SEC Charges Investment Bank Analyst with Illegally Tipping College Friend About Nonpublic Merger Deals
The Securities and Exchange Commission today charged a former analyst at a Boston-based investment bank with illegally tipping a close friend with confidential information about clients involved in impending mergers and acquisitions.
The SEC alleges that Jauyo “Jason” Lee, who worked in the San Francisco office of Leerink Swann LLC, gleaned sensitive nonpublic information about the deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions, which involved medical device companies. Lee tipped his longtime college friend Victor Chen of Sunnyvale, Calif., with the confidential information, and Chen traded heavily on the basis of the nonpublic details that Lee had a duty to protect. Chen made more than $600,000 in illicit profits, which was a 237 percent return on his initial investment. Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.
“Lee worked in an industry where safeguarding nonpublic information is essential, yet he exploited his access to confidential merger and acquisition details to give his friend an unfair trading advantage,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office.
According to the SEC’s complaint filed in U.S. District Court for the Northern District of California, Lee was first privy to information about Leerink’s client Syneron Medical Ltd., which was negotiating an acquisition of Candela Corporation in 2009. He later learned that Leerink’s client Somanetics Corporation was in the process of being acquired by Covidien plc. in 2010. As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly and exchanged dozens of phone calls and text messages. Some of the calls took place from Lee’s office telephone at Leerink. Lee had a duty to preserve the confidentiality of the information that he received in the course of his employment at Leerink.
The SEC alleges that in the days leading up to the public announcements of each of these deals, Chen made sizeable purchases of stock and call options in Candela and Somanetics and made unusual trades in the securities of each of these acquisition targets. Chen had never previously bought securities in these companies, yet he suddenly spent a significant portion of his available cash to buy the Candela and Somanetics securities. Chen proceeded to sell most of his Candela and Somanetics holdings once public announcements were made about the transactions. Because Chen made some of his trades in his sister Jennifer Chen’s account, the SEC’s complaint also names her as a relief defendant for the purposes of recovering the illegal profits in her account.
The SEC alleges that Lee and Chen violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against Lee and Chen.
The SEC’s investigation was conducted in the Chicago Regional Office by Kara M. Washington and John E. Kustusch and supervised by Peter Chan and Steven L. Klawans. The litigation is being handled by Steven C. Seeger. The SEC thanks the Financial Industry Regulatory Authority’s (FINRA) Office of Fraud Detection and Market Intelligence as well as the Options Regulatory Surveillance Authority for their assistance in this matter.