SEC CHARGES ATTORNEY WITH INSIDER TRADING IN ADVANCE OF MERGER ANNOUNCEMENT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

07/16/2015 02:10 PM EDT

The Securities and Exchange Commission charged a Pennsylvania attorney with insider trading in the stock of Harleysville Group, Inc. in advance of the 2011 announcement of a $760 million merger of Harleysville and Nationwide Mutual Insurance Company.

According to the SEC’s complaint, Herbert K. Sudfeld illegally traded on the news that sent Harleysville’s stock price up 87 percent when the merger of the two insurance companies was announced in September 2011.  At the time, Sudfeld was a real estate partner at a law firm that advised Harleysville on the merger.  Sudfeld was not involved in the merger and learned that the announcement of it was imminent from a conversation between an attorney working on the transaction and their shared legal assistant.  Sudfeld allegedly stole the inside information and purchased Harleysville stock in his and his wife’s accounts.  Once the merger was announced, Sudfeld sold all the shares he had purchased, realizing approximately $79,000 of illegal profits.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Pennsylvania today announced criminal charges against Sudfeld.

“We allege that Sudfeld breached his duties of trust and confidence owed to his law firm when he misappropriated information about the merger to enrich himself,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.  “The Commission will continue to aggressively pursue attorneys and other professionals who abuse their access to confidential information.”

The SEC’s complaint filed in federal court in Philadelphia names Sudfeld’s wife, Mary Jo Sudfeld, as a relief defendant for the purpose of recovering insider trading profits in her brokerage account through trades conducted by Sudfeld.  The complaint charges Sudfeld with violating antifraud provisions of the federal securities laws and an SEC antifraud rule.  The SEC seeks a permanent injunction and financial penalties against Sudfeld and return of allegedly ill-gotten gains and prejudgment interest from Sudfeld and Mary Jo Sudfeld.

The SEC’s investigation has been conducted by Kelly L. Gibson, Assunta Vivolo and John Rymas of the SEC’s Market Abuse Unit in the Philadelphia Regional Office.  The case is being supervised by Mr. Hawke and G. Jeffrey Boujoukos.  The litigation will be led by David A. Axelrod and John V. Donnelly of the Philadelphia Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the Federal Bureau of Investigation.

FINAL JUDGMENTS ENTERED IN INSIDER TRADING CASE INVOLVING MERGERS, DRUG APPROVAL, EARNINGS REPORTS

FROM:  US. SECURITIES AND EXCHANGE COMMISSION 

Court Enters Final Judgments by Consent Against Michael Pendolino, Lawrence D. Grum, and Michael L. Castelli

The Securities and Exchange Commission announced that on June 12, 2014, in SEC v. Lazorchak et al., Civ. Act. No. 12-07164 KSH-PS, the Honorable Katharine S. Hayden, United States District Court Judge for the District of New Jersey, entered final judgments by consent against Defendants Michael Pendolino (Pendolino), of Nashua, New Hampshire; Lawrence D. Grum (Grum), of Livingston, New Jersey; and Michael L. Castelli (Castelli), of Morris Plains, New Jersey. The judgments permanently enjoin Pendolino, Grum, and Castelli from future violations of antifraud provisions of the federal securities laws and order them to pay disgorgement and prejudgment interest.

The SEC's complaint, filed on November 19, 2012, alleged an insider-trading scheme spanning five years and involving illegal tipping by insiders at three public companies: Celgene Corp. (Celgene), Sanofi-Aventis Corporation (Sanofi); and (3) Stryker Corp. (Stryker), and at least eleven material events, including mergers, a drug approval application, and quarterly earnings information. The SEC further alleged that the insiders tipped material nonpublic information about each of these corporate events to Grum and Castelli who, in turn, traded on the basis of, and tipped that information to others. As alleged, the Celgene insider also tipped material nonpublic information about two of the events to his high school friend, Pendolino, who traded on the basis of, and tipped that information to others.

The judgments permanently enjoin Pendolino, Grum, and Foldy from violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and order them to pay combined disgorgement and prejudgment interest as follows: Pendolino, $68,862.12; Grum, $838,758.75; Castelli, $716,208.90.

