal friend of Bugenhagen. In 1998, he was the president and sole owner of an environmental engineering business.
11. Timothy P. Gallagher died on May 4, 2001, at the age of 65, while a resident of Philadelphia, Pennsylvania. Tim Gallagher was Bob Gallagher's brother. Tim Gallagher was one of the founders of an informal investment group that met every Wednesday to have lunch and discuss investments (the "Wednesday Group").
12. Richard J. Merman, age 63, resides in Wayne, Pennsylvania. Merman is a retired engineer and a member of the Wednesday Group.
13. John P. Dougherty, age 63, resides in Springfield, Pennsylvania. Dougherty is a retired engineer and a member of the Wednesday Group.
14. Fred D. Shapiro, age 49, resides in Bala Cynwyd, Pennsylvania, and works as a sales engineer. Shapiro was a member of the Wednesday Group.
15. BetzDearborn was a Pennsylvania corporation based in Trevose, Pennsylvania, that produced and marketed chemical treatment programs for water, wastewater, and industrial process systems. Prior to its merger with Hercules on October 15, 1998, BetzDearborn's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was traded on the New York Stock Exchange. BetzDearborn call option contracts were traded on the Pacific Stock Exchange.
16. Hercules Inc. is a Delaware corporation based in Wilmington, Delaware, that manufactures specialty chemical products for a variety of markets worldwide.
Bugenhagen Learns of
17. From April 1998 through the July 30, 1998 merger announcement, BetzDearborn and Hercules conducted merger negotiations in secret. Defendant Bugenhagen was an executive assistant for BetzDearborn and worked in the suite of offices occupied by BetzDearborn's most senior executives.
18. As an employee of BetzDearborn, Bugenhagen had a duty to maintain the confidentiality of information she learned during the course of her employment and not to use the information for her benefit or for the benefit of her friends. BetzDearborn's 1994 employee handbook included sections titled "Insider Information" and "Proprietary Information" that instructed employees not to trade in BetzDearborn securities if they were knowledgeable about any "inside" information and not to disclose such information to anyone. In May 1994, Bugenhagen signed an acknowledgement that she had received and reviewed the handbook.
19. Prior to June 30, 1998, Bugenhagen learned about the merger discussions between BetzDearborn and Hercules during the course of her employment at BetzDearborn. The information about the merger was both nonpublic and material.
20. On June 30 and July 1, 1998, Bugenhagen used her knowledge of the merger to purchase BetzDearborn stock in her 401(k) retirement plan. She raised her allocation of BetzDearborn common stock from zero to 25%, and transferred the entire balance of her "growth & income" fund ($330) into BetzDearborn common stock.
21. On July 17, 1998, Bugenhagen purchased 300 shares of BetzDearborn for $38.50 per share, for a total cost of $11,550 - her first-ever purchase of common stock outside of her 401(k) plan. Bugenhagen asked her brother-in-law, Shisler, to purchase the 300 BetzDearborn shares for her in his securities account. After the purchase, approximately 81% of Bugenhagen's liquid assets were tied up in BetzDearborn stock.
22. On or before June 30, 1998, Bugenhagen told Shisler about the planned merger. On June 30, 1998, Shisler made his first-ever purchase of BetzDearborn securities, buying 100 shares for $42.4375, for a total cost of $4,243.75, in his online brokerage account.
23. On July 29, 1998, BetzDearborn's closing stock price was $35.88. After the merger announcement the next day, BetzDearborn's stock price increased to $69.25 and closed for the day at $67.69.
24. On July 30, 1998, after the merger was announced, Bugenhagen sold the 300 shares she bought through Shisler's brokerage account for $68 and realized a profit of $8,850. Bugenhagen realized a profit of $475 on the shares purchased in her 401(k) account, for a total profit of $9,325.
25. On July 30, 1998, after the merger announcement, Shisler sold all his BetzDearborn securities for $68 per share, for an unlawful profit of $2,556.
26. Bugenhagen's purchase of BetzDearborn stock in her 401(k) and in Shisler's account, as well as her disclosure of merger negotiations to Shisler, were in breach of her duty to BetzDearborn not to use the information for her own benefit and to maintain the information in confidence. The disclosure to Shisler was made under circumstances in which it was reasonably foreseeable that Shisler would use the information to trade in BetzDearborn securities.
27. Shisler knew or was reckless in not knowing that the merger information was delivered to him in breach of Bugenhagen's duty of trust and confidence owed to BetzDearborn. Shisler inherited Bugenhagen's duty not to trade in BetzDearborn securities while in possession of material nonpublic information about the merger.
