Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, November 25, 2013

Commission did not know what was tipped, who tipped it, or who was tipped

By Rodney F. Tonkovic, J.D.

The District Court for the Southern District of New York has dismissed an SEC complaint that the court described as appearing "to have been filed in search of a liable tippee." The Commission alleged that unknown traders made insider trades in shares of Onyx Pharmaceuticals, Inc. (Onyx) shortly before Onyx made a public announcement that caused a 51 percent jump in its share price. The court granted without prejudice the defendants' motion to dismiss the complaint and clarified an earlier asset freeze order (SEC v. One or More Unknown Traders In The Securities of Onyx Pharmaceuticals, Inc., November 21, 2013, Oetken, J.).

Background. In early June 2013, Amgen Inc. made an unsolicited multibillion dollar offer to purchase Onyx, a biopharmaceutical company. Onyx's board rejected the offer on June 26. On June 30, Onyx announced the offer and that the board had rejected it. On the next day, Onyx's stock, which was trading under $85 on June 26, subsequently jumped to over $131 a share.

The SEC claims that three suspicious trades occurred between June 26 and June 28. First, on June 26, a trader used an account with Citigroup Global Markets, Inc. (Citigroup) to purchase 255 call options for shares of Onyx stock. Second, on June 27, a trader used an account with Barclays Capital, Inc. (Barclays) to purchase 544 call options. Third, on June 28, more call options were purchased using the Citigroup account. According to the Commission, the traders using the Citigroup account profited over $2.2 million, and those using the Barclays account profited at least $2.3 million.

Allegations. The Commission alleged that the traders who made the June 26-28 purchases were tipped about Amgen's offer to buy Onyx. The court ordered a temporary asset freeze on the same day the Commission filed the action. No traders filed an opposition or appeared to show cause, and the court then issued an asset freeze order.

Two traders who had made the trades using the Citigroup account, Dhia Jafar and Omar Nabulsi, both residents of Dubai, argued that Citigroup improperly froze all of their assets in the Citigroup account, not just the proceeds from the trades at issue. Neither Jafar nor Nabulsi have been named as defendants. The two traders moved to dismiss the complaint for failure to state a claim, and, in the alternative, to modify the freeze order to limit it to profit attributable to the trades at issue.

Insider trading. At the outset, the court observed that the SEC's allegations established that (1) there was material, nonpublic information; (2) that traders placed substantial bets that Onyx's stock price would rise; and (3) the details of Amgen's offer were published by a Canadian publication after the market closed on June 28. From these points, the Commission maintained that the defendants were tipped, that the tipper expected a benefit, and that the defendants knew that they were tipped and traded in violation of their fiduciary duties. The court described these allegations as "all belief and no information." The allegations were not well-pleaded factual allegations, the court stated, and it was not bound to accept them as true.

The Commission asserted that the trades were highly suspicious based on their "timing, size, and profitability," among other factors. The court found that while some of the circumstances raised "mild suspicion," the Commission’s information was insufficient to show whether the size of the trades was unusual in the context of recent trading activity. Even if the trades were unusually large, the court continued, the accounts in question were omnibus accounts, and there was no background information about the number of traders using the accounts or their trading habits. The court also noted that the trades were not especially risky.

The allegations also lacked sufficient particularity to imply that anyone tipped the defendants, the court found. It was not reasonable to infer that there even was a tip from these facts alone, and the Commission did not identify any potential tipper, any records of any communications between a potential tipper and the defendants, or any other link between the defendants and a tipper. Moreover, the Commission failed to allege facts giving rise to a strong inference of scienter. The court stated that the allegations did not support any reasonable inference that the tip violated any fiduciary duty or that the defendants knew, or should have known, about the violation. In the absence of information about what was tipped, by whom, and to whom, the court was unable to infer a culpable state of mind, and accordingly dismissed the complaint.

Asset freeze. Next, in the Second Circuit, an asset freeze order may be sustained even if the SEC failed to state a claim. Here, the court found that the SEC demonstrated a "tenuous" basis for a possible inference that the defendants were liable as tippees. Neither Jafar nor Nabulsi offered declarations or evidence showing an innocent explanation for their trades, but the court found that it was possible to infer that they traded on insider information, even though this inference was not well supported. The court decided to extend the freeze order for 30 days and clarified that it applied to an amount attributable to the proceeds from the trades at issue. The freeze will be vacated and the case dismissed if the SEC does not file an amended complaint containing new allegations within 30 days.

The case is No. 13 Civ 4645.

Attorney: John B. Bulgozdy for the SEC

Companies: Amgen Inc.; Barclays Capital, Inc.; Citigroup Global Markets, Inc.; Onyx Pharmaceuticals, Inc.

MainStory: TopStory FraudManipulation NewYorkNews

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.

A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.