U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20528 / April 16, 2008
Securities and Exchange Commission v. David K. Donovan, Jr. and David R. Hinkle, Civil Action No. 08-CA-10649-RWZ (D.Mass. April 16, 2008)
SEC Charges Former Fidelity Trader and a Broker With Defrauding Fidelity and Its Advisory Clients
The Securities and Exchange Commission ("Commission") today filed a civil action in the U.S. District Court in Boston against David K. Donovan, Jr. ("Donovan"), a former equity trader at Fidelity Investments, and David R. Hinkle ("Hinkle"), a former broker at Capital Institutional Services, Inc. ("Capital Institutional Services"), for defrauding Fidelity and its advisory clients. The complaint alleges that, between July and September 2003, the defendants defrauded Fidelity and its advisory clients by gaining access to confidential trading information stored on Fidelity's internal order database, by learning that Fidelity's advisory clients, including the Fidelity mutual funds, were purchasing and intended to continue purchasing a substantial amount of the common stock of Covad Communications Group, Inc. ("Covad"), by using that confidential information concerning Fidelity's pending securities orders to trade on and ahead of Fidelity's securities orders for the stock of Covad, by failing to disclose to Fidelity and its clients that they were trading on and ahead of those orders, and by profiting thereby.
According to the Commission's complaint, Donovan accessed Fidelity's internal order database on approximately 107 occasions and obtained confidential information that Fidelity was purchasing and intended to continue purchasing for its advisory clients a substantial amount of Covad common stock. The complaint further alleges that Donovan requested authorization from Fidelity to trade Covad stock in his personal account during the same period, and was denied. According to the complaint, during the above-mentioned period, Donovan viewed Fidelity's pending Covad orders using the internal order database, communicated with Hinkle, disclosed confidential trading information of Fidelity and its advisory clients, and, shortly thereafter, Hinkle purchased the stock. In addition, the Commission's complaint alleges that after viewing Fidelity's orders and being denied permission to buy Covad stock, Donovan caused purchases of the stock to be made in the account of his mother, who is a resident of Marblehead, Massachusetts. According to the complaint, profits accrued to both Hinkle and Donovan's mother's account when they sold out positions in Covad in the weeks following the purchases.
The Commission's complaint alleges that Donovan and Hinkle violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties.