Category: Famous Cases


Deepwater Horizon Rig

According to the Securities and Exchange Commission, after the explosion on the Deepwater Horizon oil rig on April 20, 2010, Seilhan was designated to BP’s Incident Command Center in Houma, Louisiana, where he was responsible for overseeing the initial oil collection and clean-up operations.  In his position as Incident Commander, Seilhan learned of nonpublic information relating to the seriousness of the disaster, including initial oil flow estimates from the sunken rig that were significantly greater than the public estimate of  5,000 barrels per day.  Indeed, those private estimates were between 52,700 and 62,200 barrels per day – a 10x increase than that provided to the public.

After he learned of this information, Seilhan sold his and his family’s entire $1 million portfolio of BP securities, including common shares and options.  By doing so, Seilhan and his family were able to avoid over $100,000 in losses as BP’s share price eventually declined 48%.  Later, after BP announced it had successfully capped the well, Seilhan  repurchased shares of the BP Stock Fund (composed nearly entirely of BP shares) at a lower basis.

While the Commission acknowledged the assistance of the Department of Justice’s Deepwater Horizon Task Force, there is no indication that criminal charges will be filed.

Keith A. Seilhan, a senior responder for BP during the Deepwater Horizon oil spill, agreed to settle claims that he violated federal securities laws by selling his family’s entire $1 million portfolio of BP securities after he learned that the public estimations of the spill’s magnitude were grossly understated.  Without admitting or denying the allegations, Seilhan agreed to pay (i) $105,409 of ill-gotten gains; (ii) $13,300 in prejudgment interest; and (iii) a civil penalty of $105,409.

A copy of the SEC’s Complaint is here and embedded below:

Source:

http://www.forbes.com/sites/jordanmaglich/2014/04/17/sec-accuses-former-bp-employee-of-insider-trading-during-deepwater-horizon-spill/

Rakesh Agarwal vs. SEBI.

Rakesh Agarwal, was the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G regarding their intentions to takeover ABS. It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. He was an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34, 00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17, 00,000 in each exchange) to compensate any investor which may make any claim subsequently.” On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal, however, held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS) to help Bayer A. G acquire his company.

Securities and Exchange Board have set out in its order banning Arora — the former star Asia-Pacific fund manager of Alliance Capital Management — from trading in August are far from convincing.

There are three main charges. One, that Arora played a pivotal role in thwarting Alliance Capital’s efforts to sell its India operations by resorting to unethical means.

Two, he did not make disclosures or sometimes made wrongful disclosures when some of Alliance’s holdings in certain stocks breached limits that required informing the respective companies.

Third, he sold his entire holding in Digital GlobalSoft based on unpublished, price-sensitive information.

In this case, SEBI conducted investigations into the management, conduct and other affairs of the Alliance Capital Asset Management (I) Pvt. Ltd. (ACAML). Samir Arora was the fund manager of the company. Knowing that the company was inviting bids for takeover of the same, he made special arrangement with Henderson Global Investors. For helping this company takeover his present company, he purchased shares and when the price rose sold off the shares to get a considerable profit. The Authority found him guilty and directed him not to buy, sell or deal in securities, in any manner, directly or indirectly, for a period of five years.

The conduct of Samir Arora is not in consonance with the high standards of integrity, fairness and professionalism expected from a fund manager. His conduct erodes the investors’ confidence and is detrimental to their interests as well as the safety and integrity of the securities market. His association in the securities market in any capacity is prejudicial to the interests of the investors and the safety and integrity of the securities market.

Hindustan Lever Limited (HLL) – Brooke Bond Lipton India Limited  (BBLIL)

The controversy involved HLLs purchase of 8 lakh shares of BBLIL two weeks prior to the public announcement of the merger of the two companies (HLL and BBLIL). SEBI, suspecting insider trading, conducted enquiries, and after about 15 months, in August 1997, SEBI issued a show cause notice to the Chairman, all Executive Directors, the Company Secretary and the then Chairman of HLL. Later in March 1998 SEBI passed an order charging HLL with insider trading.

SEBI directed HLL to pay UTI compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL. Later HLL filed an appeal with the appellate authority, which ruled in its favour.

Background of the case:

The SEBIs charges were triggered off by HLLs purchase of 8 lakh shares of Brooke Bond Lipton India Ltd (BBLIL) from the Unit Trust of India (UTI, 1996-97 income: Rs 7,481 crore) at Rs 350.35 per share. This transaction took place on March 25, 1996, before the HLL-BBLIL merger was announced on April 19, 1996. A day after the announcement of the merger, the BBLIL scrip quoted at Rs 405, thereby leading to a notional gain of Rs 4.37 crore for HLL, which then cancelled the shares bought.

