UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission (the "SEC") alleges:
NATURE OF THE ACTION
1. This matter involves insider trading in the securities of Information Resource Engineering, Inc. ("IREG"), now known as Safenet, Inc., in advance of the company's October 4, 1999 announcement that it expected to report third quarter results below analysts' expectations. During the week immediately before the announcement, Benjamin J. Maldonado III, then a registered representative at the Washington, DC office of Merrill Lynch, Pierce, Fenner & Smith, Inc., sold 500 IREG shares from his own account and 29,000 shares from the accounts of his brother, mother, and grandmother. Maldonado sold these IREG shares after Sean R. Price, IREG's Vice President of North American Sales at the time, tipped Maldonado with confidential information about IREG's adverse financial results. Maldonado and Price (collectively "Defendants") knew each other since at least their early teenage years, and Maldonado was the stockbroker assigned to Price's brokerage accounts at Merrill Lynch since December 1989. As a result of his illegal sales, Maldonado and his family avoided losses of more than $38,000. By engaging in the conduct stated here, Price and Maldonado violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and both are likely to commit such violations in the future unless the Court enjoins them from doing so.
JURISDICTION AND VENUE
2. This Court has jurisdiction over this action pursuant to Sections 21(d)(1), 21(e), 21A and 27 of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78u(d)(1), 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. This Court properly has venue over this action because certain of Defendants' transactions, acts, practices and courses of business occurred within the District of Columbia.
5. 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.
6. Benjamin J. Maldonado III, age 37, resides in Bethesda, Maryland. From October 1986 until January 2000, Maldonado was employed as a stockbroker at Merrill Lynch in Washington, DC. On January 11, 2000, Merrill Lynch terminated Maldonado because of the insider trading described here.
7. Sean R. Price, 38, resides in West Allenhurst, New Jersey. Price was employed as the Vice President of North American Sales at IREG from April 1997 to May 1999, and (after a brief stint away from the company) from July 1999 to December 1999. Price was responsible for selling IREG's end-user products, system sales, and OEM software. Price was promoted in January 2000, and is currently Safenet's Vice President of Sales with worldwide responsibilities.
STATEMENT OF FACTS
8. Safenet is a Delaware corporation with its principal place of business in Baltimore, Maryland. Prior to a corporate name change on November 1, 2000, and during the time of the events described here, the company was known as Information Resource Engineering, Inc. Safenet provides Virtual Private Network technology that enables organizations to use the Internet and other shared networks for private communications. Safenet's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is listed for trading on NASDAQ under the ticker symbol "SFNT."
9. Maldonado and Price have known each other since at least their early teenage years. They have had a friendly relationship throughout their adulthood.
10. During the relevant times and for about 10 years prior to the transactions at issue, Maldonado was the stockbroker assigned to Price's brokerage accounts at Merrill Lynch. On at least one occasion, Maldonado told Price that if any investment banking opportunity arose at IREG, Merrill Lynch would be interested. Thereafter, in the spring of 1999, IREG was considering hiring an investment banking firm, and an IREG Executive ("Executive") informed Price that IREG was interviewing various firms. Price recommended Maldonado and Maldonado's firm, Merrill Lynch, to IREG. On another occasion, Price exercised and sold a number of IREG stock options worth more than $260,000 through Maldonado. Subsequently, in September 1999, Price used some of the proceeds from the sale of these IREG stock options to purchase a new home. Again, Maldonado assisted Price with this transaction.
11. Price knew that Maldonado had purchased IREG stock. In January 1999, Maldonado attended a trade show at the Convention Center in Washington, DC, where he encountered Price. Price told Maldonado that IREG was a good company. On February 17, 1999, Maldonado bought IREG shares for his and his brother's account, and he made additional purchases of IREG stock for his brother, mother, and grandmother's accounts in July and August 1999.
12. Price received IREG's insider trading policy, entitled "Statement of Company Policy Re Confidentiality and Securities Trades by Company Personnel." Price read and understood IREG's insider trading policy, and he signed a certification that he understood and intended to comply with the policy. IREG's insider trading policy states that "projections of future earnings or losses" and "current financial performance" are examples of material, nonpublic information. Price understood "material, nonpublic information" to be "confidential information that could have an impact on company stock." Price also understood that a "duty of confidentiality" meant "it is the duty of personnel within the company to keep material non-public information confidential." Moreover, Price understood that a person could not trade on a stock when he has material, nonpublic information and, similarly, a person cannot pass that information along to others for trading purposes.
