UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17197 / October 18, 2001
Securities and Exchange Commission v. Rodolfo Luzardo, Elias I. Kodsi, and Alain D. Kodsi, 01 Civ. 9206 (DC) (S.D.N.Y.)
SEC CHARGES THREE WITH INSIDER TRADING USING SWISS ACCOUNTS
The Securities and Exchange Commission today filed an injunctive action in the United States District Court for the Southern District of New York, alleging that Rodolfo Luzardo, a former employee of J.P. Morgan Securities, Inc., Alain D. Kodsi, a co-owner of the venture capital firm M.G. Capital L.L.C., and Elias I. Kodsi, a retired jewelry distributor, engaged in illegal insider trading in advance of the July 30, 1998 announcement that BetzDearborn Inc. and Hercules Inc. had agreed to merge. The complaint alleges that Luzardo misappropriated confidential information regarding the pending merger from his then-employer, J.P. Morgan, which was the adviser to BetzDearborn. According to the complaint, Luzardo tipped his friend and new employer, Alain Kodsi, who in turn tipped his father, Elias Kodsi. The complaint further alleges that Elias Kodsi purchased 30,000 shares of BetzDearborn common stock through two numbered Swiss accounts the day before the merger was announced at a cost of over $1 million, and that after the announcement on July 30, Elias Kodsi sold the shares for unlawful profits of $963,750.
The complaint further alleges:
- Luzardo worked for J.P. Morgan in New York for a year, and for the last nine months worked as an analyst in the North American M&A Chemicals Unit, which was advising BetzDearborn in its negotiations with Hercules. Luzardo had a duty to maintain the confidentiality of information he learned during the course of his employment. J.P. Morgan's Worldwide Rules specifically prohibited an employee from disclosing confidential client information, and provided that obligation continued after an employee left the firm. While working at J.P. Morgan, Luzardo learned about the pending merger between BetzDearborn and Hercules.
- In June 1998, Luzardo's friend, defendant Alain Kodsi, offered Luzardo a job with a company in which M.G. Capital had an interest, named Industrial Powder Coatings, Inc. Luzardo accepted Kodsi's offer of employment but continued to work at J.P. Morgan without disclosing that he had accepted a job with Industrial Powder Coatings.
- On July 28, 1998, Luzardo informed his supervisors at J.P. Morgan that he was resigning, effective immediately. That evening, there were a series of calls between Luzardo and Alain Kodsi, and through the night and into the early morning of July 29 there were a series of calls between Alain Kodsi and his father Elias Kodsi, during which material nonpublic information about the impending merger was shared by Luzardo and the Kodsis.
- On the morning of July 29, Elias Kodsi bought 25,000 shares of BetzDearborn common stock in one numbered Swiss account, and 5,000 shares of BetzDearborn common stock in a second numbered Swiss account, at a cost of over $1 million. Kodsi's purchase of 30,000 shares of BetzDearborn common stock on July 29, 1998 was thirteen percent (13%) of the volume of BetzDearborn shares traded on that date.
- On July 30, 1998, BetzDearborn and Hercules announced that they agreed to merge and that Hercules would pay $72 per share for all outstanding BetzDearborn shares. After the announcement, BetzDearborn common stock opened at $68.25 per share, an increase of $32.375, or approximately ninety percent (90%), over the prior day's closing price.
- After the announcement on July 30, Elias Kodsi sold the 30,000 shares of BetzDearborn common stock he had purchased the prior day, and the proceeds were promptly transferred out of Elias Kodsi's two numbered Swiss accounts. Elias Kodsi made a profit of $963,750.
Rudolfo Luzardo, age 27, is a citizen of Venezuela who currently resides in Norwalk, Ohio. Alain D. Kodsi, age 37, and Elias I. Kodsi, age 74, both reside in Brooklyn, New York.
The Commission alleges that as a result of the conduct described above, Elias Kodsi, Alain Kodsi, and Luzardo violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In its action, the Commission is seeking permanent injunctions, disgorgement of the illegal trading profits, prejudgment interest, and civil penalties.