Litigation Release No. 21312 / November 23, 2009

Securities and Exchange Commission v. David K. Donovan, Jr. and David R. Hinkle, Civil Action No. 08-CA-10649-RWZ (D. Mass., Complaint filed April 16, 2008)

Jury Enters Verdict in Insider Trading Case

The Commission announced that a federal jury in Boston returned a verdict on November 20, 2009 in favor of the SEC against a former Fidelity Investments trader for insider trading. David K. Donovan, of Massachusetts, was found to have engaged in insider trading in stock of Covad Communications Group, Inc. ("Covad"). The jury found Donovan's co-defendant, David R. Hinkle of Texas, not liable for insider trading.

In its complaint, the SEC had alleged that, between July and September 2003, Donovan obtained confidential information on Fidelity's internal order database that Fidelity was purchasing a substantial amount of Covad common stock for its advisory clients. The Commission's complaint alleged that after viewing Fidelity's orders and being denied permission by Fidelity to buy Covad stock in his own personal account, Donovan caused purchases of the stock to be made in early August 2003 in the account of his mother. According to the Commission's complaint, Donovan's mother profited after later selling the Covad stock in early September 2003, after the price of Covad stock had increased.

The jury heard closing arguments in the seven-day trial on November 19, 2009 and announced its verdict the next day. In rendering its verdict, the jury found that David Donovan engaged in insider trading by knowingly giving to his mother material, nonpublic information concerning Covad stock in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Although the jury found that Donovan tipped his mother to inside information about Covad, it did not find that he tipped co-defendant David Hinkle to inside information, and did not find Hinkle liable for insider trading.

The Honorable Rya W. Zobel of the United States District for the District of Massachusetts presided over the trial. The SEC filed its complaint on April 16, 2008.

Donovan was previously a respondent in unrelated administrative proceedings instituted by the Commission on March 5, 2008, alleging that he and others at Fidelity accepted travel, entertainment, and gifts from brokerage firms that sought and obtained orders for securities transactions on behalf of the Fidelity Funds. Donovan later settled that matter by agreeing to an Order by the Commission issued on December 11, 2008, without admitting or denying the Commission's findings, that Donovan violated Section 17(e)(1) of the Investment Company Act of 1940 and ordering him to cease and desist from violating that law, censuring him, and ordering him to pay over $208,000 in disgorgement of ill-gotten gains, prejudgment interest, and civil penalties.

For further information, please see Litigation Release Nos. 20528 (April 16, 2008), 19930 (December 1, 2006) and 19983 (January 29, 2007). See also Investment Advisers Act Release Nos. 2812 (December 11, 2008) and 2715 (March 5, 2008).

On December 2, 2009, following entry of the jury's verdict, the Honorable Rya W. Zobel entered judgment. Judge Zobel ordered that Donovan pay disgorgement of $89,775.00, representing profits earned by his mother. The court did not order the entry of an injunction or any monetary penalty.