13. IREG has closed important transactions during the last days of a given quarter. In the software business, customers often wait until the end of the quarter to close important transactions. In August and September 1999 (the last month of the company's third quarter), Price was engaged in negotiations to close a deal for the sale of software to an important IREG customer ("Customer I"). The deal was potentially worth up to $2 million.
14. The sale to Customer I was an important transaction for IREG during the third quarter of 1999. On September 1, 1999, Price received an internal IREG e-mail that stated: "Our big deal for the quarter is [the Customer I deal]." The Customer I transaction had also been referred to as the "swing deal" because the deal would have made a significant difference in IREG's financial performance for the third quarter of 1999. Indeed, in a memo to IREG's sales staff, the Customer I deal was referred to as "[t]he deal that will make or break the quarter." Price also described the Customer I deal as being the "make it or break it" deal, and he was involved in negotiations for the sale of IREG's software to Customer I.
15. Before IREG could close the transaction with Customer I, another important IREG customer ("Customer II") informed Customer I that Customer II could provide the same IREG software to Customer I at less than the price that IREG was quoting Customer I. Although Customer II had a license to IREG's software, IREG informed Customer II that their licensing agreement was not intended to provide Customer II with a "blanket license," such as would enable Customer II to sell the software to Customer I. As a result, IREG and Customer II engaged in negotiations on a transaction worth an additional payment of $1.5 million to IREG to reflect a sale from IREG to Customer I through Customer II. When the Customer I deal was structured to go through Customer II, Price's Supervisor ("Supervisor") took the lead on the dealings with Customer II. Price, however, was kept up to date on the progress of the deal. In fact, the Customer I deal and the Customer II deal "could have been considered one and the same." Price was privy to the Customer I/Customer II deal because the deal was a North American deal. Price understood that the status of the Customer I/Customer II deal was confidential.
16. On Friday, September 24, 1999, Executive and Supervisor met with representatives of Customer II. The purpose of the meeting was to try to get Customer II to sign the $1.5 million deal with IREG before the end of the third quarter of 1999. The deal would have been "a straight hit to revenues," meaning that IREG would have recognized the revenue at the time the contract was executed.
17. On Sunday, September 26, 1999, Price received an e-mail from Executive stating, "[a]lthough [Customer II] will try to get the contract signed this week, there is a significant probability that this will not get done till the 4th quarter." Price understood that Executive's comment about the Customer II deal was confidential, inside information.
18. The next day, Monday, September 27, 1999, at 8:56 a.m., the same e-mail was forwarded to Price by Supervisor, who commented that, "[w]hat this means short term --- IIIQ --- is that we are not going to get the [Customer I] deal this quarter." Price understood that Supervisor's comment about the Customer I deal was confidential, inside information.
19. On or about September 27, 1999, Price was aware that IREG might not meet third quarter internal expectations because IREG was unable to close the Customer I/Customer II deal. Price was also aware that IREG's internal expectations were closely matched with analysts' expectations.
20. At 10:41 a.m. on September 27, Maldonado called Price at IREG. At that time, Price was closing on the purchase of his new home, and he needed to determine the amount of funds in his account at Merrill Lynch in order to ensure that the necessary funds were available, and to make sure that Merrill Lynch issued the appropriate check. Price called Maldonado back at 11:27 a.m., and they spoke for 4.4 minutes. During their telephone conversation, Price told Maldonado, in words or in substance, that IREG "might not make the quarter." Maldonado understood Price's comment to mean that IREG might not make its earnings expectations for the quarter.
21. Shortly after this telephone call, at 11:52 a.m., Maldonado sold 1,000 shares of IREG from his mother's account. Later that day, Maldonado sold another 1,000 IREG shares from his mother's account, and 1,000 shares from his grandmother's account.
