Kenneth L. Miller (KM-5614)
UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("SEC") alleges:
1. This action arises from insider trading in the common stock of Barnett Banks, Inc. ("Barnett"), Beacon Properties Corporation ("Beacon"), and PerSeptive Biosystems Corporation ("PerSeptive") by a former Wall Street analyst and his friends. During 1997, while employed as an analyst by Morgan Stanley & Co. ("Morgan Stanley"), Ronald K. Mahabir ("Mahabir") misappropriated material nonpublic information concerning impending mergers involving Morgan Stanley clients Barnett, Beacon, and PerSeptive. Mahabir then communicated that information to John Panagotacos and James Panagotacos. Mahabir also communicated material nonpublic information concerning Barnett to another person who formerly was a Morgan Stanley analyst.
2. While in possession of material nonpublic information obtained from Mahabir, the Panagotacoses each traded in the securities of Barnett and Beacon, and James Panagotacos traded in the securities of PerSeptive. As a result of their illegal and fraudulent trading, John Panagotacos made illegal profits of $54,444, and James Panagotacos made illegal profits of $103,000. While in possession of material nonpublic information obtained from Mahabir, the former Morgan Stanley analyst traded in the securities of Barnett, and realized profits of $19,197.
3. The SEC seeks against each defendant injunctions against future violations, full disgorgement of the defendants' illegal profits together with prejudgment interest, and civil monetary penalties pursuant to Sections 21(d)(1), 21(e) and 21A of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(1), (e), and 78u-1].
4. This Court has jurisdiction pursuant to Sections 21(d)(1), 21(e), 21A and 27 of the Exchange Act [15 U.S.C. §§ 78u(d)(1), (e), 78u-1, and 78aa]. Defendants directly or indirectly used the means or instrumentalities of interstate commerce or the mails, or the facilities of a national securities exchange, in connection with their illegal conduct.
DEFENDANT -- TIPPER
5. Ronald K. Mahabir, age 28, currently is unemployed, and resides in Japan. Mahabir was employed as an analyst in the real estate section of Morgan Stanley's New York office during the time of the violations alleged herein.
DEFENDANTS -- TIPPEES
6. Defendant John James Panagotacos ("John Panagotacos"), age 28, is a student at New York Medical College and currently resides in Valhalla, New York. John Panagotacos is a close friend and former college roommate of Mahabir, and the son of James Panagotacos. John Panagotacos was Mahabir's frequent travel companion, and the pair regularly went on gambling trips during which John Panagotacos lent money to Mahabir. During the relevant period, John Panagotacos also loaned Mahabir $40,000 for a business venture.
7. Defendant James John Panagotacos ("James Panagotacos"), age 52, is an unemployed dentist who resides in Corte Medara, California. James Panagotacos is the father of John James Panagotacos.
CLAIM FOR RELIEF
8. Plaintiff SEC repeats and realleges Paragraphs 1 through 7 above.
Mahabir's Relationship With The Panagotacoses
9. Mahabir and John Panagotacos have a close and long-established friendship that began when they both attended the University of California at Berkley from approximately 1991 to 1995. Mahabir was John Panagotacos' college roommate for 2-½ years. Their friendship and frequent contact continued until the summer of 1998, when they traveled together on an approximately one-month trip to Europe. In addition, Mahabir accompanied John Panagotacos on trips within the United States and has gone on at least one vacation with the Panagotacos family.
Morgan Stanley's Policies Concerning Insider Trading
10. At all relevant times, Morgan Stanley's policies prohibited its employees from using any material nonpublic information concerning its clients to either buy or sell securities. Morgan Stanley's policies also prohibited its employees from passing on such material nonpublic information to others. Mahabir was aware of these policies because he received training as an analyst that specifically addressed the fact that insider trading was prohibited, and that emphasized the need for compliance with the federal securities laws. In addition to formal training, Morgan Stanley's policies prohibiting insider trading were frequently reiterated by Mahabir's supervisors, and were well known by his co-workers.
11. During 1997, Mahabir was a friend and roommate of another Morgan Stanley analyst ("Roommate"), with whom he had also attended college. From approximately August 1996 to August 1997, the Roommate shared a four-person cubicle with another Morgan Stanley analyst who was working on the PerSeptive transaction ("PerSeptive Analyst"). During this time Mahabir had regular contact with the Roommate, and Mahabir would visit him in the cubicle he shared with the PerSeptive Analyst. As a result of his access to the PerSeptive Analyst's cubicle, Mahabir obtained material nonpublic information concerning PerSeptive, including the fact that the company was seeking to be acquired.
12. Shortly after learning that PerSeptive was seeking to be acquired, Mahabir tipped John Panagotacos with material nonpublic information regarding PerSeptive during one of their frequent telephone conversations, and John Panagotacos subsequently tipped his father, James Panagotacos, with that information.
