Chad McGinnis is a Systems Administrator for Green Mountain Coffee Roasters, Inc. He lives in Vermont. Sergey Pugach is an Application Architect with Aetna Inc. He lives in Hartford, Connecticut. The two men have been friends for years. In 2012 and 2013 each man purchased Green Mountain options quarterly. For 12 of 13 quarters each man correctly predicted the price movement of Green Mountain shares. Mr. McGinnis had about $2.5 million in trading profits. Mr. Pugach had just over $5 million in trading profits. The SEC claims it is all insider trading. SEC v. McGinnis, Civil Action No. 3:13-cv-1047 (D. Conn. Filed July 24, 2012).
The SEC’s complaint against the two men is built on four key elements: access; phone calls; trading from the same location; and repeated high risk but virtually always successful trades.
Access: Mr. McGinnis worked in the Information Science and Technology Department of Green Mountain. He was in charge of administering the Microsoft SharePoint software. SharePoint is a document and file management system that permits a group of employees to work on a singe set of documents. The company created its periodic filings made with the SEC in this software. As the System Administrator Mr. McGinnins also had access to the e-mail accounts of other employees and a shared folder of Investor Relations. These three sources provided him with access to inside information about pending earnings announcements. There is no allegation he actually accessed any of these sources.
Phone calls: The two men lived in different states. They spoke frequently on the telephone, but typically at select times of the month. For example, between the end of January 2010 and March 1, 2013 the two men spoke 116 times on the telephone. Of those calls 90 were made within two days of the public release of Green Mountain earnings with 25 calls before and 65 after. Beginning in July 2011 the two men also communicated using the phone numbers of their spouses. The pattern essentially repeated with calls concentrated just before or on the day of the earnings announcement. There is no allegation regarding the content of the calls.
Trading from one location: The brokerage accounts for both men were accessed from the same physical location for the purpose of placing the trades. There were two IP addresses from which the brokerage accounts were accessed on the same day. This indicates the accounts were accessed from the same internet connection and thus from the same physical location in Vermont where Mr. McGinnis resides, according to the complaint.
Repeated high risk trades pay: The two men traded primarily in options. Frequently the options purchased were out of the money. The defendants correctly predicted the price movement of Green Mountain securities in twelve out of thirteen quarters.
The Commission’s complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). The complaint was initially filed under seal. A freeze order was obtained over the accounts. The case is in litigation. See Lit. Rel. No. 22769 (Aug. 2, 2013).
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
For more information about LexisNexis products and solutions connect with us through our corporate site.