UNITED STATES DISTRICT COURT
Plaintiff, the United States Securities and Exchange Commission (the "Commission") alleges:
NATURE OF THE ACTION
1. This insider trading case involves the unlawful purchase by defendant Felix Litvinsky of 60 shares and 20 call options of BetzDearborn Inc. ("BetzDearborn") two days before the July 30, 1998 announcement that BetzDearborn and Hercules Incorporated ("Hercules") had signed a definitive merger agreement. Felix Litvinsky was tipped about the impending merger by his then-girlfriend and roommate, and now wife, defendant Olga Summar Litvinsky. Olga Litvinsky was employed as an administrative assistant by J.P. Morgan Securities, Inc. ("J.P. Morgan"), a registered broker-dealer based in New York, New York, which was advising BetzDearborn about the merger. Felix realized $56,239 by unlawfully acquiring BetzDearborn securities while in possession of material nonpublic information he knew, or was reckless in not knowing, was stolen from J.P. Morgan by Olga Litvinsky.
2. By informing Felix Litvinsky about the BetzDearborn merger with Hercules, Olga Litvinsky unlawfully misappropriated material nonpublic information from J.P. Morgan in breach of her duty to her employer. This nonpublic information was intended to be used for the business purposes of J.P. Morgan and its client, BetzDearborn, and not for personal gain. Felix Litvinsky knew, or should have known, that Olga Litvinsky had misappropriated nonpublic information in breach of her duty of trust and confidence to her employer.
3. By virtue of the conduct alleged above, defendants violated antifraud provisions of the federal securities laws. The Commission requests that the Court enter injunctive relief against further violations of these laws, impose a penalty on each defendant, and hold the defendants jointly and severally liable for disgorgement of all profits realized from the unlawful trading in BetzDearborn securities, plus prejudgment interest on that amount.
JURISDICTION AND VENUE
4. Defendants engaged in acts, practices, and courses of business that violate Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §240.10b-5], through the means or instrumentalities of interstate commerce, the mails, or the facilities of a national securities exchange.
5. This Court has jurisdiction under Sections 21(e), 21A(d)(4), and 27 of the Exchange Act [15 U.S.C. §§ 78u(e), 78u-1(d)(4), and 78aa]. Certain of the defendants' transactions, acts, practices, and courses of business occurred within this District, and venue is proper pursuant to Section 27 of the Exchange Act.
6. Olga Summar Litvinsky, age 42, resides in Fairlawn, New Jersey. From July 1997 through July 30, 1998 (and thereafter), Olga was employed by J.P. Morgan as the assistant to a managing director ("managing director"). The managing director was J.P. Morgan's relationship manager for BetzDearborn and the principal coordinator of its financial advisory services during the BetzDearborn/Hercules merger negotiations. Olga lived with her boyfriend, Felix Litvinsky, beginning in the summer 1997. They were married in August 1998.
7. Felix Litvinsky, age 36, resides in Fairlawn, New Jersey. During 1998, Felix was employed as a quality assurance manager by Citibank.
8. BetzDearborn was a Pennsylvania corporation based in Trevose, Pennsylvania, that produced and marketed chemical treatment programs for water, wastewater, and industrial process systems. Prior to its merger with Hercules on October 15, 1998, BTL's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act and was traded on the New York Stock Exchange. BetzDearborn call options were traded on the Pacific Stock Exchange.
9. Hercules Inc. is a Delaware corporation based in Wilmington, Delaware, that manufactures specialty chemical products for a variety of markets worldwide.
10. From April 1998 through the July 30, 1998 merger announcement, BetzDearborn and Hercules conducted merger negotiations in secret. Olga Litvinsky's supervisor, a managing director, was responsible for coordinating all services provided by J.P. Morgan to BetzDearborn in connection with the merger with Hercules.
11. As the managing director's assistant, Olga Litvinsky had full access to all of his files and documents concerning BetzDearborn, including memos, agreements, drafts, calendar and his meeting schedule. Olga Litvinsky was aware of a pending merger of BetzDearborn with Hercules prior to the merger announcement on July 30, 1998.
