U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20113 / May 11, 2007
SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp., Ajaz Rahim, Sunil Sehgal, Seema Sehgal, Hafiz Naseem, and Francisco Javier Garcia, Civil Action No. 07C1208 (N.D. Ill.)
Securities and Exchange Commission Charges Ajaz Rahim, Pakistani Banker, With Insider Trading
On May 11, 2007, the Commission charged Ajaz Rahim, a Pakistani banker who was employed by Faysal Bank in Karachi, Pakistan with insider trading based on material, non-public information he received from Hafiz Naseem, an employee of Credit Suisse (USA) LLC in New York. In a Third Amended Complaint in the insider trading case originally filed on March 2, 2007 against certain Unknown Purchasers of TXU call options, the Commission alleged that, on February 5, 6, 7, 8 and 23, 2007, Naseem, in breach of his duty to Credit Suisse and its client, telephoned Rahim and conveyed to him non-public, material information concerning the proposed but unannounced leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group., and other information. According to the Third Amended Complaint, Rahim, on February 23, 2007, purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and 15,000 shares of TXU stock through Bank Julius Baer Co. Ltd. (Guernsey Branch). According to the Commission, these purchases allowed him to reap, following the public announcement of the buyout, trading profits of approximately $5.1 million.
The Third Amended Complaint further alleges that Naseem made calls from his office phone to Rahim's home and cell phones and alerted him to pending business combinations and deals involving 9 other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The Third Amended Complaint alleges that, in at least 25 instances, Rahim placed trades in the securities of these issuers minutes after receiving a phone call from Naseem. According to the Third Amended Complaint, Credit Suisse served as an investment banker or financial advisor in all of the involved deals, and the phone calls to Rahim were made close in advance of — and frequently the day of or the day before — announcements of the proposed deals. The Third Amended Complaint also alleges that Rahim purchased securities in those companies in advance of public merger announcements through accounts held at Merrill Lynch Pierce Fenner & Smith and/or Bank Julius Baer Co. Ltd (Guernsey Branch), obtaining profits of $2,425,000. Finally, according to the Third Amended Complaint, Naseem, in order to insure he would obtain a personal, financial benefit from his misappropriations, in May 2006 opened up a brokerage account in Pakistan and granted trading authority over that account to Rahim, his "tippee."
The Commission alleges that, as a result of these activities, Rahim engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.
The Commission's original complaint against the Unknown Purchasers alleged that between February 21 and February 23 — prior to the public disclosure of TXU Corp.'s merger agreement — while in possession of material, nonpublic information regarding the acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 8,020 call option contracts for TXU stock. The unrealized illicit profits on these option contracts total approximately $5.4 million. On March 2, 2007 the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of the Unknown Purchasers. On March 28, 2007, the District Court approved an extension of the asset freeze as to the Unknown Purchasers who purchased TXU securities through Credit Suisse in Zurich and Francisco Javier Garcia, then identified as the Unknown Purchaser who purchased TXU securities through Fimat Banque Frankfurt Zweigniederlassung. The Court also approved a 60-day extension of the asset freeze as to Rahim, then identified as the Unknown Purchaser who traded through UBS AG London. Garcia, believed to be a resident of Switzerland, purchased at least 260 TXU call options in advance of the public announcement. As a result of his insider trading, Garcia is in a position to reap trading profits of at least $150,500, the Commission alleges.
As a result of an Amended Complaint filed by the Commission, on March 28, 2007, the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of Sunil and Seema Sehgal, a married couple residing in the United Kingdom. The Amended Complaint added the Sehgals as defendants in the March 2, 2007 case against certain Unknown Purchasers of TXU call options, and alleged that the Sehgals made highly profitable and suspicious purchases of 700 call option contracts for the common stock of TXU Corp. through accounts at Charles Schwab & Co., Inc., and Clark Dodge & Co, Inc., in January and February 2007. The Commission alleged that, as a result of the increase in price of TXU stock following the public announcement of the leveraged buyout, the illicit profits on the Sehgals' option contracts total approximately $270,000. On April 12, 2007, the Court approved a 60-day extension of the asset freeze as to the Sehgals. In its Third Amended Complaint, the Commission alleges that, in addition to timely purchases of TXU securities, Seema Sehgal also traded Hydril Company stock, and Sunil Sehgal traded Hydril Company, John Harland Co., and Caremark Rx, Inc. securities in advance of public merger announcements, realizing aggregate trading profits of approximately $292,900 in addition to the TXU profits.
The Commission wishes to thank the New York Stock Exchange, the Chicago Board Options Exchange, the Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom for their assistance in this matter.