SEC Bats 0-for-2 on Insider Trading

A California federal jury sided against the U.S. Securities and Exchange Commission on Friday, June 6, finding the founder of storage device maker STEC Inc. not guilty on insider trading charges.  This is the second insider trading loss in a week for the SEC, following a May 30 defeat in which a New York federal jury rejected insider trading allegations against three defendants, including hedge fund manager Nelson Obus.

In STEC, the SEC alleged that founder Manouchehr Moshayedi made a secret deal with a customer to conceal a drop in demand in advance of a secondary offering.  According to the complaint, Moshayedi knew that one of STEC’s key customers, EMC Inc., would demand fewer of STEC’s most profitable products than analysts expected.  The SEC alleged that he then made a secret deal that allowed EMC to take a larger share of inventory in exchange for a steep, undisclosed discount.

After the deal with EMC went through and STEC’s revenue guidance for the third quarter remained high, the SEC claimed that Moshayedi then sold 9 million of his own shares before news of the EMC deal broke, reaping gross proceeds of approximately $134 million each for himself and his brother.  Moshayedi’s previous court filings argued that the SEC’s claims were “an egregious case of fraud by hindsight.”  The jury appears to have agreed.

In its case against Obus, the SEC alleged that Obus exploited a tip from an insider at GE Capital when he purchased 287,000 shares of SunSource, Inc. on the eve of its acquisition by Allied Capital Corp.  The SEC also charged the alleged insider, Thomas Bradley Strickland, and Obus’s co-worker, Peter Black.  All three were found not liable.

The allegations against Obus stemmed from a transaction completed in 2001.  Whether the timing may or may not have played a role is unclear, but the long waiting period between the events at issue and the trial could not have been helpful in a case where the defense argued that the key SEC witness’s recollection of the events was vague and unreliable.

Although the SEC may be riding high on the 2nd Circuit’s reversal of Judge Jed Rakoff’s decision in Citibank , the SEC has met less success in these insider trading and individual fraud cases.  These two verdicts against them mark the latest in a string of defeats following high profile losses against Dallas Mavericks owner Mark Cuban and former Citigroup employee Brian Stoker.  It is unclear what effect, if any, these losses will have on the SEC’s recent vow to bring even the most difficult cases to trial.