SEC v. All Know Holdings, Ltd., 11 C
8605 (N.D. Ill. Opinion issued June 10, 2013) is one of the SEC's aggressive
insider trading actions, filed initially based largely on "suspicious trading"
and information and belief. The case centers on the November 2011 announcement
by Pearson plc that it would acquire China based Global Education &
Technology Group, Ltd. The SEC filed suit within days of the announcement,
charging the company and others with insider trading in violation of Exchange
Act Section 10(b).
Clearly missing from the complaint was a key element - a
source of the inside information. After litigating the case since it was filed
in late December 2011 the SEC faced the same difficulty in responding to
summary judgment motions. On one it prevailed. On the other it did not.
Defendant Youghui Zhang, U.S. citizen born in China, and
the company, its principal and her friend moved for summary judgment. Mr.
Zhang, who did postdoctoral research at Albert Einstein College of Medicine and
Columbia, returned to China in October 2010 to start a gene diagnostics
company. During the process he again was employed by Global Education, a
company founded by his younger brother Yongqi "David" Zahng and his wife,
Xiadong "Veronica Zhang. The day before the take-over announcement he purchased
7,900 American Depository Shares of the company on the NASDAQ. Nevertheless, he
argued that summary judgment should be granted in his favor since he had no
knowledge of the take-over and the SEC failed to identify a source of the
In opposing the motion the SEC cited five key points:
1) Mr. Zhang's office at the firm is on the same floor as
that of his brother and sister-in-law;
2) He had numerous communications during the period with
his brother and sister-in-law as well as others at the firm;
3) Defendant Zhang previously had not purchased shares of
4) Mr. Zhang purchased his shares the day before the deal
5) The share purchase price was more than three times his
These points were bolstered by two others. During
discovery Mr. Zhang failed to produce any evidence about the "numerous"
discussions he had with his brother and sister-in-law during the period despite
a request by the SEC. Furthermore, he offered different explanations for his
purchase of the shares during the case when questioned under oath.
The court rejected the motion for summary judgment,
ruling in favor of the Commission. While the court did not draw an adverse
inference against Mr. Zhang for his discovery failures, his access to inside
information, failure to provide responses in discovery and differing
explanations for his purchases were the key factors.
In contrast, the motion of the "All Know defendants" -
the company along with Sha Chen and Zhi Yao - was granted. All Known Holdings
is a British Virgin Islands company that is wholly owned by defendant Sha Chen.
She is a citizen of the PRC. The company engages in stock trading, frequently
taking large positions in select company shares according to the defendants.
Zhi Yao is a life long friend of Defendant Chen.
In the days immediately preceding the deal announcement,
the firm purchase about $950,000 worth of Global Education shares. While the
position was large, after making the purchases the firm had a substantial
amount of cash remaining. Those purchases were based on a trading philosophy
which focused on acquiring shares of China based U.S. companies which the
defendants viewed as undervalued and there research about the company. At the
same time Defendant Yao also purchased shares.
In granting the All Knowing Defendants' motion the court
pointed to the failure of the SEC to cite any evidence demonstrating that the
All Know Defendants knew or had contact with an insider. While the failure to
identify an insider was not dispositive, the court termed it "troubling." That
failure contrasts with the detailed explanations offered by the Defendants for
The court went on to conclude that while the SEC offered
substantial evidence, it "fails to address whether the information purportedly
procured by the All Know Defendants was disclosed in breach of a fiduciary duty
and whether the All Know Defendants knew or should have known of the breach."
Absent evidence on this critical point the Commission cannot prevail.
Finally, the court rejected the SEC's claim that what it
viewed as obstructive conduct during discovery by the All Know defendants
supported it opposition. The SEC never filed a motion bringing this conduct to
the attention of the court. If it was an issue, the Commission should have
moved for an order compelling discovery and later sanctions if the defendants
failed to comply rather than raising this point here. Accordingly, this claim
failed to support the Commission's opposition and summary judgment was granted
in favor of the All Know defendants.
ABA Seminar: Fifth
Annual FCPA Update: Protecting Your Business in the Future: Lessons from the
New DOJ-SEC FCPA Guide, June 19, 2013 from 1:00 -2:30 p.m. EST. The discussion
will focus on building effective compliance systems and conducting M&A due
diligence. Co-moderators: Thomas Gorman and Frank Razzano. Panel: John Buretta,
Principal Deputy to the Assistant AG, DOJ; Charles Cain, Assistant Director,
FCPA Unit, SEC Division of Enforcement; Catherine Razzano, Assistant General
Counsel, General Dynamics Corporation; Steve Siegel, Senior Counsel, Northrop
Grumman Corporation; Ryan Ong, Director of Business Advisory Services, U.S.
China Business Counsel. Live in Washington, D.C at 600 14th St. N.W.,
Penthouse (no charge for ASECA members attending live in Washington who
pre-register by sending an e-mail to firstname.lastname@example.org). Webcast
nationally by the ABA and available in other Dorsey & Whitney offices. For
further information please click here.
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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