James Panagotacos Trades on Mahabir's Tip
13. On March 12, 1997, James Panagotacos purchased 11,000 shares of PerSeptive for $96,250 through an account he maintained at Charles Schwab & Co. ("Schwab"). On April 14, 1997, James Panagotacos purchased an additional 1,000 shares of PerSeptive for $7,125. Between July 1996 and March 1997, when James Panagotacos first purchased PerSeptive stock, his only other securities investment was in a Government Money Fund at Schwab. Within days of each purchase of PerSeptive stock, Mahabir sent checks to James Panagotacos. On or about March 18, 1997, Mahabir sent a check for $8,900 to James Panagotacos, and on or about April 20, 1997, he sent another check for $7,250 to James Panagotacos.
Perkin-Elmer Announces A Merger With PerSeptive
14. On August 25, 1997, Perkin-Elmer Corporation ("Perkin-Elmer") announced that it would buy PerSeptive for $360 million. The deal between Perkin-Elmer and PerSeptive had been in the works for approximately nine months before the August 25, 1997 public announcement. Following the public announcement, PerSeptive's stock price rose approximately 17 percent, from $10.625 per share to $12.4375 per share.
James Panagotacos Sells His PerSeptive Stock
15. James Panagotacos sold his entire position in PerSeptive on August 25, 1997, the day of the public announcement, realizing illegal profits of $45,125.
16. During 1997, Mahabir was friends with another Morgan Stanley analyst who also worked in the firm's real estate section. In mid-August 1997, Mahabir's friend transferred to the banking group, whereupon he immediately began working on the team that was advising Barnett in its bid to be acquired by another financial institution. At the time Mahabir's friend transferred to the banking group, it was clear that Barnett would be acquired imminently. Soon after Mahabir's friend transferred to the banking group, Mahabir learned this material nonpublic information concerning Barnett.
17. Shortly after learning of the status of the Barnett transaction, Mahabir, through a series of telephone calls on August 19, 25, and 27, 1997 from his New York apartment to the house where both John and James Panagotacos lived at the time, tipped John Panagotacos with material nonpublic information concerning the pending acquisition of Barnett. John Panagotacos then tipped his father with material nonpublic information concerning Barnett.
The Panagotacoses Open New Brokerage Accounts
18. On August 25, 1997, James and John Panagotacos each opened new electronic trading accounts ("E Schwab" accounts) at a Schwab office in Corte Madera, California. At the time, they both had other accounts at Schwab, but there had been no trading activity in John Panagotacos' other Schwab account. In fact, since January 1996, his only investment in the account was approximately $300 in a Schwab Money Market Fund. Similarly, in the previous 18 months, the only trading by James Panagotacos in his other Schwab account were his purchases of PerSeptive stock.
The Panagotacoses Trade on Inside
19. The first trade in John Panagotacos' new E Schwab account was the purchase of 1,000 Barnett shares on August 26, 1997 for $52,688. On August 28, 1997, John Panagotacos purchased an additional 1,000 Barnett shares for $52,375 through the same account. John Panagotacos' second purchase of Barnett stock occurred at 2:24 a.m. PST, following a telephone call from Mahabir on the evening of the previous day. John Panagotacos' purchases of Barnett stock were made on margin, and were financed by an inter-account transfer of $53,705 on August 28 from his father's account. On or about August 28, 1997, Mahabir sent a check for $8,000 to John Panagotacos.
20. The first two trades in James Panagotacos' newly opened E Schwab account were purchases of Barnett stock on August 26 and August 28, 1997 -- the same days as his son's trades. On August 26, 1997, James Panagotacos purchased 2,000 Barnett shares for $105,375, and on August 28, 1997, he purchased an additional 2,000 Barnett shares for $104,750. The purchase order for James Panagotacos' trade on August 28 was placed at 2:21 a.m. PST, just three minutes before his son John purchased additional Barnett stock. In order to finance his Barnett purchases, James Panagotacos cashed in two certificates of deposit prior to their maturity date and used margin privileges.
Mahabir Tips A Former
21. Shortly after learning of the status of the Barnett transaction, Mahabir, through a series of phone calls during the last week of August 1997, tipped a former Morgan Stanley analyst with material nonpublic information regarding Barnett's pending acquisition.
22. On August 28, 1997, following Mahabir's tip about the pending Barnett merger, the former Morgan Stanley analyst purchased 1,620 shares of Barnett stock for $87,919.
23. On August 29, 1997, and on September 2, 1997, the former Morgan Stanley analyst sold all of his Barnett shares and realized total profits of $19,197.
NationsBank Announces A Merger With Barnett
24. On August 29, 1997, NationsBank Corporation ("NationsBank") and Barnett publicly announced that they had reached a definitive merger agreement. Following the public announcement, Barnett's stock price rose approximately 24 percent, from $54.8125 to $68.125.
