U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20305 / September 27, 2007
SEC v. Morris Gad and Nathan Rosenblatt, 07-CV-8385 (GEL) (S.D.N.Y.)
Today, the Securities and Exchange Commission filed a complaint against Nathan Rosenblatt, a former director of NBTY, Inc., and member of its three-person audit committee, and his close friend Morris Gad, an officer and principal shareholder of Almod Diamonds, Inc., a family-owned jewelry retailer. In its complaint, the Commission charges that Rosenblatt, while in possession of material, nonpublic information concerning the company's significant revenue and earnings shortfall for the third quarter of 2004, tipped Gad with this information prior the company's public release of its financial results. With this information in hand, Gad sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children prior to NBTY's release of its 2004 third quarter financial results. In so doing, Gad made approximately $400,000 in trading profits and losses avoided.
The Commission's complaint charges Gad and Rosenblatt with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5.
Specifically, the Commission's complaint alleges as follows:
- On July 20, 2004, at 3:17 p.m., NBTY's chief financial officer faxed the members of NBTY's audit committee, including Rosenblatt, a reminder that a telephonic meeting of the audit committee would take place on July 21 at 11:00 a.m. He attached for their review NBTY's financial results for the third quarter. The financial results showed a 12% decline in net income from $29.5 million in the previous year's third quarter to $25.9 million, as well as a slump in its U.S. retail and catalogue sales. They also showed earnings per share of $.37, down from $.43 in the previous year's third quarter.
- The following morning, beginning at 8:57 a.m., Gad and Rosenblatt placed several phone calls to each other. At 11:00 a.m., the audit committee held a telephonic conference, during which it approved the issuance of the financial results. At 11:29 a.m. and again at 12:50 p.m., Gad placed calls to Rosenblatt. Two minutes after the second call, at 12:52 p.m., Gad called his broker.
- Beginning at 12:59 p.m., Gad sold his entire position of 13,920 NBTY shares. Thereafter, beginning at 2:20 p.m., Gad sold short 30,000 NBTY shares and purchased 50 August 30 put contracts. Gad also directed the sales of 105 August 20 call contracts out of the accounts of his three children on that day.
- Later that evening, Gad and Rosenblatt spent the evening together at a small dinner party to celebrate the birthday of a mutual friend.
- The next morning, July 22, 2004, Gad attempted to sell short an additional 20,000 shares of NBTY stock. Although he was unable to sell short that number of shares at his order price, he was able to sell short 10,000 shares. This gave Gad a total short position in NBTY stock of 40,000 shares.
- On July 22, 2004, Gad also bought an additional 150 August 30 put contracts, which gave him a total position of 200 put contracts.
- After the close of trading on July 22, 2004, NBTY announced its third quarter results.
- The following day, July 23, 2004, the price of the stock dropped to a new 52-week low to close at $19.68 per share, down from the prior day's close of $24.50 per share, losing nearly 20% of its value. Trading volume that day jumped to over 8.5 million shares from the previous day's volume of under 1 million.
- Gad made approximately $400,000 in trading profits and losses avoided by trading in NBTY securities while he was aware of material, nonpublic information concerning NBTY's financial results.
In its complaint, the Commission seeks permanent injunctive relief, disgorgement of trading profits and losses avoided, prejudgment interest, and civil penalties against Gad and Rosenblatt. The Commission also seeks to bar permanently Rosenblatt from acting as an officer or director of a public company.
SEC Complaint in this matter