HLL is an insider, according to Section 2 (e) of the SEBI (Insider Trading) Regulations. It states: An insider means any person who is, or was, connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information.

The SEBI has argued that both these conditions were met when HLL bought the BBLIL shares from the UTI. HLL and BBLIL had a common parentage–as subsidiaries of the London-based $33.52-billion Unilever–and were then under a common management. Thus, HLL and its directors had prior knowledge of the merger. Agrees Both HLL and BBLIL are deemed to be under the same management even under Section 370 (1)(b) of the Companies Act, 1956.

No company can be an insider to itself. The transnational knowledge of the merger was because it was a primary party to the process, and not because BBLIL was an associate company. To buttress this point, HLL maintains that if it had purchased shares of Tata Oil Mills Co. (TOMCO) before the two merged in April, 1994, SEBI would not consider it a case of insider trading. Why? Because HLL was not associated with the Tata-owned TOMCO.

HLL contends that it purchased the BBLIL shares so that its parent company, Unilever, could maintain a 51 per cent stake in the merged entity. Before the merger, Unilever had a 51 per cent stake in HLL, but only 50.27 per cent in BBLIL. Thus, the HLL management feels that the SEBI should consider if it had any additional information which it should not, legitimately, have had as a transferee company in the merger.

According to the SEBI guidelines, HLL can be deemed to be an insider. But the SEBIs definition of an insider has to be fleshed out by it to provide a clearer picture.

HLL dealt in, or purchased, the BBLIL shares on the basis of unpublished price-sensitive information which is prohibited under Section 3 of the Regulations. Section 2 (k)(v) states that unpublished, price-sensitive information relates to the following matters (amalgamations, mergers, and takeovers), or is of concern to a company and is not generally known or published.

According to the SEBI, there can be no dispute that the information of the overall fact of the merger falls under this definition.

Only the information about the swap ratio is deemed to be price-sensitive. And this ratio was not known to HLL–or its directors–when the BBLIL shares were purchased in March, 1996. Moreover, HLL argues that the news of the merger was not price-sensitive as it had been announced by the media before the companies announcement, April 7, 1996). HLL also points out that it was a case of a merger between two companies in the group, which had a common pool of management and similar distribution systems. Therefore, the merger information in itself had little relevance; the only thing that was price-sensitive was the swap ratio.

Why did HLL not follow the route of issuing preferential shares to allow Unilevers stake to rise to 51 per cent in HLL? As per the SEBI chargesheet Such a step would have involved various compliances/ clearances, and required Unilever to bring in substantial funds in foreign exchange. The implication: HLL depleted its reserves to ensure that Unilever did not have to bring in additional funds

Issuing of preferential shares would have, indeed, been a cheaper option to ensure that Unilever had a 51 per cent stake in HLL. Had HLL followed this route, it would have had to pay Rs 282..35, instead of Rs 350.35, per share. In other words, it would have made a profit of Rs 5.41 crore by doing so. However, Unilever always enjoyed the option. Says a senior manager with HLL: The forex angle falls flat on that ground itself. HLL also states that while the preferential route would have been beneficial for itself, it would have been dilutory for other shareholders since it would have resulted in an expanded capital base, leading to a lower earnings per share in the future.

HLL was probably worried that the clearances for a preferential allotment from the SEBI and the Reserve Bank of India (RBI) would take their time in coming–or not be given at all. It had already faced a time-consuming and expensive run-in with the RBI during the HLL-TOMCO merger in 1994.

Levers cancelled the entire holding of HLL in BBLIL

HLL was upfront that its entire holding in BBLIL–1.60 per cent–including the lots purchased from the UTI would be cancelled after the merger in March, 1997. HLL maintains that this is perfectly legal. In addition, shareholders of both HLL and BBLIL approved of the cancellation of shares as part of the merger scheme. Says Iyer: By this process of cancellation, which normally happens in every amalgamation, the voting rights of Unilever have gone up. However, so have the voting rights of other shareholders. So, no exclusive benefit–profits or avoidance of loss–has accrued to HLL or Unilever.

By extinguishing the shares, HLL wanted to maintain Unilevers shareholding at 51 per cent and not realise any financial gains. However, Section 3 defines insider trading irrespective of whether profits are made or not.