The Panagotacoses Sell Their Barnett Stock
25. Following the August 29, 1997 public announcement of a merger between NationsBank and Barnett, John and James Panagotacos each sold their Barnett shares. James Panagotacos sold 600 shares of Barnett stock on September 9, 1997, and his remaining 4,000 shares of Barnett stock on September 12, 1997 -- making illegal profits of $57,875. John Panagotacos sold 1,000 shares of Barnett stock on September 9, 1997, and his remaining 1,000 shares of Barnett stock on September 10, 1997 -- making illegal profits of $29,563.
26. During 1997, Mahabir shared a four-person cubicle with another Morgan Stanley analyst who was working on a transaction involving Beacon ("Beacon Analyst"). Mahabir exploited his daily contact with the Beacon Analyst and their shared physical work-space and thereby obtained material nonpublic information concerning Beacon, including that it was likely to be acquired.
27. Shortly after learning of the status of the Beacon transaction, Mahabir tipped John Panagotacos with material nonpublic information concerning Beacon's pending acquisition. John Panagotacos then tipped his father, James Panagotacos, with that information.
The Panagotacoses Trade on Inside
28. On the evening of September 11, 1997, Mahabir placed two telephone calls to the Panagotacos' home from his Manhattan apartment. The following day, September 12, 1997, John Panagotacos purchased 4,000 shares of Beacon stock for $145,119.
29. On September 15, 1997, James Panagotacos purchased 4,000 shares of Beacon stock for $176,000.
Beacon Announces a Merger
30. On September 15, 1997, Equity Office Properties Trust ("Equity") announced that it had agreed to acquire Beacon for $4 billion in stock and debt. The deal marked the first time that a publicly traded Real Estate Investment Trust ("REIT") purchased another publicly traded REIT. Following the public announcement, Beacon's stock price rose approximately 16 percent, from $36.625 to $42.625.
The Panagotacoses Sell Their Beacon Stock
31. On September 22, 1997, John Panagotacos sold his 4,000 shares of Beacon stock, and made illegal profits of $24,881. James Panagotacos also sold his 4,000 shares of Beacon stock, but lost money on his trade.
Mahabir Violated His Fiduciary Duties
32. As an employee, Mahabir owed a fiduciary duty to Morgan Stanley and to its respective clients. Because of this relationship, Mahabir had duties not to trade while in possession of material nonpublic information concerning Morgan Stanley's clients, to safeguard the confidentiality of that client information, and not to misuse it.
33. In breach of the foregoing duties, and for his personal benefit, Mahabir communicated material nonpublic information concerning the proposed business combinations involving Morgan Stanley clients to John Panagotacos and the former Morgan Stanley analyst. Mahabir knew or was reckless in not knowing the information he disclosed was nonpublic and that his disclosure of the information was improper and in breach of duties he owed. Mahabir's disclosure of this information was made under circumstances in which he knew, or should have known, or acted with reckless disregard of the fact that John Panagotacos, James Panagotacos and the former Morgan Stanley analyst were likely to effect transactions in the securities of Morgan Stanley's clients or to disclose the information to others who were likely to effect such transactions.
The Panagotacoses Violated Their Fiduciary Duties
34. The Panagotacoses knew, should have known, or acted in reckless disregard of the fact that the nonpublic information they received from Mahabir was nonpublic, and that the information was disclosed to them in violation of a fiduciary duty or other duty of trust and confidence. Accordingly, each of the Panagotacoses inherited Mahabir's duty not to trade on that information and not to communicate it improperly to others. As part of a scheme to defraud, the Panagotacoses thereafter knowingly or recklessly breached these duties, and effected transactions in the securities of Morgan Stanley's clients while in possession of material nonpublic information concerning potential business combinations they obtained from Mahabir.
35. By reason of the foregoing, defendants Mahabir, John Panagotacos, and James Panagotacos each, 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 are likely to commit such violations in the future unless enjoined from doing so.
PRAYER FOR RELIEF
WHEREFORE, plaintiff SEC requests that this Court enter a judgment:
(i) permanently enjoining defendants Mahabir, John Panagotacos, and James Panagotacos 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];
(ii) ordering defendants Mahabir, John Panagotacos, and James Panagotacos to disgorge all profits realized from the unlawful trading alleged herein (except the profits obtained by the former Morgan Stanley analyst described in paragraph 23), together with prejudgment interest;
(iii) ordering defendants Mahabir, John Panagotacos, and James Panagotacos to each pay civil monetary penalties under Section 21A of the Exchange Act [15 U.S.C. § 78u-1]; and
(iv) granting such other relief as this Court may deem just and appropriate.
Dated: March 5, 2002
S/ Kenneth L. Miller