SEC Charges Two Brokers With Insider Trading Ahead of IBM-SPSS Merger for $1 Million Profit
The Securities and Exchange Commission recently charged two retail brokers who formerly worked at a Connecticut-based broker-dealer with insider trading on nonpublic information ahead of IBM Corporation's acquisition of SPSS Inc.
The SEC alleges that Thomas C. Conradt learned confidential details about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction who discussed it in confidence. Conradt purchased SPSS securities and subsequently tipped his friend and fellow broker David J. Weishaus, who also traded. The insider trading yielded more than $1 million in illicit profits. The SEC's investigation uncovered instant messages between Conradt and Weishaus where they openly discussed their illegal activity. The SEC's investigation is continuing.
"When licensed professionals who are privileged to work in the securities industry violate legal duties and enrich themselves at investors' expense, it undermines public confidence in the integrity of the markets," said Daniel M. Hawke, Director of the SEC's Philadelphia Regional Office. "As industry professionals, Conradt and Weishaus clearly understood that what they were doing was wrong, but did so anyway while knowing the consequences they would face if caught."
In a parallel action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Conradt and Weishaus, who live in Denver and Baltimore respectively.
According to the SEC's complaint filed in federal court in Manhattan, the scheme occurred in 2009. Conradt revealed in instant messages that he received the information from the research analyst and warned Weishaus that they needed to "keep this in the family." Weishaus agreed, typing "i don't want to go to jail." They went on to discuss other people who have been prosecuted for insider trading. In another series of instant messages, Conradt bragged that he was "makin everyone rich" by sharing the nonpublic information. Weishaus later noted, "this is gonna be sweet."
The SEC alleges that the research analyst's attorney friend sought moral support, reassurance, and advice when he privately told the research analyst about his new assignment at work on the SPSS acquisition by IBM. In describing the magnitude of the assignment, the lawyer disclosed material, nonpublic information about the proposed transaction, including the anticipated transaction price and the identities of the acquiring and target companies. The associate expected the research analyst to maintain this information in confidence and refrain from trading on this information or disclosing it to others.
The SEC alleges that Conradt, Weishaus, and other downstream tippees purchased common stock and call options in SPSS. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Conradt, Weishaus, and other downstream tippees invested so heavily in SPSS securities that the investments accounted for 76 percent to 100 percent of their various brokerage accounts. Conradt and Weishaus both hold law degrees. Conradt is admitted to practice law in Maryland, and he passed the Colorado bar examination administered in February 2012.
The SEC alleges that Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.
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