By virtue of being in uncharted territory, the parallel hearing before the Union Ministry of Finance will be disposed of within four or five months from the date of filing. And if the verdict goes against Levers, the group will then go to court. If so, expect a long-drawn legal battle. For now, the SEBI verdict is a black spot on a company that excels in cleaning them up.

Prosecution Not Justifiable:

Round two of the battle between SEBI and HLL took place under the aegis of the Appellate Authority of the Finance Ministry.

In response to the SEBI’s charge, HLL appealed to the Appellate Authority pleading that it be absolved of the charges of insider trading. UTI later filed an appeal with the Appellate authority, claiming a higher compensation of Rs. 75.2 million (7.52 crore).

It pleaded that it had to incur a notional loss as it was not aware that a merger of the two Unilever group companies was on the cards

HLL Not Guilty-Proposal ‘Generally Known':

In support of its ruling, the Appellate Authority cited press reports that indicated “prior market knowledge of the merger.” However, by its own admission, there were only a few reports “prior to the actual purchase (of shares from UTI).” The Authority had cited 21 news reports to support the contention that the prospect of a merger between HLL and BBLIL was widely known.

In its judgement, the Appellate Authority said that under Regulation 11B, SEBI was not capable of initiating investigations and then taking recourse to powers under the Act for awarding compensation without passing an order under the above mentioned regulation.

Although not high-ranking in terms of dollars, the case of Wall Street Journal columnist R. Foster Winans is a landmark case for its curious outcome.

Winans wrote the  “Heard on the Street” column profiling a certain stock. The stocks featured in the column often went up or down according to Winans’ opinion.

Winans leaked the contents of his column to a group of stockbrokers, who used the tip to take up positions in the stock before the column was published. The brokers made easy profits and allegedly gave some of their illicit gains to Winans.

Winans was caught by the SEC and put at the center of a very tricky court case. Because the column was the personal opinion of Winans rather than material insider information, the SEC was forced into a unique and dangerous strategy. The SEC charged that the info in the column belonged to the Wall Street Journal, not Winans. This meant that while Winans was convicted of a crime, the WSJ could theoretically engage in the same practice of trading on its content without any legal worries.

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lE4vsw1y

One of the most famous cases of insider trading made household names of Michael Milken, Dennis Levine, Martin Siegel and Ivan Boesky. Milken received the most attention because he was the biggest target for the Securities and Exchange Commission (SEC), but it was actually Boesky who was the spider in the center of the web.

Boesky was an arbitrageur in the mid-1980s with an uncanny ability to pick out potential takeover targets and invest before an offer was made. When the fated offer came, the target firm’s stock would shoot up and Boesky would sell his shares for a profit. Sometimes, Boesky would buy mere days before an unsolicited bid was made public – a feat of precognition rivaling the mental powers of spoon bender Uri Geller.

Like Geller, Boesky’s precognition turned out to be a fraud. Rather than keeping a running tabulation of all the publicly traded firms trading at enough of a discount to their true values to attract offers and investing in the most likely of the group, Boesky went straight to the source – the mergers and acquisitions arms of the major investment banks. Boesky paid Levine and Siegel for pre-takeover information that guided his prescient buys. When Boesky hit home runs on nearly every major deal in the 1980s – Getty Oil, Nabisco, Gulf Oil, Chevron (NYSE:CVX), Texaco – the people at the SEC became suspicious.

The tips were well worth the money, because Boesky made millions by buying up pre-takeover shares and unloading them after the market learned about the deals. The takeover of Carnation by Nestle (OTC:NSRGY) alone netted Boesky $28 million and, for that reason, alerted the Securities and Exchange Commission (SEC) to his activities. Siegel’s firm also came under scrutiny, and Boesky and Siegel parted ways, with Siegel receiving a final pay-off from Boesky of $400,000 dropped at a phone booth. The net was already cast, however, and the SEC reeled in Siegel and Boesky along with other big criminal names, such as Michael Milken.

Read more: http://www.investopedia.com/articles/stocks/08/fraud-wall-street-crypt.asp#ixzz1lE20KJb3

The SEC’s break came when Merrill Lynch was tipped off that someone in the firm was leaking info and, as a result, Levine’s Swiss bank account was uncovered. The SEC rolled Levine and he gave up Boesky’s name. By watching Boesky – particularly during the Getty Oil fiasco – the SEC caught Siegel. With three in the bag, they went after Michael Milken. Surveillance of Boesky and Milken helped the SEC draw up a list of 98 charges worth 520 years in prison against the junk bond king. The SEC charges didn’t all stick, but Boesky and Milken took the brunt with record fines and prison sentences.