Pendolino, Grum, and Castelli were criminally charged in a parallel criminal action in federal district court in the District of New Jersey. They have since pled guilty to charges of conspiracy to commit securities fraud and/or securities fraud and have been sentenced: Pendolino to probation of one year, and Grum and Castelli to prison terms of a year and a day, and nine months, respectively. United States v. Pendolino, 2:13-00657-KSH; United States v. Grum, 2:13-00737-KSH; United States v. Castelli, 2:13-00738-KSH.

The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

SOFTWARE COMPANY FOUNDERS SETTLE SEC CHARGES OF INSIDER TRADING AHEAD OF SALE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Three Software Company Founders to Pay $5.8 Million to Settle Charges of Insider Trading Ahead of Sale

The Securities and Exchange Commission filed insider trading charges against three software company founders for taking unfair advantage of incorrect media speculation and analyst reports about the company’s acquisition.

They agreed to pay nearly $5.8 million to settle the SEC’s charges.

The SEC alleges that Lawson Software’s co-chairman Herbert Richard Lawson tipped his brother William Lawson and family friend John Cerullo with nonpublic information about the status of the company’s 2011 merger discussions with Infor Global Solutions, a privately-held software provider. Lawson Software’s stock price had begun to climb following media and analyst reports that the company was considering a sale and multiple bidders were possible. However, Richard Lawson knew reports about possible multiple bidders were incorrect, and the merger share price offered by the lone bidder was significantly lower than what journalists and analysts were speculating. While in possession of the accurate, inside information from his brother, William Lawson sold more than one million shares of his family’s Lawson Software stock holdings. He also suggested that another trader sell shares. Cerullo sold approximately 175,000 of his company shares on the basis of the nonpublic information. When Lawson Software later announced the merger agreement at the lower-than-anticipated share price, the company’s stock value dropped 8.7 percent. By selling their shares at the inflated stock prices prior to the merger announcement, the traders collectively profited by more than $2 million.

According to the SEC’s complaint filed in federal court in San Francisco, Lawson Software was founded by the Lawsons and Cerullo in 1975 and based in St. Paul, Minn. William Lawson and Cerullo each retired in 2001, but Richard Lawson was still serving as co-chairman of the board of directors when the company began considering a possible sale. After Lawson Software and Infor Global Solutions entered into a non-disclosure agreement and met about a possible merger, Richard Lawson and other members of the board were regularly informed about the ongoing merger discussions. While Infor conducted its due diligence in late February 2011, Lawson Software began a “market check” in which its financial adviser reached out to five competitors to gauge their interest in acquiring the company. The market check elicited little-to-no interest, and Richard Lawson and the board were kept informed throughout the process.

Meanwhile, according to the SEC’s complaint, a March 8 article reported that Lawson Software had retained a financial adviser to explore a possible sale. The article identified other companies as potential acquirers of Lawson Software and led to a 13-percent jump in Lawson Software’s stock price that day. The article also fueled widespread - and incorrect - media speculation about potential acquirers of Lawson Software and possible merger prices. Soon thereafter, Lawson Software publicly confirmed an acquisition offer from Infor for $11.25 per share. Nevertheless, ensuing media and analyst reports still incorrectly suggested that other potential purchasers would likely enter the bidding and submit competing higher offers for Lawson Software. Some reports suggested a merger price of up to $15-16 per share. In reality, the same companies being speculated as potential purchasers already had informed Lawson Software that they weren’t interested in an acquisition. But fueled in part by the reports, Lawson Software’s stock price closed at $12.24 per share on March 14 - nearly $1 higher than Infor’s offer of $11.25. The stock price had increased approximately 23 percent since the March 8 article.

The SEC alleges that Richard Lawson knew that these media and analyst reports were inaccurate and the very entities mentioned as possible acquirers had in fact told the company they were not interested. He knew that Infor was the lone bidder and would not increase its offer. Richard Lawson also knew that Lawson Software’s financial adviser and board of directors viewed Infor’s bid as reasonable. After Richard Lawson tipped his brother and Cerullo with nonpublic information about the planned deal, they proceeded to sell their shares at approximately $1 per share higher than the eventual merger price of $11.25. Following the merger announcement on April 26, Lawson Software’s stock price dipped to $11.06 per share at market close. The merger became effective in July 2011.

