U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20348 / October 29, 2007
SEC v. Quan Zhu, Civil Action No. CV 07-07033 ODW (JTLx) (C.D. Cal.)
SEC Files Insider Trading Action Against Former VP of Countrywide Financial Corp.
The Securities and Exchange Commission filed insider trading charges today in federal district court in Los Angeles, Calif. against a former vice president of Countrywide Financial Corp. The Commission's complaint alleges that Quan Zhu, age 43, of Santa Monica, Calif., traded in Countrywide stock while aware of confidential negative earnings information and in breach of his fiduciary duty to Countrywide. Zhu agreed to settle the charges, without admitting or denying the allegations, by repaying his ill-gotten trading profits and paying a monetary penalty twice the amount, for a total of approximately $108,840.
On October 20, 2004, Countrywide issued a press release announcing that its third quarter earnings per share were $0.94, compared to $1.93 the year before. That day, Countrywide's stock price fell 11.5% and trading volume increased 307%. The Commission's complaint alleges that by mid-October 2004, Alan Cao, a vice president of financial planning, tipped Zhu with material, nonpublic information that Countrywide would fall short of the Wall Street analysts' consensus estimate for the third quarter earnings.
After receiving that insider information and beginning on October 15, 2004, Zhu sold shares of Countrywide stock already owned, purchased Countrywide put options, and sold short Countrywide stock in his wife's brokerage account. A few hours after the October 20 earnings announcement, after Countrywide's stock price had declined, Zhu purchased Countrywide stock to cover the shares he sold short and sold the put options which he had purchased. Zhu's insider trading resulted in total profit and losses avoided of $35,547.93.
To settle the Commission's charges, Zhu consented to the entry of a final judgment permanently enjoining him from future violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Zhu agreed to pay $35,547.93 in disgorgement of his illegal trading profits, prejudgment interest of $2,196.33, and a civil money penalty of $71,095.86.
The Commission previously filed a settled insider trading case against Alan Cao, the tipper, and Jun Shi, another Countrywide vice president that Cao tipped. SEC v. Alan Cao and Jun Shi, Civil Action No. CV 06-1269 (RCx) (C.D. Cal.). For addition information, see Lit. Rel. No. 19586 (March 2, 2006).
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Central District of California, Federal Bureau of Investigation, and New York Stock Exchange in the investigation of this matter.