U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21858 / February 16, 2011
Securities and Exchange Commission v. Brett A. Cohen; David V. Myers; Aaron J. Scalia; and Stephen J. Scalia, United States District Court for the Southern District of California, Case No. 3:10-cv-2514-L-WMC.
SEC CHARGES FORMER PATENT AGENT AND HIS BROTHER IN INSIDER TRADING SCHEME
On February 15, 2011, the Securities and Exchange Commission filed an amended complaint charging a San Diego-based patent agent and his brother with illegally tipping inside information regarding two biotechnology companies, as part of a larger insider trading scheme. According to the amended complaint, Aaron J. Scalia, a former patent agent for Sequenom, Inc., tipped material, non-public information regarding Sequenom and another biotechnology company, to his brother Stephen J. Scalia. Stephen Scalia then tipped his fraternity brother, Brett A. Cohen, who, in turn, tipped his uncle, David V. Myers. Myers traded on the illegally obtained inside information, garnering more than $600,000 in illicit profits, and provided Stephen Scalia with $14,000 in cash kickbacks.
The SEC filed its initial charges in the case in December 2010 against Cohen and Myers. In its amended complaint filed yesterday in federal court in San Diego, the SEC charged the Scalia brothers. In a parallel criminal proceeding, on February 15, 2011, the U.S. Attorney’s Office for the Southern District of California filed criminal charges against the Scalia brothers.
According to the SEC’s amended complaint, Aaron Scalia learned about two corporate events involving Sequenom prior to the public release of the information:
The SEC’s amended complaint alleges that Aaron Scalia conducted intellectual property due diligence with respect to the EXAS transaction, and that he was the patent agent assigned to Sequenom’s Down syndrome test.
The amended complaint further alleges that Aaron Scalia tipped material, non-public information about the EXAS transaction to his brother, Stephen Scalia, who relayed it to his fraternity brother Cohen. For example, Stephen Scalia sent Cohen an e-mail asking, “[a]ny word related to Blu H@rsesh0e? La Jolla says the times are ripe.” The movie Wall Street uses the phrase, “Blue Horseshoe loves Anacot Steel,” as a code for insider trading. “La Jolla” references the fact that Aaron Scalia lived and worked near La Jolla, Calif.
The SEC alleges that after at least a dozen phone calls among the scheme’s four participants in the succeeding days, Myers made his first-ever purchase of EXAS securities, buying 15,000 shares. It was the first stock purchase in Myers’s brokerage account since at least January 2007. Myers later purchased an additional 20,000 shares of EXAS stock before Sequenom publicly announced after the markets closed on Jan. 9, 2009, that it planned to acquire EXAS. EXAS stock rose 50 percent by the close of the markets on January 10 on increased trading volume of 466 percent. During the next few weeks, Myers sold nearly all of his EXAS stock for illegal profits of more than $34,000, and then sent a cash kickback of $4,000 to Cohen, who delivered it to Stephen Scalia as payment for the EXAS stock tip.
The SEC’s amended complaint alleges that Aaron Scalia also tipped his brother ahead of Sequenom’s announcement that investors could no longer rely on previously disclosed data related to its Down syndrome test. The announcement caused Sequenom’s stock price to drop by more than 75 percent in one day. Stephen Scalia tipped Cohen just prior to the company’s announcement, and Cohen immediately tipped Myers through a series of communications, including a call he placed from a pay phone near his workplace. Myers quickly purchased risky Sequenom put options just minutes before the markets closed on April 29, 2009. The next morning, Myers sold his entire Sequenom position for illegal profits of more than $570,000. Approximately one month later, Myers personally delivered $10,000 in cash to Stephen Scalia as payment for the Sequenom tip.
The SEC’s amended complaint charges all four defendants with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC is seeking permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties against all four defendants.
The SEC thanks the U.S. Attorney’s Office for the Southern District of California and the Federal Bureau of Investigation for their cooperation and assistance in this matter. The SEC also acknowledges the assistance of FINRA and the Options Regulatory Surveillance Authority in this investigation.