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From Securities Regulation Daily, September 30, 2014

SEC targets childhood buddies for insider trading in Herbalife

By Mark S. Nelson, J.D.

The SEC today detailed charges it brought against two childhood friends the agency said engaged in insider trading of Herbalife Ltd. based on information one of them allegedly got from a former research analyst at Pershing Square Management, L.P., the hedge fund founded by activist investor William Ackman.

One of the friends, Filip Szymik, a consultant, agreed to settle the charges against him without admitting or denying the SEC’s findings. Administrative proceedings are ongoing against Szymik’s friend, Jordan Peixoto, a Deloitte research analyst during the time covered by the SEC’s order. The SEC did not charge Pershing, Ackman, or the Pershing analyst with any violations (In Re Szymik, September 30, 2014; In Re Peixoto, September 30, 2014).

Sanjay Wadhwa, senior associate director, SEC New York Regional Office, emphasized the severity of the charges. “Szymik and Peixoto chose to engage in illicit tipping and trading in advance of the announcement of market-moving information and today they are being held accountable for those offenses.”

Highly confidential. According to the SEC, Szymik learned from his roommate, an unnamed research analyst at Pershing, that the analyst was researching Herbalife for Pershing, Pershing would soon publicize its negative view of Herbalife, the date of the Pershing event, and that Pershing would present its “thesis” about Herbalife. The SEC said Pershing had taken a $1 billion short position in Herbalife and that its “thesis” amounted to a public accusation by Ackman that Herbalife was an unlawful pyramid scheme.

The SEC said Szymik and the Pershing analyst had remained friends since their childhood in Poland. They even shared an apartment in New York City and often shared personal and professional confidences. Szymik also was a close friend of Peixoto, who lived a block away from Szymik in New York City. Szymik and Peixoto socialized on most weekends; Peixoto allegedly knew of Szymik’s and the analyst’s lifelong friendship, and that the analyst worked at Pershing.

The SEC’s order described an exchange between Szymik and the Pershing analyst, in which the analyst told Szymik that any information Szymik may learn from him was “highly confidential” and that Szymik should refrain from trading securities based on it. Szymik allegedly said he would comply with the analyst’s confidentiality request.

Szymik allegedly told Peixoto the “essential substance and date” of Pershing’s Herbalife event, which was to be held at the Sohn Conference Foundation. The SEC said Szymik breached his duty of trust to the Pershing analyst by relaying the Herbalife information to Peixoto. The SEC also said that Szymik got a personal benefit from relaying the Pershing analyst’s Herbalife information to Peixoto, but Szymik never traded Herbalife’s securities.

One day before the Pershing event, Peixoto allegedly bought eight out-of-the-money Herbalife put options, despite no prior experience trading options or Herbalife securities. CNBC reported later that same day that the Pershing event would happen the next day. Herbalife’s stock fell after both the CNBC report and the Pershing event. All told, Herbalife’s shares had fallen 39 percent in just four days after the Pershing event. The SEC said Peixoto netted $47,100 in profits when all but one of his brokers adhered to his request to let his profitable Herbalife options expire unexercised.

Civil penalties. The SEC charged both Szymik and Peixoto with violating Exchange Act Section 10(b) and Rule 10b-5. Szymik settled with the SEC and agreed to cooperate with the agency. Szymik also must pay a civil monetary penalty of $47,100 and abide by a cease and desist order.

The SEC’s action against Peixoto is ongoing. Peixoto has been ordered to file an answer to the SEC’s charges before a public hearing, and an administrative law judge must issue an initial decision within a year. Peixoto faces default if he fails to timely reply to the SEC’s order.

The Releases are No. 34-73262 and No. 34-73263.

Companies: Herbalife Ltd.; Pershing Square Management, L.P.; Deloitte; CNBC; Sohn Conference Foundation

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