U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20270 / September 6, 2007
Securities and Exchange Commission v. Chauncey Shey, Case No. C-07-4605 SI. (N.D. Cal. filed Sept. 6, 2007)
SEC Charges Telecom Company Co-Founder With Insider Trading
The Securities and Exchange Commission today filed insider trading charges against Chauncey Shey, a co-founder and former officer and director of UTStarcom, Inc., an Alameda, Calif.-based telecommunications company. The Commission alleges that Shey learned from a UTStarcom executive with whom he maintains a relationship of trust and confidence that the company was going to pre-announce that it had missed earnings guidance for the quarter. Shortly after talking with the UTStarcom executive, Shey and his wife began liquidating their UTStarcom holdings, avoiding over $420,000 in potential losses when, days later, the public disclosure of the disappointing financial results caused the stock price to plummet.
The Commission's complaint, filed in the United States District Court for the Northern District of California, alleges that in addition to his relationship with the UTStarcom executive, Shey also managed a venture capital fund owned in part by UTStarcom, and thus was privy to certain confidential information about the company. In late September 2005, UTStarcom failed to finalize a significant deal and the company was preparing to pre-announce to the market that it would not be able to meet its earnings guidance for the quarter. According to the Commission, Shey spoke to the UTStarcom executive by phone the weekend before the public announcement. Shortly after that conversation, Shey contacted his broker and began the process of liquidating his extensive UTStarcom stock holdings.
According to the complaint, just minutes after the market opened on Monday, October 3, Shey began selling his UTStarcom stock, and Shey's wife began selling UTStarcom stock in accounts of her family members. Shey sold more than 600,000 shares over the following days, making his final sale less than an hour before UTStarcom announced the revenue shortfall on October 6. Following that announcement, the company's stock price fell by more than 26 percent.
The Commission's complaint alleges that Shey violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder by making the illegal stock sales before the announcement and avoiding losses of more than $420,000. Without admitting or denying the allegations, Shey agreed to disgorge $420,226.60 plus prejudgment interest of $31,909.96, to pay a civil penalty of $420,226.60, and to an order enjoining him from future violations of the securities laws.