The Commission was handed a split verdict in its insider trading – front running case against Siming Yang and his investment company, Prestige Trade Investments Limited by an Illinois jury yesterday. SEC v. Yang, Case No. 12-cv-02473 (N.D. Ill. Filed April 4, 2012). The jury found for the defendants and against the Commission on an insider trading claim but in favor of the SEC and against defendant Yang on a front running charge and two false filing claims.
The action centered on the March 27, 2012 announcement by Xianfu Zhu, Chairman and CEO of Zhongpin Inc., that he had submitted a non-binding proposal to take the company private by purchasing all the outstanding shares. The price would be $13.50 per share, a 46% increase over the closing price the prior day. The meat and food processing company is based in Changge City, Henan Province China.
The initial complaint, naming seven defendants, was filed just eight days after the deal announcement. The initial defendants were Siming Yang, a New York City resident who at one time was employed by a New York City registered broker dealer and investment adviser; Prestige Trade Investment Ltd., a company created in January 2012 by defendant Yang; Caiyin Fan, a PRC citizen and resident who had a joint brokerage account with defendant Yang; and Shui Chong (Eric) Chang, a resident of Hong Kong formerly employed at Deutsche Bank Securities, New York City; and three others.
The complaint was based largely on what it called “suspicious” trading and information and belief. For example, it alleged that:
· Defendants Yang and Fan purchased 2,571 call options and 58,000 shares of Zhongpin stock for a total of $688,962 shortly before the deal announcement. After that announcement they had unrealized profits of $733,006.
While the complaint alleged coordinated trading among the defendants, it failed to identify any source of inside information. It alleged violations of Exchange Act Section 10(b).
Subsequently, the Commission amended its complaint, naming as defendants only the four listed above. The claims were significantly reconfigured, shifting focus from suspicious trading to front running and false filings while retaining the too insider trading claim. Thus the amended complaint focused on Mr. Yang, his company and how the trading was conducted. It claimed that Mr. Yang, while employed as a research analyst at a New York based registered broker dealer and investment adviser, traveled to China and raised funds to start-up Prestige which he had secretly created. After raising $30 million he returned to the U.S and failed to inform his employer about the fund.
Subsequently, Mr. Yang, “[k]nowing that he was about to place enormous, market-moving purchases of Zhongping stock for Prestige’s account . . . first sought to take advantage by purchasing Zhongpin stock and call options for a personal brokerage account that he held jointly with Defendant Caiyin Fan. Mr. Yang then implemented the purchase program for Prestige, buying about 41% of the available Zhongpin stock during one period and about 8% of the outstanding shares.
On April 2, 2012 Prestige filed a Schedule 13D with the Commission. It disclosed the holdings of the firm. It did not disclose those of Mr. Yang.
The amended complaint also alleged a possible source of inside information. Prior to leaving his position at the brokerage firm, Mr. Yang deleted a number of documents from his computer. One was a “non-public presentation that was created by a Hong Kong-based investment bank and detailed a plan to take Zhongpin private. The presentation was market ‘HIGHLY RESTRICTED’ on each page and used the code word ‘Project Zeus” to avoid using the name ‘Zhongpin.’ The document also contained a disclaimer that stated that the document ‘is not for public circulation, must not be copied, transferred or the content disclosed to any third part.’” While the complaint alleges that “Yang’s possession . . . of the Project Zeus presentation reflects that Yang had access to material, non-public information . . .” about the deal, it says nothing about the source of the document or how it was obtained by Mr. Yang. The complaint alleged violations of Exchange Act Sections 10(b), 13(d) and Advisers Act Sections 206(1) and (2).
Mr. Yang and Prestige went to trial. Three claims were presented to the jury for consideration in the instructions: Claim I: insider trading by both defendants; Claim II, front running by Mr. Yang; Claim II, false SEC filing by Mr. Yang; and Claim III, false SEC filing by Mr. Yang. The jury found in favor of both defendants on Claim I and for the SEC on each of the remaining claims. The Court will consider remedies at a later date.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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