SEC Charges Family Insider Trading Ring

Insider trading continues to dominate securities enforcement. This time, however, it is not the on-going investigations by the Manhattan U.S. Attorney. Now, it is an insider trading case filed by the SEC centered on an international family insider trading ring. SEC v. McClellan, Case No. CV 10 5412 (N.D. Cal. Filed November 30, 2010). See also Litig. Rel. 21578 (Nov. 30, 2010).

The defendants in the case are a San Francisco couple, Arnold McClellan and his wife Annabel McClellan. Mr. McClellan was a mergers and acquisitions tax partner at Deloitte Tax LLP, resident in the San Francisco office. He was the head of one of Deloitte's regional mergers and acquisition teams. Mrs. McClellan was previously employed at Deloitte in London and San Jose. The other family members are Miranda Sanders, sister of Mrs. McClellan, and her husband James Sanders. The Sanders reside in London where Mr. Standers is a director, shareholder and co-founder of Blue Index Limited. Mrs. Sanders works part time at Blue Index.

Over a two year period beginning in 2006, Arnold McClellan disclosed confidential information on seven deals he was working on to his wife, according to the Commission. She in turn passed that information to her sister and brother-in-law. Mr. Sanders would then trade, purchasing a kind of derivative called "spread bet contracts." In some instances, Mr. Sanders shared the information with clients of his firm who traded. In one case, he shared the information with his best friend.

The family split the profits. Four deals went forward, resulted in acquisitions and netted the family traders over $3 million. Three deals did not close. The pattern of tipping and trading repeated over all the deals.

The profitable trades were:

• Per Se Technologies: In late September 2006, Arnold McClellan began working on a deal in which McKesson Corporation would acquire this company. By late October, an e-mail noted the deal would go forward. Annabel McClellan then tipped Miranda and James Sanders, according to the complaint. Following two October 29, 2006 telephone calls, James Sanders purchased spread bet contracts on the underlying common stock of Per Se in his account at a trading firm. Following the November 6, 2006 deal announcement, the share price increased 13%. Mr. Sanders sold his position for a profit of about $16,000 (using the 2:1 dollars/pounds conversion rate from the SEC's papers).
• Kronos: From November 2006 through March 2007, Mr. McClelland advised H&F on the acquisition of this company. In late January 2007, according to the complaint, Mrs. McClellan tipped the Sanders about the deal. On January 31, 2007, James Sanders made his first purchase of spread bet contracts. Later, he increased his position. In addition, Blue Index circulated a "client pitch" on Kronos. When the deal was announced on March 23, 2007, the share price increased by 14%. Mr. Sanders sold his position at a profit about $1.1 million. Clients of Blue Index made profits of about $3.6 million.
• aQuantive: On May 14 2007, Arnold McClellan was told that a firm client was going to bid to acquire this company. The next day, according to the complaint, he told his wife about the proposed deal. On May 15, 2007, there was a phone call from the McClellans' home phone to the residence of the Sanders. The complaint alleges that Mrs. McClellan tipped her sister and brother-in-law. The same day, James Sanders contacted the head trader of Blue Index about preparing a "client pitch" on the company. Blue Index clients subsequently purchased the equivalent of 590,000 common shares in aQuantive. James Sanders also placed his typical trades. On May 18, the deal was announced. The share price increased 78%. James Sanders made over $1.1 million. Blue Index clients made more than $16 million in profits.
• Getty Images: On December 3, 2007 Arnold McClellan began working for a firm client on the acquisition of Getty. Shortly thereafter, the complaint claims his wife flew to London, arriving on January 29 in the early afternoon. Later that day, James Sanders made his first purchase of spread bet contacts regarding the company. Subsequently he made additional purchases. The complaint also alleges that Mr. Sanders tipped his best friend who traded. When the deal was announced on February 25, 2008, the share price increased 30%. James Sanders made profits of about $800,000. His best friend made profits of about $300,000. .

The complaint also details three instances in which the family traded on inside information, but did not profit. Each deal followed the same pattern, but yielded no profits because the potential acquisition did not close. James Sanders is not alleged to have shared the information about these deals with his firm or friends.

The SEC's complaint alleges violations of Exchange Act Section 10(b). It is litigation. The FSA in London has announced charges against James and Miranda Sanders and their colleagues who are alleged to have made about $20 million, according to the SEC's Press Release.

For more news involving securities issues, visit SEC Actions, a blog by Thomas Gorman

See also: Bad Accountants, by Brian Quinn