22. On September 30, 1999, IREG convened a senior staff meeting, which was attended by Supervisor. At the meeting, Supervisor was informed that IREG would not meet analysts' expectations for the third quarter of 1999, that IREG would issue an earnings pre-release the next day, October 1, 1999, and that the information was extremely confidential. Had the Customer I/Customer II deal closed during the third quarter, IREG would have met analysts' expectations.
23. On Friday, October 1, 1999, Price was at home when he received a telephone call from Supervisor. During their conversation, Supervisor told Price that IREG was pre-announcing its earnings that day. Price's home telephone records show that, at 2:42 p.m., Price called Maldonado at Merrill Lynch. The call lasted about two minutes. Price told Maldonado, in words or in substance, that IREG did not make its quarter. Maldonado understood Price's comment to mean that IREG would not meet its earnings expectations.
24. Immediately after his telephone conversation with Price, Maldonado started selling his and his family's entire position on IREG. Maldonado's first IREG sale was executed at 2:47 p.m., barely five minutes after his conversation with Price. Maldonado continued selling, incrementally, until 4:09 p.m. At the end of the day, Maldonado had sold 25,500 shares worth more than $500,000 from his own account and accounts belonging to his brother, mother, and grandmother.
25. That same day, October 1, 1999, Price received another telephone call from Supervisor, who told Price that IREG had postponed its pre-announcement to Monday, October 4, 1999.
26. Price understood the remarks made by Supervisor about the earnings pre-release to be confidential, inside information.
27. On Monday, October 4, 1999, at 8:37 a.m., Maldonado called Price's cellular phone. They spoke for 1.3 minutes. At 9:51 a.m., Maldonado sold another 1,000 IREG shares from his mother's account.
28. Because of heavy trading volume on the morning of October 4, IREG requested that NASDAQ halt trading, which was done at 10:35 a.m. The last reported trade in IREG stock before the trading halt was $18-15/16 per share. At 11:14 a.m., IREG issued its press release announcing that it expected a net loss of approximately $1.5 million, which was below analysts' expectations, for the third quarter ending September 30, 1999. Immediately after the announcement, IREG stock traded as low as $13 per share, and closed the day at $18-1/2 per share (IREG's stock price closed at $19-13/16 per share on October 1). IREG's total trading volume of 305,160 shares on October 4 was more than double the typical daily trading volume at the time.
29. As a result of his illegal sales, Maldonado and his family avoided losses of more than $38,000.
30. Price knew or was reckless in not knowing that he was in possession of material, nonpublic information relating to IREG's third quarter 1999 earnings at the time that he tipped Maldonado.
31. Price breached his duty of confidentiality owed to IREG and its shareholders by giving Maldonado material, nonpublic information concerning IREG's third quarter 1999 earnings, despite knowing or recklessly disregarding the likelihood that Maldonado would trade in IREG shares.
32. Maldonado knew or was reckless in not knowing that he traded in the securities of IREG while in possession of material, nonpublic information about IREG's third quarter 1999 earnings, and that the information he possessed had been communicated by Price in breach of a duty that Price owed to IREG.
Sean R. Price and Benjamin J. Maldonado III Violated
33. Paragraphs 1 through 32 are realleged and incorporated herein by reference.
34. By reason of the foregoing, Price and Maldonado, directly and indirectly, 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], and will likely commit such violations in the future unless enjoined from doing so.
Sean R. Price and Benjamin J. Maldonado III Violated
35. Paragraphs 1 through 32 are realleged and incorporated herein by reference.
36. By reason of the foregoing, Price and Maldonado, directly and indirectly, violated Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], and will likely commit such violations in the future unless enjoined from doing so.
PRAYER FOR RELIEF
WHEREFORE, Plaintiff SEC respectfully requests that this Court enter a Judgment:
(i) finding that Price and Maldonado have engaged in the conduct described above, and that in so doing, they have violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
(ii) that permanently restrains and enjoins Price and Maldonado from violating Section 17(a) of the Securities Act;
(iii) that permanently restrains and enjoins Price and Maldonado from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
(iv) that orders Price and Maldonado to disgorge all profits realized from the unlawful trading alleged herein, with prejudgment interest;
(v) that orders Price and Maldonado to pay civil penalties under Section 21A of the Exchange Act [15 U.S.C. § 78u-1]; and
(vi) that grants such other relief as this Court may deem just and appropriate.