South Florida Broker/Dealer and Investment Advisor Fraud and Misrepresentation Litigation and FINRA Arbitration Attorney, Russell L. Forkey, Esq.
SEC Charges Former Yahoo Executive and Former Ameriprise Manager with Insider Trading
The Securities and Exchange Commission recently charged a former executive at Yahoo! Inc. and a former mutual fund manager at a subsidiary of Ameriprise Financial Inc. with insider trading on confidential information about a search engine partnership between Yahoo and Microsoft Corporation.
The SEC alleges that Robert W. Kwok, who was Yahoo’s senior director of business management, breached his duty to the company when he told Reema D. Shah in July 2009 that a deal between Yahoo and Microsoft would be announced soon. Shah had reached out to Kwok amid market rumors of an impending partnership between the two companies, and Kwok told her the information was kept quiet at Yahoo and only a few people knew of the coming announcement. Based on Kwok’s illegal tip, Shah prompted the mutual funds she managed to buy more than 700,000 shares of Yahoo stock that were later sold for profits of approximately $389,000.
The SEC further alleges that a year earlier, the roles were reversed. Shah tipped Kwok with material nonpublic information about an impending acquisition announcement between two other companies. Kwok traded in a personal account based on the confidential information for profits of $4,754.
Kwok and Shah, who each live in California, have agreed to settle the SEC’s charges. Financial penalties and disgorgement will be determined by the court at a later date. Under the settlements, Shah will be permanently barred from the securities industry and Kwok will be permanently barred from serving as an officer or director of a public company.
“Kwok and Shah played a game of you scratch my back and I’ll scratch yours,” said Scott W. Friestad, Associate Director in the SEC’s Division of Enforcement. “When corporate executives and mutual fund professionals misuse their access to confidential information, they undermine the integrity of our markets and violate the trust placed in them by investors.”
In a parallel criminal case announced today by the U.S. Attorney’s Office for the Southern District of New York, Kwok has pled guilty to conspiracy to commit securities fraud, and Shah has pled guilty to both a primary and conspiracy charge. Both are awaiting sentencing.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Shah and Kwok first met in January 2008 when Shah was attending a real estate conference in California at the same facility where Yahoo was holding a meeting. The two met in a hallway and began discussing their respective businesses, and thereafter they spoke frequently by phone or in person. Kwok provided Shah with information about Yahoo, including whether Yahoo’s quarterly financial performance was expected to be in line with market estimates. In return, Shah provided Kwok with information she learned in the course of her work, and he used it to help make his personal investment decisions. Both Shah and Kwok benefitted from this exchange of information.
The SEC alleges that in early 2008, shortly after their initial meeting, Shah told Kwok that she had learned through an inside source at Autodesk Inc. that it intended to acquire Moldflow Corporation. Based on this illegal tip that Kwok received from Shah, he purchased 1,500 shares of Moldflow in a personal account from April 7 to April 25. Autodesk and Moldflow announced the acquisition on May 1, and the price of Moldflow stock increased 11 percent. Kwok then sold his shares for a profit.
According to the SEC’s complaint, Shah followed Yahoo closely as a portfolio manager at Ameriprise subsidiary RiverSource Investments LLC and previously at J. & W. Seligman & Co. She believed that the announcement of a partnership between Yahoo and Microsoft would have a positive impact on Yahoo’s stock. In July 2009, when certain media began reporting that a deal could be forthcoming with Microsoft making a large up-front payment to Yahoo, Shah reached out to Kwok for inside information. Both Kwok and Shah knew that Kwok was tipping Shah in breach of his duty to Yahoo. Based on the confidential information she received from Kwok, Shah prompted certain RiverSource funds she helped managed to purchase 700,300 shares of Yahoo on July 16. The largest purchase was made in the Seligman Communications and Information Fund, which alone added approximately 450,000 shares of Yahoo to its holdings. On July 28, the shares were sold and a profit was realized.
The SEC’s complaint charges Kwok and Shah with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In the settlements that are subject to court approval, Kwok and Shah acknowledged the facts to which they pled guilty and consented to judgments that impose permanent injunctions. The settlements also include the bars and to-be-determined financial sanctions.