On Wednesday, June 29, 2022, in the U.S. District Court for the District of New Jersey, the U.S. Securities and Exchange Commission (“SEC”) sued a Wrightstown, New Jersey, businessman (and active investor) who from 9:56 to 10:03 am on Sept. 9, 2020, purchased, in three transactions, a total of 250 short-term out-of-the-money options to purchase the stock of Virtusa Corp. (“Virtusa”). The aggregate cost for these transactions was $27,621. He made these purchases based on non-public information that Virtusa was going to be acquired by Baring Private Equity Asia (“Baring”) for approximately $2 billion in cash. That acquisition deal was announced publicly on Sept. 10, 2020, and the price of Virtusa stock rose from $40.50 to $50.48, a gain of some 24.6 %. The Wrightstown businessman sold his call options that same day for a gain of $89,904.
The businessman took no market risk (he did take the risk of being caught by the authorities for trading on non-public information) on these transactions because his “domestic partner,” who was employed by Virtusa in its marketing department, told him in advance about the pending transaction. She was aware of the pending acquisition because her job included drafting press releases announcing the acquisition. In fact, she learned what the SEC Complaint calls “highly confidential information” regarding the acquisition during an 11:32 am telephone conversation with a member of Virtusa management. She needed that information to draft the public announcement about the deal. Although Virtusa is a Delaware corporation headquartered in Southborough, Massachusetts, she (possibly due to the Covid pandemic) was teleworking from the Wrightstown, New Jersey, home she shared with the businessman.
The September option purchases were the first time the businessman had ever purchased Virtusa securities, and those purchases represented 100% of the Virtusa option trading that day. He sold all the Virtusa options on September 10, “just minutes after the market opened” and less than 24 hours after he purchased them. He made the purchases and sale from his business office, not from the home he shared with his “domestic partner.” He did not tell her he had netted a 325 percent gain on the transactions. The Complaint notes that they had a history during their four-year relationship (including two years of living together) of sharing confidences, but that he concealed his Virtusa trades from her. This explains why she was not charged by the SEC.
The Commission sued the businessman for violating the anti-fraud provisions of the Securities Exchange Act of 1934, as amended, and for violating Rule 10b-5. Without admitting the SEC’s allegations, the defendant agreed to the entry of a final judgment permanently enjoining him from violating the securities laws and ordering him to pay disgorgement of $89,904, prejudgment interest of $3,878.74, and a civil penalty of $89,904. That settlement is subject to approval by the Court. Neither the Complaint nor the related SEC Press Release reports on the fate of the relationship with his “domestic partner.” The case was brought by the Division of Enforcement’s Market Abuse Unit in the SEC’s Philadelphia Regional Office. The SEC established Market Abuse Units in its various offices beginning in 2010 to take advantage of advances in data analytic tools to detect market manipulation and illegal trading activity.
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