U.S. Securities and Exchange Commission
Litigation Release No. 18836 / August 18, 2004
SEC v. Gary M. Kornman, Civ. Action No. 3:04CV1803-L (Northern District of Texas)
The Securities and Exchange Commission announced today that it filed a civil lawsuit in federal district court in Dallas, Texas, alleging illegal insider trading against Alabama-licensed attorney and registered securities salesman Gary M. Kornman, 61, of Dallas, Texas. The complaint alleges that Kornman operated a tax-planning firm, The Heritage Organization LLC, which offered tax shelters and estate planning to wealthy individuals. On two separate instances in 2001, Kornman obtained material nonpublic information concerning acquisitions of public companies in confidential discussions with prospective tax-planning clients, each of whom faced significant capital-gains taxes as a result of the planned sale of their respective companies. Specifically, the complaint alleges:
In February 2001, Kornman learned in a confidential meeting with an executive of MiniMed, Inc., a Nasdaq-listed medical-equipment company, that there was a "70% chance" that MiniMed would be acquired in approximately four months by a Fortune 100 company. Two days after learning this information, Kornman purchased 6600 shares of MiniMed for approximately $38 per share on behalf of a hedge fund he controlled. In May 2001, MiniMed announced it was being acquired by Medtronic, Inc. for $48 per share, and Kornman's hedge fund profited by approximately $67,000 when the merger ultimately took place in August 2001.
In a November 2001 meeting with a board member of Hollywood Casino Corporation, an Amex-listed company, Kornman learned that Hollywood would "definitely" be sold to another company in the near future within a certain price range per share. Upon learning this information, Kornman began acquiring Hollywood shares in the account of another hedge fund he controlled at an average price below the price range he had learned in the confidential meeting. By the time Hollywood announced it was being acquired by another publicly held casino firm in August 2002, Kornman's hedge fund had acquired 29,900 shares at an average cost below the announced acquisition price. At Kornman's direction, the hedge fund sold all of these shares for a profit of approximately $75,000 shortly after the merger was announced.
The SEC's complaint seeks to permanently enjoin Kornman from violating the anti-fraud provisions of the federal securities laws, specifically Section 10(b) of the Securities Exchange Act of 1034 and Rule 10b-5 thereunder. It also seeks disgorgement of $142,231 in illegal profits plus prejudgment interest and a civil penalty.
SEC Complaint in this matter