Wednesday, July 27, 2022

SEC’s data analysis team cracks three alleged insider trading schemes

By Lene Powell, J.D.

The SEC announced insider charges against nine individuals in connection with three separate alleged schemes, including a former chief information security officer (CISO), an investment banker, and a former FBI trainee. The actions originated from the SEC Enforcement Division’s Market Abuse Unit’s (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns. The U.S. Attorney's Office for the Southern District of New York charged parallel criminal violations.

The alleged schemes yielded more than $6.8 million in ill-gotten gains.

“If everyday investors think that the market is rigged at their expense in favor of insiders who abuse their positions, they are not going to invest their hard earned money in the markets,” said SEC Enforcement Director Gurbir S. Grewal. “But as today's actions show, we stand ready to leverage all of our expertise and tools to root out misconduct and to hold bad actors accountable no matter the industry or profession. That's what’s required to restore investor trust and confidence.”

Former FBI trainee linked to law firm associate. As alleged, former FBI trainee Seth Markin’s then-girlfriend worked as an associate for a law firm representing Merck & Co., Inc. in a planned tender offer to acquire Pandion Therapeutics, Inc. Markin allegedly learned material nonpublic information by secretly reviewing the binder of deal documents, which he then traded on and tipped to several friends and family members, indirectly causing more than twenty people to trade on the basis of the inside information. According to the SEC, Markin made approximately $82,000 and another charged defendant made $1.3 million. Markin allegedly lied to FBI agents, as well as to his girlfriend when she questioned why her name came up in a FINRA inquiry.

The SEC seeks permanent injunctive relief, civil penalties, and disgorgement with prejudgment interest against Markin and his friend. Markin is charged with nine counts of securities fraud, eight counts of tender offer fraud, one count of conspiracy, and one count of making false statements. Another defendant was charged with 11 counts of securities fraud, 10 counts of tender offer fraud, and one count of conspiracy (SEC v. Markin and U.S. v. Markin).

Investment banker. According to the filings, Brijesh Goel was an investment banker in the financing group at a major international investment bank in New York City (widely reported to be Goldman Sachs). Goel allegedly learned confidential internal information about potential mergers and acquisitions transactions the investment bank was considering financing and tipped the information to a friend, who worked at another investment bank. The friend allegedly then used the information to trade call options, including short-dated, out-of-the-money call options, in brokerage accounts in the name of his brother. According to the filings, between approximately 2017 and 2018, Goel tipped the friend about at least seven deals, yielding total illegal profits of approximately $280,000. Goel allegedly directed his friend to delete electronic communications about the scheme.

The SEC seeks permanent injunctive relief, civil penalties, and disgorgement with prejudgment interest against Goel and his friend. Goel is charged with four counts of securities fraud, one count of obstruction of justice, and one count of conspiracy to commit securities fraud and tender offer fraud (SEC v. Goel and U.S. v. Goel).

Chief information security officer. According to the SEC and DOJ, Amit Bhardwaj, former CISO of Lumentum Holdings Inc., learned material nonpublic information about the company’s plans to first acquire Coherent, Inc. and later acquire NeoPhotonics Corporation. Bhardwaj allegedly bought Coherent securities ahead of the merger and tipped a friend with the understanding that the friend would share some of his ill-gotten gains. Bhardwaj then tipped several friends about the planned NeoPhotonics acquisition, who then amassed large positions of NeoPhotonics, and one friend indirectly transferred funds to Bhardwaj’s relative in India, as instructed by Bhardwaj. The defendants allegedly acted to obstruct the federal investigation, including by concocting false stories and creating false documents.

The SEC seeks permanent injunctive relief, civil penalties, and disgorgement with prejudgment interest, including from relief defendants. The DOJ charged Bhardwaj with seven counts of securities fraud, two counts of wire fraud, one count of conspiracy to commit securities fraud and wire fraud, and one count of conspiracy to obstruct justice. Two of Bhardwaj’s friends were also charged, and an additional two defendants have separately pleaded guilty and are cooperating with the government (SEC v. Bhardwaj and U.S. v. Bhardwaj).

“The crimes we allege threaten both the integrity of our financial markets and investors’ faith in them,” said FBI Assistant Director-in-Charge Michael J. Driscoll. “Our actions demonstrate we remain committed to ensuring a level playing field for all.”

This is case Nos. 1:22-cv-06276 (SEC v. Markin) and 22 CRIM 395 (U.S. v. Markin); 1:22-cv-06277 (SEC v. Bhardwaj) and 22 CRIM 398 (U.S. v. Bhardwaj); 1:22-cv-06282 (SEC v. Goel) and 22 CRIM 396 (U.S. v. Goel).