LITIGATION Release No. 16487 / March 27, 2000
Securities and Exchange Commission v. Andrea Caputo and Gerard J. Bell, U.S. District Court for the Southern District of New York (00 Civ. 2285) (KMW)SEC SUES TWO BROOKLYN RESTAURATEURS FOR INSIDER TRADING IN CONNECTION WITH THOMSON'S 1994 TENDER OFFER FOR MEDSTAT
In a complaint filed today, the Securities and Exchange Commission charged Andrea Caputo and Gerard J. Bell with violations of Securities Exchange Act Section 14(e) and Rule 14e-3 for illegal insider-trading trading in advance of the November 16, 1994, public announcement that The Thomson Corporation would launch a tender offer for The MEDSTAT Group, Inc. ("Medstat"). The complaint seeks more than $244,000 in disgorgement of trading profits, as well as prejudgment interest and penalties. Caputo settled the case against her, without admitting or denying the Commission's allegations, by agreeing to a permanent injunction and to pay approximately $237,000 in disgorgement, interest and penalties.
The Commission's complaint alleges the following:
- Caputo first invested in Medstat at the recommendation of a close friend who was a Thomson Corporation insider.
- Her friend later learned that Thomson was interested in acquiring Medstat. He told her of Thomson's interest and warned her not to buy any more Medstat stock or tell anyone about it.
- Caputo ignored his warnings, bought more Medstat stock, and tipped her neighborhood friend Gerard Bell, a fellow Brooklyn restaurant owner. Bell bought Medstat stock and recommended it to others. Caputo also recommended Medstat to her hairdresser and her business partner.
- After tipping Bell, Caputo surreptitiously eavesdropped on one of her friend's business conversations and learned about a corporate development that would affect the timing of the proposed acquisition. Caputo then bought more Medstat stock and expressed enthusiasm about it to Bell and others.
- Later, Caputo asked her friend what was going on with Medstat. Inferring that she might have disregarded his warning, her friend became very angry, asked her if she had told anyone about Medstat and explained that he could lose his job if she did. Caputo told Bell what her friend had said, and asked Bell if he told anyone about Medstat. Bell swore, falsely, that he had not.
- During a visit to her friend's vacation house, Caputo heard another Thomson employee comment that he would be "glad when this whole thing is over with Medstat." She understood this comment to mean that the acquisition would happen soon, and told Bell that her friend's company was going to get Medstat. Bell subsequently bought more Medstat stock and made his first-ever options purchase, buying 40 Medstat call options two days before the tender offer was announced.
- In total, Caputo accumulated 4,500 shares of Medstat following her friend's warning. As a result of the tender offer, she made $54,520. Her hairdresser and her business partner, who bought on her recommendation, made $19,420 and $2,500, respectively.
- Bell made $63,200 on the 2,575 Medstat shares and 40 Medstat call options he held when the tender offer was announced. Two of the friends that Bell recommended Medstat to also bought Medstat securities and reaped trading profits of $91,214 and $13,519.
Simultaneous with the filing of the complaint, Caputo settled the case against her by consenting to an injunction against future violations of Section 14(e) of the Exchange Act and Rule 14e-3 and agreeing to pay a total of $ 237,180.57, consisting of (1) disgorgement of $76,440.14, representing her own, her hairdresser's and her business partner's illegal trading profits; (2) $41,220.85 in prejudgment interest; and (3) a penalty of $119,519.58. Bell has not entered into a settlement.
This is the Commission's third enforcement action alleging insider trading in advance of Thomson's tender offer for Medstat. See Lit. Rel. 15801 (July 7, 1998); Lit. Rel.15549 (November 4, 1997); Lit. Rel.14732 (November 27, 1995). Including Caputo's settlement, the Commission will have recovered over $1.35 million in disgorgement, prejudgment interest, and penalties in these cases.