Siegel became a witness for the government and was let off easy with a two-month sentence and a fine, while Boesky was given three years and fined $100 million for his involvement in the scheme.

Read more: http://www.investopedia.com/articles/stocks/08/fraud-wall-street-crypt.asp#ixzz1lE1mU3fP

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lDzGkTRA

In this famous case, Rakesh Agarwal, the Managing Director of ABS Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a company registered in Germany), regarding their intentions to takeover ABS. Therefore, he had access to this unpublished price sensitive information.

It was alleged by SEBI that prior to the announcement of the acquisition, Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased shares of ABS from the market and tendered the said shares in the open offer made by Bayer thereby making a substantial profit. The investigations of SEBI affirmed these allegations. Bayer AG subsequently acquired ABS.

Further he was also an insider as far as ABS is concerned. By dealing in the shares of ABS through his brother-in-law while the information regarding the acquisition of 51% stake by Bayer was not public, the appellant had acted in violation of Regulation 3 and 4 of the Insider Trading Regulations.

Rakesh Agarwal contended that he did this in the interests of the company. He desperately wanted this deal to click and pursuant to Bayer’s condition to acquire at least 51% shares of ABS, he tried his best at his personal level to supply them with the requisite number of shares, thus, resulting in him asking his brother-in-law to buy the aforesaid shares and later sell them to Bayer.

The SEBI directed Rakesh Agarwal to “deposit Rs. 34,00,000 with Investor Education & Protection Funds of Stock Exchange, Mumbai and NSE (in equal proportion i.e. Rs. 17,00,000 in each exchange) to compensate any investor which may make any claim subsequently.” along with a direction to “(i) initiate prosecution under section 24 of the SEBI Act and (ii) adjudication proceedings under section 15I read with section 15 G of the SEBI Act against the Appellant.”

On an appeal to the Securities Appellate Tribunal (SAT), Mumbai, the Tribunal held that the part of the order of the SEBI directing Rakesh Agarwal to pay Rs. 34,00,000 couldn’t be sustained, on the grounds that Rakesh Agarwal did that in the interests of the company (ABS), as is mentioned in the facts above.

During the Roaring ’20s, many Wall Street professionals, and even some of the general public, knew Wall Street was a rigged game run by powerful investing pools. Suffering from a lack of disclosure and an epidemic of manipulative rumors, people believed coattail investing and momentum investing were the only viable strategies for getting in on the profits. Unfortunately, many investors found that the coattails they were riding were actually smokescreens for hidden sell orders that left them holding the bag. Still, while the market kept going up and up, these setbacks were seen as a small price to pay in order to get in on the big game later on. In October, 1929, the big game was revealed to be yet another smokescreen.

After the crash, the public was hurt, angry, and hungry for vengeance. Albert H. Wiggin, the respected head of Chase National Bank, seemed an unlikely target until it was revealed that he shorted 40,000 shares of his own company. This is like a boxer betting on his opponent – a serious conflict of interest.

Using wholly-owned family corporations to hide the trades, Wiggin built up a position that gave him a vested interest in running his company into the ground. There were no specific rules against shorting your own company in 1929, so Wiggin legally made $4 million from the 1929 crash and the shakeout of Chase stock that followed.

Not only was this legal at the time, but Wiggin had also accepted a $100,000 a year pension for life from the bank. He later declined the pension when the public outcry grew too loud to ignore. Wiggin was not alone in his immoral conduct, and similar revelations led to a 1934 revision of the 1933 Securities Act that was much sterner toward insider trading. It was appropriately nicknamed the “Wiggin Act”.

Click here for actual Newspaper cutting of 1933 mentioning the news

Read more: http://www.investopedia.com/articles/stocks/09/insider-trading.asp#ixzz1lDsV8aMC

Rajaratnam was the founder of the once mighty hedge fund firm Galleon Group. The firm fell apart after Rajaratnam was arrested in 2009 for conspiring to trade using insider information. The scheme could have brought in profits of some $20 million, according to the U.S. Government.

Rajaratnam was found guilty on 14 counts of conspiracy and securities fraud charges on May 11, 2011. The jury convicted Rajaratnam of nine counts of securities fraud and five counts of conspiracy for what prosecutors describe as the money manager‘s central role in the most sweeping probe of insider trading at hedge funds on record.

Skilling, the former Enron president, was convicted in 2006 on 19 counts, including insider trading. Skilling was sentenced to 24 years and fined $45 million. Skilling’s appeal went all the way to the Supreme Court, whose June ruling sent the case back to the appeals court for review.

 

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