U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19586 / March 2, 2006
SEC v. Alan Cao and Jun Shi, Civil Action No. CV 06-1269 (RCx) (C.D. Cal.)
SEC Files Insider Trading Action Against Former VPs of Countrywide Financial Corp.
The Securities and Exchange Commission filed insider trading charges today in federal district court in Los Angeles, Calif. against two former vice presidents of Countrywide Financial Corp. The Commission's complaint alleges that Alan Cao, age 37, of Woodland Hills, Calif., and Jun Shi, age 42, of Moorpark, Calif., traded in Countrywide stock while aware of confidential negative earnings information. Cao and Shi agreed to settle the charges, without admitting or denying the allegations, by repaying their ill-gotten trading profits and paying a monetary penalty of a like amount, for a total of approximately $100,000 for Cao and $40,000 for Shi.
On October 20, 2004, Countrywide issued a press release announcing that its third quarter earnings per share were $0.94, compared to $1.93 the year before. That day, Countrywide's stock price fell 11.5% and trading volume increased 307%. The Commission's complaint alleges that by mid-October 2004, Cao, a vice president of financial planning, had learned that Countrywide's third quarter earnings results were negative and that Countrywide would announce revised downward earnings guidance. The complaint further alleges that on October 19, Cao, betting that Countrywide's stock price would decline after the company's negative earnings announcement, sold short (i.e., borrowed and then sold) 15,000 Countrywide shares. A few hours after the October 20 earnings announcement, when Countrywide's stock price had declined, Cao purchased 15,000 Countrywide shares to cover the borrowed shares, for an illegal profit of $48,352.
The Commission's complaint further alleges that Cao twice tipped Shi, a first vice president of finance in Countrywide's treasury bank division, with Countrywide's nonpublic negative earnings information. After the first tip, Shi sold 2,300 Countrywide shares, thereby avoiding losses of $11,567 that he otherwise would have incurred. After the second tip, Shi sold short 2,000 Countrywide shares, which he covered a few hours after the October 20 announcement, for a profit of $8,461. By engaging in such trading, Cao and Shi breached their duty to Countrywide not to trade on the basis of confidential corporate information.
To settle the Commission's charges, Cao and Shi consented to the entry of a final judgment permanently enjoining each from future violations of the antifraud provisions of 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. Cao agreed to pay $48,352 in disgorgement of his illegal trading profits, prejudgment interest of $1,267, and a civil money penalty of $48,352. Shi agreed to pay $20,028 in disgorgement of his illegal trading profits, prejudgment interest of $525, and a civil money penalty of $20,028.
The Commission acknowledges the assistance of the New York Stock Exchange in the investigation of this matter.