SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16701 / September 14, 2000
Securities and Exchange Commission v. David W. Butler (W.D. Pa., Civil Action No.00-CV-1827 (DWA))
The Securities and Exchange Commission announced today that it filed a complaint against David W. Butler, a former vice-president of Warrendale, Pennsylvania-based Fore Systems, Inc., in the United States District Court for the Western District of Pennsylvania, alleging that Butler engaged in illegal insider trading by purchasing and selling options on the common stock of Fore Systems while he possessed nonpublic information that Fore Systems was unlikely to meet its projected revenue for the quarter ending March 31, 1997. Butler, who now resides in Woodside, California, was a regional vice-president of sales for Fore Systems until he resigned from the company in December 1998. Fore Systems, a producer of data transfer systems for computer networks, was traded on NASDAQ until it was acquired by The General Electric Company, P.L.C., a British company not affiliated with the U.S. company of a similar name, in June 1999. The complaint alleges that Butler derived unlawful trading profits of more than $364,000 from his options transactions.
The Commission's complaint alleges that Butler purchased puts and sold calls on Fore Systems common stock on March 17, 1997 and March 24, 1997, almost immediately after participating in confidential teleconferences with senior executives of Fore Systems who discussed the fact that the company was unlikely to meet its revenue expectations of $123 million for the quarter ending March 31, 1997. On April 1, 1997, Fore Systems publicly announced that its revenue for the quarter ending March 31, 1997 would be approximately $101 million, well below stock analysts' expectations. As a result, Fore Systems' stock price dropped 33 percent, from $15.00 per share to a low of $10.00, before recovering to $13.06 on the day of the public announcement. Butler sold his puts immediately following the April 1, 1997 public announcement, netting him a profit of approximately $304,000 on this transaction alone.
A call option gives the buyer of the call the right to buy the underlying stock at a specified price within a specified period of time. If the price of the stock falls during this specified period of time, the call becomes worthless and the seller keeps the premium without having to deliver any stock to the buyer of the stock. A put option provides investors with a method of making money when the price of the stock falls. A put option is a contract to sell a specified stock at a future date for a specified price. If the price of the stock falls below the option price during the period in which the option is open, the holder of the put option can make a profit by purchasing stock at the low market price and then selling it for the higher option price.
The Commission's complaint alleges that Butler 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. The complaint seeks permanent injunctive relief, disgorgement of Butler's illegal trading profits plus prejudgment interest, and the imposition of civil penalties of up to three times Butler's trading profits.