U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22180 / December 6, 2011
Securities and Exchange Commission v. All Know Holdings Ltd, et al. Civil Action No. 11 CV 8605 (N.D. Ill, filed December 5, 2011)
SEC FREEZES ASSETS OF FOUR CHINESE CITIZENS CHARGED WITH INSIDER TRADING
On December 5, 2011, the Securities and Exchange Commission charged four Chinese citizens and a Chinese-based entity with insider trading and obtained an emergency court order to freeze their assets after they reaped more than $2.7 million in profits by trading in advance of a recent public announcement of a merger agreement between London-based Pearson plc and Beijing-based Global Education and Technology Group, Ltd.
The SEC’s complaint names Sha Chen, Song Li, Lili Wang, Zhi Yao, All Know Holdings Ltd., and one or more unknown purchasers of Global Education stock as defendants. The SEC alleges that they purchased American Depository Shares (ADS) of Global Education in the two weeks leading up to a November 21 public announcement of a planned merger between the two education companies. Some of the defendants’ brokerage accounts were dormant until they bet heavily on Global Education shares, and some of the purchases made either equaled or exceeded the stated annual income of that trader. After the agreement was announced, they immediately began selling some of their Global Education shares. Their illicit gains totaled more than $2.7 million.
According to the SEC’s complaint, filed in the U.S. District Court in Chicago, Pearson and Global Education each announced before trading began on November 21 that Pearson agreed to acquire all of Global Education’s outstanding stock for $294 million ($11.006 per share traded in the U.S.). Global Education’s stock price increased 97 percent that day, from $5.37 to $10.60.
The SEC alleges that the defendants made their purchases of Global Education’s shares while in possession of material, non-public information about the merger. A Global Education co-founder apparently tipped Wang and possibly others about the potential acquisition. Wang then transferred new funds into her previously dormant brokerage account and bought 28,000 Global Education shares. The others also engaged in similarly suspicious trading in Global Education stock, which was typically thin. On November 18, the last trading day before the acquisition announcement, their purchases accounted for more than 35 percent of the entire day’s trading volume for the company’s shares, which trade on the NASDAQ.
The SEC alleges that the defendants each violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief, the SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties. The emergency court order that the SEC obtained on December 5 on an ex parte basis freezes approximately $2.7 million of defendants’ assets held in U.S. brokerage accounts and, among other things, grants expedited discovery and prohibits the defendants from destroying evidence. The investigation is continuing.
A hearing on the SEC’s motion for preliminary injunction has been set for December 15, 2011 at 9:45 a.m. in the U.S. District Court for the Northern District of Illinois, Courtroom 1719, located at 219 South Dearborn Street, Chicago, Illinois, 60604.