Richard Lawson agreed to settle the SEC’s charges by paying a penalty of $1,557,384.57 for tipping his brother and Cerullo. The penalty amount is equivalent to the ill-gotten gains received by William Lawson and Cerullo. Richard Lawson also agreed to be barred from serving as an officer or director of a public company. William Lawson agreed to pay disgorgement of $1,853,671.28, prejudgment interest of $162,442.60, and a penalty of $1,853,671.28 for a total of $3,869,785.16. William Lawson’s disgorgement amount includes the ill-gotten gains of the other trader who he suggested sell shares. Cerullo agreed to pay disgorgement of $178,481.29, prejudgment interest of $15,640.81, and a penalty of $178,481.29 for a total of $372,603.39. Without admitting or denying the SEC’s allegations, the Lawsons and Cerullo agreed to the entry of final judgments enjoining them from future violations 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. The settlement is subject to court approval.

The SEC’s investigation was conducted by Michael Fuchs and Wendy Kong, and supervised by Josh Felker. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority and the Financial Industry Regulatory Authority.

DOJ WANTS DIVESTMENT'S BEFORE TEMPLE INLAND & INTERNATIONAL PAPER MERGER

The following excerpt is from the Department of Justice website:

Friday, February 10, 2012
“WASHINGTON — The Department of Justice announced today that it will require International Paper Company and Temple-Inland Inc. to divest three containerboard mills in order to proceed with their $4.3 billion merger.  The department said that the merger, as originally proposed, would have substantially lessened competition in the production and sale of containerboard, the type of paper used to make corrugated boxes, in the United States.   
 
The department’s Antitrust Division filed a civil antitrust lawsuit today in U.S. District Court in Washington, D.C., to block the proposed transaction.  At the same time, the department filed a proposed settlement that, if approved by the court, will resolve the lawsuit by requiring International Paper and Temple-Inland to divest three containerboard mills to resolve the competitive concerns alleged in the lawsuit. 
 
“Corrugated boxes made from containerboard are used to ship more than 90 percent of all goods nationwide,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division.  “With the mill divestitures, the transaction can proceed and American consumers and businesses across the country can be assured that competition is preserved in this important industry that is vital to the U.S. economy.” 
 
According to the complaint, International Paper and Temple-Inland are, respectively, the largest and third-largest producers of containerboard in North America.  The merger, as originally proposed, would have produced a single firm in control of approximately 37 percent of North American containerboard capacity. 
 
The department said that by combining the containerboard capacity of International Paper and Temple-Inland, the proposed merger would significantly expand the volume of containerboard over which International Paper would benefit from a price increase, and likely would have led International Paper to strategically reduce its output of containerboard in order to increase the market price.
 
The proposed settlement requires the divestiture of Temple-Inland’s containerboard mills in Waverly, Tenn., and Ontario, Calif., and either International Paper’s containerboard mill in Oxnard, Calif., or International Paper’s containerboard mill in Henderson, Ky., but not both of those mills.  Collectively, the divestitures account for approximately 950,000 tons of containerboard capacity.  The department’s Antitrust Division must approve the purchaser or purchasers of the divested mills. 
 
International Paper is a New York corporation headquartered in Memphis, Tenn.  International Paper owns and operates 12 containerboard mills and 133 box plants that convert containerboard into corrugated boxes in the United States.  In 2010, International Paper reported revenues of approximately $25.2 billion, with its North American Industrial Packaging Group, which produces containerboard and corrugated products, accounting for $8.4 billion.
 
Temple-Inland is a Delaware corporation headquartered in Austin, Texas.  Temple-Inland owns and operates seven containerboard mills and 53 box plants in the United States.  In 2010, Temple-Inland reported revenues of approximately $3.8 billion, with its corrugated-packing business accounting for approximately $3.2 billion.
 
The proposed settlement, along with the department’s competitive impact statement, will be published in the Federal Register, as required by the Antitrust Procedures and Penalties Act.  Any person may submit written comments concerning the proposed settlement within 60 days of its publication to Joshua H. Soven, Chief, Litigation I Section, Antitrust Division, U.S. Department of Justice, 450 Fifth Street, N.W., Suite 4100, Washington, D.C. 20530.  At the conclusion of the 60-day comment period, the court may enter the settlement upon a finding that it is in the public interest.”