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From Securities Regulation Daily, April 23, 2014

Insider trading settlement keeps expert networks in spotlight

By Mark S. Nelson, J.D.

The SEC said today that the 45th person charged as part of the agency’s ongoing investigation into expert networks has agreed to settle insider trading allegations. Chris Choi will pay $30,000 in penalties and must abide by injunctive relief sought by the SEC, including a five-year officer and director bar. Choi neither admitted nor denied the SEC’s allegations, and the settlement awaits court approval (SEC v. Choi, April 23, 2014).

The SEC said its focus on expert networks has uncovered $430 million in illicit profits by corporate insiders, investment professionals and hedge funds. Sanjay Wadhwa, senior associate director, SEC New York Regional Office, emphasized that corporate insiders must properly handle material, nonpublic information.

“Insiders at public companies who are entrusted with confidential information are duty- bound to protect it,” Wadhwa said. “Choi violated that sacred duty by regularly tipping his friend with nonpublic financial data that hedge fund traders exploited for millions of dollars in illegal profits,” he added.

Poker-playing tipsters. The SEC alleged that Choi, a licensed certified public accountant in California, obtained material, nonpublic information about Nvidia Corporation (Nvidia) via his work as an accounting manager for multiple Nvidia divisions. According to the SEC, Choi provided his friend, Hyung Lim, with numerous, progressively more detailed and accurate tips about Nvidia’s financials, including its revenues and gross profit margins, ahead of the company’s quarterly earnings announcements in 2009 and 2010.

Lim then allegedly passed the inside information to Danny Kuo, whom he met at poker parties staged by a mutual friend. Kuo paid Lim $15,000 for this information. Kuo also allegedly gave the Nvidia information to his supervisor at Whittier Trust Company. In addition, Kuo allegedly tipped three analysts at other hedge funds, who in turn tipped their supervisors. The ultimate tippees included Todd Newman, portfolio manager at Diamondback Capital Management, LLC (Diamondback); Anthony Chiasson, founding partner at Level Global Investors, LP (LGI); and Michael Steinberg, portfolio manager at Sigma Capital Management, LLC (Sigma).

According to the SEC’s complaint, all four hedge fund firms traded on Choi’s information ahead of Nvidia’s May 2009 earnings announcement, yielding more than $16.3 million in gains (or avoided losses) for Diamondback ($73,000), LGI ($15.6 million), Sigma ($500,000), and Whittier ($144,000). Whittier gained $149,000 more on later trades ahead of Nvidia’s November 2009 and 2010 earnings announcements, for total gains and avoided losses of $293,000. All told, the SEC alleged the four hedge fund firms gained or avoided losses of nearly $16.5 million.

In January 2012, the SEC brought related civil insider trading charges against Kuo, the three hedge fund analysts, and Newman and Chiasson for trading in the stock of Nvidia and Dell, Inc. A parallel criminal case alleged these individuals unlawfully gained over $61.8 million. Following their convictions for securities-related crimes, Chiasson and Newman received hefty prison sentences. Lawyers for Chiasson and Newman yesterday urged a federal appellate court to overturn their convictions in that case.

Settlement terms. The SEC’s complaint against Choi alleged that he violated Exchange Act Sec. 10(b) and Rule 10b-5 and Securities Act Sec. 17(a). The SEC asked for permanent injunctive relief, disgorgement, civil penalties, and sought to bar Choi from serving in high-level positions at public companies.

According to the settlement terms revealed by the SEC, Choi will pay a $30,000 penalty without admitting or denying the SEC’s allegations. Choi will also be enjoined from future similar violations of the federal securities laws. In addition, Choi will be barred from serving as a director or officer of a public company for five years. The settlement is subject to court approval.

Attorneys: Sanjay Wadhwa, senior associate director, SEC New York Regional Office, for the SEC.

Companies: Nvidia Corporation; Whittier Trust Company; Diamondback Capital Management, LLC; Level Global Investors, LP; Sigma Capital Management, LLC; Dell, Inc.

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