12. As an employee of J.P. Morgan, Olga Litvinsky had a duty to maintain the confidentiality of information she learned during the course of her employment. The J.P. Morgan Worldwide Rules-General Standards of Conduct (1996) ("Rules") specifically prohibited an employee from disclosing any confidential client information. The Rules also required pre-approval of all personal securities transactions, prohibited trading in stock options, and applied to persons living with an employee. On February 4, 1998, Olga Litvinsky certified that she had read and understood the Rules, and that she had complied with the Rules and would comply with them in the future.
13. Beginning in February 1998, J.P. Morgan provided confidential advice to BetzDearborn concerning a business combination with Hercules. On June 23, 1998, J.P. Morgan signed an exclusive engagement letter with BetzDearborn, which provided that J.P. Morgan would maintain the confidentiality of BetzDearborn's merger negotiations with Hercules.
14. On or before July 28, 1998, in breach of her duty to her employer, Olga Litvinsky told Felix Litvinsky that BetzDearborn was going to be acquired by Hercules. This information was nonpublic and material.
15. On July 28, 1998, Felix Litvinsky bought BetzDearborn stock and options in two different accounts. Felix Litvinsky bought 60 shares for $36.6875 per share, for a cost of $2,201.25 (excluding commissions) in his Citibank IRA account, selling the only asset in the account, which he had owned since 1986. Felix Litvinsky realized $2,238 on the sale, and used $2,231 - or all but seven dollars, to buy BetzDearborn shares.
16. Also on July 28,1998, Felix Litvinsky bought 20 August 40 BetzDearborn call options at $31,25 per contract, for a cost of $625 in his discount brokerage account, which at the time had a cash balance of $710. These 20 option contracts gave Felix Litvinsky the right to acquire up to 2,000 shares of BetzDearborn common stock (100 shares per contract) at the set price, or "strike price," of $40 a share until the contracts expired on the Saturday after the third Friday in August, here Saturday, August 22, 1998. On the day these option contracts were purchased, the price of BetzDearborn's common stock closed at $34.75, which was below the strike price of $40, making these "out of the money" call options.
17. On July 30, 1998, after the merger announcement, Felix Litvinsky sold all of his BetzDearborn securities, realizing a profit of $56,238.75. Felix Litvinsky sold his 60 shares at $67.75 per share, for gross proceeds of $4,065. He sold his 20 August 40 option contracts at $2,750 per contract, for gross proceeds of $55,000.
18. Olga Litvinsky misappropriated from J.P. Morgan material nonpublic information about BetzDearborn's confidential negotiations to merge with Hercules, and tipped that information to Felix Litvinsky, in breach of the duty of trust and confidence that Olga Litvinsky owed to J.P. Morgan and under circumstances in which it was foreseeable that Felix Litvinsky would use the information himself to buy BetzDearborn securities.
19. Defendant Felix Litvinsky knew, or was reckless in not knowing, that the information he received from Olga Litvinsky concerning BetzDearborn's confidential plans to merge with Hercules was material, nonpublic information that had been provided in breach of Olga Litvinsky's duty of trust and confidence to her employer.
20. By virtue of the conduct alleged in paragraphs 1-19 herein, each defendant, directly or indirectly, in connection with trading in BTL common stock, by use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange: (1) employed devices, schemes, or artifices to defraud; (2) made untrue statements of material facts, or omitted to state material facts necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading; or (3) engaged in acts, practices, or transactions which operated as a fraud or deceit upon purchasers or sellers of securities or upon other persons, in connection with the purchase or sale of securities.
21. By reason of the foregoing acts, practices, and transactions, each defendant violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
Grant a Final Judgment of Permanent Injunction restraining and enjoining each defendant and their agents, servants, employees, attorneys-in-fact, and assigns and those persons in active concert or participation with them, and each of them, from violating Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5].
Order the defendants jointly and severally to disgorge illegal trading profits plus prejudgment interest thereon.
Order each defendant to pay civil penalties under the Insider Trading and Securities Fraud Enforcement Act of 1988, Section 21A of the Exchange Act [15 U.S.C. § 78u-1].
Grant such other relief as this Court may deem just and appropriate.