Bugenhagen Tips her Close Friend Bob Gallagher About BetzDearborn's Secret
28. On or before July 7, 1998, Bugenhagen tipped Bob Gallagher material nonpublic information about BetzDearborn's merger plans. Bob Gallagher knew, or was reckless in not knowing, that the information had been provided to him by Bugenhagen, in breach of her duty of trust and confidence owed to BetzDearborn. Bob Gallagher inherited this duty not to trade in, or recommend that others trade in, BetzDearborn securities from Bugenhagen.
29. Following the tip from Bugenhagen, Bob Gallagher related to his brother Tim Gallagher that a BetzDearborn executive secretary told him that BetzDearborn and Hercules were going to merge. It was foreseeable under the circumstances that Tim Gallagher would use the information to trade in BetzDearborn securities. Tim Gallagher knew, or was reckless in not knowing, that the information had been provided to his brother by an executive secretary, in breach of her duty of trust and confidence owed to BetzDearborn. Tim Gallagher inherited this duty not to trade in BetzDearborn securities through his brother, Bob Gallagher.
30. On July 8, 1998, Tim Gallagher bought 50 shares of BetzDearborn for $42.125 per share, for a total cost of $2,106.25, and on July 9 he bought 40 August 40 BetzDearborn call options. These 40 option contracts gave Tim Gallagher the right to acquire up to 4,000 shares of BetzDearborn common stock (100 shares per contract) at the set price, or "strike price," of $40 a share until the contracts expired on the Saturday after the third Friday in August, here Saturday, August 22, 1998. On the day these option contracts were purchased, the price of BetzDearborn's common stock closed at $39.9375, which was below the strike price of $40, making these "out of the money" call options.
31. On July 31, 1998, Tim Gallagher sold his 50 shares for $68 per share, for gross proceeds of $3,400. On August 3 and 4, he sold all of his call options for gross proceeds of $106,275. Tim Gallagher's total unlawful profits were $102,569.
Tim Gallagher Tips his Friends Merman, Dougherty and Shapiro, who Purchase
32. On July 8, 1998, during a gathering of the Wednesday Group, Tim Gallagher tipped his friends, Merman, Dougherty, and Shapiro, material nonpublic information about BetzDearborn's merger plans that had been provided to him by Bob Gallagher. It was foreseeable under the circumstances that Merman, Dougherty, and Shapiro would use the information to trade in BetzDearborn securities. Merman, Dougherty, and Shapiro knew, or were reckless in not knowing, that the information had been provided to Bob Gallagher by an executive secretary at BetzDearborn, in breach of her duty of trust and confidence owed her employer. Merman, Dougherty, and Shapiro inherited this duty not to trade in BetzDearborn securities from Tim Gallagher.
33. On July 9, 1998, Dougherty purchased 20 October 50 BetzDearborn call options for $25 per contract, for a cost of $500. These contracts expired on the third Friday in October 1998.
34. On July 14, 1998, Shapiro bought 300 shares of BetzDearborn at $39.50 per share, for a cost of $11,850.
35. On July 15, 1998, Merman bought 50 October 45 BetzDearborn call options for $75 per contract, for a cost of $3,750.
36. Merman sold his 50 October 45 call options between August 6 and October 9, 1998, for an illegal profit of $109,750.
37. On July 30, 1998, the day of the announcement, Dougherty sold his 20 October 50 call options at a price of $1,837.50 per contract, realizing an illegal profit of $36,250.
38. On October 15, 1998, at the close of the merger, Shapiro tendered his BetzDearborn shares at a price of $72 and realized an illegal profit of $9,750.
39. By virtue of the conduct alleged in paragraphs 1-38 herein, each defendant, directly or indirectly, in connection with trading in BetzDearborn common stock, by use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange: (1) employed devices, schemes, or artifices to defraud; (2) made untrue statements of material facts, or omitted to state material facts necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; or (3) engaged in acts, practices, or transactions which operated as a fraud or deceit upon purchasers or sellers of securities or upon other persons, in connection with the purchase or sale of securities.
40. By reason of the foregoing acts, practices, and transactions, each defendant 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 respectfully requests that this Court:
Grant a Final Judgment of Permanent Injunction restraining and enjoining each defendant (except the Estate of Timothy P. Gallagher) and their agents, servants, employees, attorneys-in-fact, and assigns and those persons in active concert or participation with them, and each of them, 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].
Order each defendant (except Bob Gallagher, who did not trade) to disgorge his or her unlawful trading profits, plus prejudgment interest thereon.
Order each defendant (except the Estate of Timothy P. Gallagher) to pay civil penalties under the Insider Trading and Securities Fraud Enforcement Act of 1988, Section 21A of the
Exchange Act [15 U.S.C. § 78u-1].
Grant such other relief as this Court may deem just and appropriate.