RECENT SEC ENFORCEMENT CASES THAT PROVIDE INSIGHT INTO THE AMOUNT OF PENALTIES PAID BY VIOLATORS IN RECENT YEARS

SEC v. Eric I. Tsao

Litigation Release No. 18889 (September 17, 2004)
http://www.sec.gov/litigation/litreleases/lr18889.htm
On September 17, 2004, the Commission announced that it has reached a settlement of its pending insider trading charges against Eric I. Tsao, a former executive at MedImmune, Inc., a biotechnology company based in Gaithersburg, Maryland. The Commission's complaint, originally filed on June 2, 2003, alleged that Tsao engaged in three separate episodes of insider trading between September 1999 and December 2001, from which he realized aggregate illicit profits of $146,850. The Commission's Complaint also alleged that when Tsao testified before the SEC staff during the investigation of this matter, he falsely denied having placed or authorized any of the relevant trades in two of the three separate instances of insider trading -- and provided a false alternative explanation for the trading.

Without admitting or denying the allegations of the Complaint, Tsao consented to the entry of a Final Judgment against him that (1) permanently enjoins him from future violations of the federal securities laws; (2) bars him from acting as an officer or director of a public company; (3) requires him to disgorge $146,850 in illicit profits, and $24,758.30 in pre-judgment interest thereon, and (4) orders him to pay civil money penalties in the amount of $220,275 and a Remedies Act penalty of $110,000. The Final Judgment allows Tsao to offset his payment of disgorgement and civil penalty by the corresponding amounts, if any, of restitution and criminal fine, respectively, he pays in connection with the parallel criminal proceeding described below. The Final Judgment is subject to the approval of the United States District Court.

The Commission's complaint alleged that on each of three occasions, within days after learning that MedImmune was involved in confidential negotiations concerning a possible business combination with another public company -- the first being U.S. BioScience Inc., the second ImClone Systems, Inc., and the third Aviron -- Tsao bought stock in the other company (and, in the case of ImClone, MedImmune stock as well). On each occasion, according to the complaint, Tsao bought the stock over the Internet in a securities account that, although nominally held by his parents in Taiwan, Tsao had opened, controlled, treated as his own, funded with his own assets, and used to pay his household expenses. The complaint also alleged that, after Tsao learned that NASD Regulation, *793

(Cite as: 1517 PLI/Corp 609, *793)

Inc. (NASDR) was investigating trading in one of the stocks at issue, he took steps to distance himself from this account, and later provided a false explanation of his trading to the SEC staff.

SEC v. Derrick S. McKinley

Litigation Release No. 18832 (August 13, 2004)
http://www.sec.gov/litigation/litreleases/lr18832.htm
On August 13, 2004, the Commission announced that it filed a complaint against Derrick S. McKinley (McKinley), a former vice president and medical director of Gliatech, Inc. (Gliatech). Gliatech was a pharmaceutical company located in suburban Cleveland. The complaint alleges that McKinley sold Gliatech stock while in possession of material, non-public information concerning problems with Gliatech's primary product, Adcon-L Adhesion Barrier Gel (Adcon-L), a gel used to reduce scarring in patients following back surgery.

From August 1999 to August 2000, McKinley sold short 221,000 shares of Gliatech stock in a series of transactions, reaping profits of approximately $1.6 million. From the outset of his trading, McKinley was aware of three major problems involving Adcon-L. By August 1999, McKinley (1) knew that a study of Adcon-L clinical trials (Adcon-L Study) submitted by Gliatech to the U.S. Food and Drug Administration (FDA) suffered from defects that undermined its reliability; (2) knew of sterility problems resulting from defective packaging by the overseas contractor Gliatech hired to manufacture Adcon-L; and (3) knew of complaints of cerebral spinal fluid leaks (CSF leaks) in patients following surgeries in which Adcon-L had been used. In October 1999, the FDA issued an import ban that prevented shipments of Adcon-L from entering the U.S. The ban resulted from unresolved FDA concerns that included the defective packaging and sterility problems. In March 2000, news of complaints about the CSF leaks became public. In August 2000, news of an FDA investigation challenging the integrity and results of the Adcon-L Study became public. When each of these adverse developments became publicly known, the price of Gliatech stock dropped.

McKinley profited from each of these three declines in the price of Gliatech stock. The Commission is seeking an order that permanently enjoins McKinley from violating the antifraud provisions of the federal securities laws and that requires McKinley to disgorge his profits from his illegal trades and to pay a civil penalty.

SEC v. Guillermo Garcia Simon, et al.

Litigation Release No. 18763 (June 24, 2004)
http://www.sec.gov/litigation/litreleases/lr18763.htm
A Massachusetts federal court has entered a final judgment against Guillermo Garcia Simon, a former FleetBoston Financial Group employee residing in Buenes Aires, Argentina, in connection with his trading in the securities of FleetBoston in advance of the announcement of its acquisition by Bank of America Corporation. Under the terms of the final judgment, entered by consent, Simon was ordered to pay approximately $525,000 in disgorgement, interest, and a penalty. He was also enjoined from further violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

The Commission filed an emergency enforcement action against Simon on Monday, October 28, 2003, only hours after Bank of America announced its acquisition of FleetBoston, and less than three days after Simon purchased FleetBoston securities. In its complaint, filed in the United States District Court for the District of Massachusetts, the Commission alleged that Simon engaged in illegal insider trading when he bought FleetBoston securities late on Friday, October 24, while in possession of material, non-public information about the acquisition that was announced the next trading day. The day it filed its complaint, the Commission also sought a temporary restraining order and asset freeze against Simon. Judge Nancy Gertner granted the order freezing Simon's trading account and prohibiting him from transferring or disposing of the securities or any trading proceeds. The Commission obtained the order before the transaction was concluded and as a result, was able to freeze the account before any profits could be removed or dissipated.

Specifically, the Commission's complaint alleged that Simon, a former employee at FleetBoston's Buenos Aires office, purchased 1100 November FleetBoston call options during the last hours of trading on Friday, October 24, 2003, at a cost of about $11,000. The complaint alleged that Simon's options purchase represented over 50% of the total trading volume in that series of call options that day. The complaint alleged that before the market opened on Monday, October 27, FleetBoston's acquisition was announced. In the wake of the announcement, the price of Fleet-Boston's stock and call options rose dramatically, with Simon's call options increasing in value by $473,000 as of the close of the day. The complaint alleged that Simon's conduct violated Section 10(b) of the Securities Exchange Act and Rule 10b-5.

Without admitting or denying the allegations in the Commission's complaint, Simon consented to the final judgment entered by the court on June 9 in this matter. The judgment permanently enjoined him from future violations of the antifraud provisions of the Securities Exchange Act of 1934. Simon was also ordered to pay disgorgement of $473,000, prejudgment interest of $1,576.67, and a civil penalty of $51,842.36, representing the entire proceeds frozen by the court.

In its complaint, the Commission had also named Simon's wife and brother, who shared the account through which Simon traded, as codefendants. The Commission dismissed the claims against them with prejudice. Corporate Law and Practice Course Handbook Series, PLI Order No. 6063

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