U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19404 / September 29, 2005
SEC v. Michael K.C. Tom, et al., (United States District Court for the District of Massachusetts, C.A. No. 05-CV-11966-NMG, filed September 29, 2005)
Commission Charges Hedge Fund Manager, Former Citizens Bank Employee, and Others with Insider Trading that Profited Over $750,000
The Commission today filed a civil injunctive action against a Massachusetts hedge fund manager, a former Citizens Bank employee and three other defendants for allegedly engaging in insider trading that netted total profits over $750,000 in connection with Citizens' May 4, 2004 announcement that it was acquiring Charter One Financial, Inc., a Cleveland-based bank. The action, filed in federal district court in Massachusetts, charges Global Time Capital Management, LLC, a Burlington, Massachusetts-based investment adviser; its portfolio manager and principal, Michael K.C. Tom of Waltham, Massachusetts; former Citizens employee Shengnan Wang of Natick, Massachusetts; her husband, Hai Liu of Natick, Massachusetts; and Michael Tom's brother, David Tom of Denver, Colorado, with trading or tipping others to trade in Charter One securities on the basis of material non-public information, in violation of a fiduciary or similar duty of trust and confidence. The Commission also named GTC Growth Fund, L.P., a Burlington, Massachusetts-based hedge fund, as a relief defendant in the action, alleging that it received approximately $199,630 in unjust enrichment and/or ill-gotten gains from the illegal trading in Charter One securities. The United States Attorney's Office for the District of Massachusetts has also brought related criminal insider trading charges against Shengnan Wang and Hai Liu.
According to the Commission's complaint, on May 4, 2004, just after the market closed, Rhode Island-based Citizens Financial Group, Inc., a subsidiary of the Royal Bank of Scotland Group, PLC, announced that it planned to acquire Charter One in a cash transaction for $44.50 per share. Charter One's stock closed at $35.95 per share that day (May 4), and closed at $43.86 per share on May 5, 2004, the first trading day after the announcement, a rise of $7.91 per share, or over 22%. The Commission's complaint alleges that in late April and early May 2004, Shengnan Wang, then an employee of Citizens, learned that Citizens was performing final due diligence for the acquisition of a Cleveland, Ohio-based bank. According to the complaint, Wang conveyed certain material, non-public information relating to Citizens' planned acquisition to her husband, Hai Liu, and to Michael Tom, a former employee of Citizens who ran a hedge fund in which Wang and her husband had invested approximately $60,000.
The complaint alleges that between April 29, 2004 and May 4, 2004, Michael Tom purchased numerous Charter One call options, which increase in value with a rise in the stock price, for his personal account and for his hedge fund, GTC Growth Fund. Michael Tom also traded Charter One securities prior to Citizens' announcement in a joint account he held with his wife and in accounts he managed for his wife and in-laws. According to the complaint, Michael Tom's illegal insider trading in Charter One securities resulted in total imputed profits of approximately $743,505.
The Complaint also alleges that Michael Tom and Wang's husband, Hai Liu, tipped their brothers, David Tom and Zheng Liu, respectively, about Citizens' acquisition plan. As a result, both David Tom and Zheng Liu traded in Charter One securities prior to Citizens' announcement. David Tom's trading resulted in imputed profits of approximately $39,089, while Hai Liu's brother, Zheng Liu, made imputed profits of approximately $2,736.
In its complaint, Commission charged Michael Tom, David Tom, Wang, Hai Liu, and Global Time Capital Management with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking the entry of permanent injunctions; disgorgement of the profits from each defendant's insider trading, plus pre-judgment interest; and the imposition of civil monetary penalties. The Commission is also seeking the disgorgement of the alleged unjust enrichment and/or ill-gotten gains that GTC Growth Fund received as a result of any illegal insider trading.
The Commission acknowledges the assistance of the United States Secret Service in its investigation.