U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20105 / May 4, 2007
Securities and Exhange Commission v. One or More Unknown Purchasers of Call Options for the Common Stock of TXU Corp, Sunil Sehgal, Seema Sehga. Hafiz Naseem and Francisco Javier Garcia, Civil Action No. 07C1208 (N.D. Ill.)
Securities and Exchange Commission Charges Hafiz Naseem, Credit Suisse Investment Banker, With Insider Trading
On May 2, 2007, the Commission charged Hafiz Naseem, an investment banker employed since at least March 2006 in New York by Credit Suisse (USA) LLC, with misappropriating from Credit Suisse and its clients material non-public information related to pending but unannounced business combinations and tipping that information to a person believed to be a banker in Pakistan. In a Second Amended Complaint in the insider trading case originally filed on March 2, 2007, against certain Unknown Purchasers of TXU call options, the Commission alleged that, on February 5,6,7,8 and 23, 2007, Naseem, in breach of his duty to Credit Suisse and its client, telephoned the Pakistani banker and conveyed to him non-public, material information concerning the proposed but unannounced leveraged buyout of TXU Corp. by an investor group led by Kohlberg Kravis Roberts & Co. and Texas Pacific Group., and other information. According to the Second Amended Complaint, the Pakistani banker, on February 23, 2007, purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and these purchases allowed him to reap, following the public announcement of the buyout, trading profits of approximately $5 million.
The Second Amended Complaint further alleges that Naseem also made calls from his office phone to the Pakistani banker's home and cell phones and alerted him to pending business combinations and deals involving 9 other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. According to the Second Amended Complaint, Credit Suisse served as an investment banker or financial advisor in all of the involved deals, and the phone calls to the Pakistani banker were made close in advance of — and frequently the day of or the day before — announcements of the proposed deals. The Second Amended Complaint also alleges that the Pakistani banker purchased securities in those companies in advance of public merger announcements and profited by an additional $2.4 million. Finally, according to the Second Amended Complaint, Naseem, in order to insure he would obtain a personal, financial benefit from his misappropriations, in May 2006 opened up a brokerage account in Pakistan and granted trading authority over that account to the Pakistani banker, i.e., to his "tippee."
The Commission alleges that, as a result of these activities, Naseem engaged in insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest thereon, and civil monetary penalties.
The Commission's complaint against the Unknown Purchasers alleges that between February 21 and February 23 — prior to the public disclosure of TXU Corp.'s merger agreement — while in possession of material, nonpublic information regarding the acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 8,020 call option contracts for TXU stock. The unrealized illicit profits on these option contracts total approximately $5.4 million. On March 2, 2007 the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of the Unknown Purchasers. On March 28, 2007, the District Court approved an extension of the asset freeze as to the Unknown Purchasers who purchased TXU securities through Credit Suisse in Zurich and Fimat Banque Frankfurt Zweigniederlassung. In its Second Amended Complaint, the Commission alleged that the person who purchased TXU securities through Fimat Frankfurt is Francisco Javier Garcia, believed to be a resident of Switzerland. The Court also approved a 60-day extension of the asset freeze as to the Unknown Purchaser who traded through UBS AG London.
As a result of an Amended Complaint filed by the Commission, on March 28, 2007, the United States District Court for the Northern District of Illinois in Chicago entered a Temporary Restraining Order freezing assets of Sunil and Seema Sehgal, a married couple residing in the United Kingdom. The Amended Complaint added the Sehgals as defendants in the March 2, 2007, against certain Unknown Purchasers of TXU call options, and alleged that the Sehgals made highly profitable and suspicious purchases of 700 call option contracts for the common stock of TXU Corp. through accounts at Charles Schwab & Co., Inc., and Clark Dodge & Co, Inc., in January and February 2007. The Amended Complaint alleged that, as a result of the increase in price of TXU stock following the public announcement of the leveraged buyout, the illicit profits on the Sehgals' option contracts total approximately $270,000. On April 12, 2007, the Court approved a 60-day extension of the asset freeze as to the Sehgals.
The Commission wishes to thank the Chicago Board Options Exchange, the NYSE, the Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom for their assistance in this matter.