U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16861 / January 17, 2001
SECURITIES AND EXCHANGE COMMISSION v. DAVID E. LIPSON, Civil Action No. 97 C. 2661 (RAG) (N.D. ILL.)
David E. Lipson, the former chairman and chief executive officer of Supercuts, Inc. who was found liable for insider trading, was ordered to pay the maximum civil penalty allowed by law and was permanently enjoined from future violations of the antifraud provisions of the federal securities laws by Judge Ronald A. Guzman of the United States District Court for Northern Illinois (Chicago). Lipson also was ordered to disgorge all of his losses avoided by selling Supercuts stock -- $621,875 - and to pay interest on that amount. In total, Lipson was ordered to pay $2,835,597 as a result of his insider trading.
Judge Guzman's order, which was issued on January 11, 2001, resulted from an 11-day jury trial which concluded on April 26, 2000 with a verdict that Lipson violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. However, the Court did not determine Lipson's sanctions at that time.
Judge Guzman also ruled on January 11 that Lipson violated the laws requiring reporting of securities transactions by officers, directors and holders of more than 10 percent of public company stock. That issue was not presented to the jury. Lipson also was enjoined from further violations of those provisions, Section 16(a) of the Securities Exchange Act and Rules 16a-2 and 16a-3 thereunder.
The Securities and Exchange Commission's Complaint alleged that Lipson violated these insider trading and reporting provisions when he sold 365,000 shares of Supercuts stock through an account in his son's name shortly before Supercuts announced its earnings for the first quarter of 1995. Supercuts earned seven cents per share for the quarter, significantly below Wall Street analyst projections of 17 to 18 cents per share. Lipson was found liable for selling the stock on four separate occasions in March and April 1995.
The Commission's Complaint, filed April 17, 1997, alleged that Lipson regularly received confidential internal financial reports from Supercuts' accounting department disclosing the company would fail to meet its own internal budget projections, which were below the earnings projected by analysts. The Commission alleged that Lipson used this inside information to sell Supercuts stock and avoid losses which he would have suffered had he waited to sell until quarterly earnings were announced on May 12, 1995. Supercuts' stock price fell nearly 15 percent after the earnings announcement. The Court concluded that Lipson avoided losses of $621,875 by selling shares earlier. He was ordered to disgorge that amount and, in addition, pay a $1,865,625 civil penalty, triple his losses avoided and the maximum amount permitted under the Securities Exchange Act.
The Court concluded that "Mr. Lipson's participation in this fraudulent endeavor was extensive. He utilized lawyers and accountants in constructing a scheme to shield his unlawful use of material nonpublic information and even utilized a third party, his son, in order to distance himself from the sale." The Commission did not allege that the son was a knowing participant in the scheme.
The Court's order stated that Lipson should be permanently enjoined, in part because of "an apparent total lack of remorse for the harm he has caused others. . . ."
Lipson told the jury that he never read internal financial reports produced by the Supercuts accounting department, claiming they were "unreliable," and that he had no information about Supercuts' financial performance until shortly before results were disclosed to the public. Lipson also claimed that he intended to sell Supercuts stock through an account in his son's name as part of his estate planning, and not because of inside information that the company's earnings would not meet Wall Street targets. The Court noted in its order that "the jury necessarily rejected in its entirety [Lipson's] evidence as to a pre-existing estate plan and his claim of lack of knowledge."
Judge Guzman also enjoined Lipson from future violations of Section 16(a) of the Exchange Act and Rules 16a-2 and 16a-3 thereunder, which require corporate officers, directors and holders more than 10 percent of any class of a company security to file reports with the Commission disclosing purchases and sales of company stock. Lipson failed to file such reports for the four sales of Supercuts stock sold through his son's brokerage account. Section 16(a) reporting is intended to alert the investing public to when insiders are buying or selling securities of the companies in which they are insiders or large investors. Judge Guzman also ordered Lipson to pay $348,097 as prejudgment interest on his avoided losses. See also Litigation Release No.16528, 72 S.E.C. Docket 741 (April 27, 2000).http://www.sec.gov/litigation/litreleases/lr16861.htm