Ex-Consulting Executive Tagged in Insider Trading Ahead of Biotech Takeovers
The Securities and Exchange Commission has charged a former global consulting firm executive and his friend who once worked on Wall Street with insider trading on confidential information about impending takeovers of two biotechnology companies.
The charges against Scott Allen came following the same action by the SEC against California-based pharma company, Immunosyn Corporation, for misleading investors about the regulatory status of the firm’s sole product. Earlier than that, the SEC filed a lawsuit against purchasers of Columbia-based nutrients manufacturer Martek Biosciences Corporation for allegedly engaging in insider trading to acquire information about the buyout of Royal DSM NV with Martek.
Now, the SEC alleged that Allen learned confidential information in advance of the acquisitions of Millennium Pharmaceuticals Inc. and Sepracor Inc. through his work at a global consulting firm that was advising the acquiring Japanese companies as they made cash tender offers.
Allen allegedly informed his longtime friend John Michael Bennett, an independent filmmaker who had previously worked at a Wall Street investment bank, about the flow of the acquisition. Using nonpublic information, Bennett purchased thousands of dollars in call options in the companies and also tipped his business partner at the independent film company they co-own.
The insider trading by Bennett and his tippee generated more than $2.6 million in illicit profits. Allen received cash from Bennett in exchange for the tips.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced the unsealing of criminal charges against Allen and Bennett.
“Allen sold his clients’ secret information to a dear friend for easy cash, thinking they wouldn’t get caught,” said George Canellos, Director of the SEC’s New York Regional Office.
Allen and Bennett, who have been close friends for more than 15 years, began their scheme in February 2008 according to the SEC as Allen first learned about the Millennium transaction through his work at the consulting firm, where he is no longer employed.
Allen communicated with Bennett about the Millennium and Sepracor transactions through either phone calls or in-person meetings, some of which are tracked through their simultaneous use of Metrocards at subway stations in New York City and ATM withdrawals of cash made by Bennett prior to those meetings.
The SEC claimed that Allen first obtained nonpublic information about the Millennium transaction in mid-February 2008 when his firm began advising Japan-based Takeda Pharmaceutical Company during its negotiations with Millennium. Allen tipped Bennett with inside information concerning Takeda’s impending cash tender offer to acquire Millennium’s shares.
For instance, after Allen received an evening e-mail on February 27 from a Takeda representative stating that the contemplated offer was for “23, potentially 24 per share,” he called Bennett just minutes later and then twice again that evening.
Bennett then called his business partner. More calls took place the following day, and then on February 29 and continuing up until the week prior to the April 10 public announcement of the acquisition, Bennett and his business partner began amassing Millennium call options.
The price of Millennium shares increased more than 48 percent after the public announcement, and beginning that afternoon Bennett and his business partner sold their entire positions of Millennium call options for ill-gotten gains of more than $602,000 and $1.12 million respectively.
According to the SEC’s complaint filed in federal court in Manhattan, Allen later was participating in his employer’s due diligence work in May 2009 for Japanese firm Dainippon Sumitomo Pharma Co. Ltd. (DSP) in connection with its impending acquisition of Sepracor.
Allen again tipped Bennett with inside information about the upcoming transaction. In the months leading up to the September 3 public announcement that DSP had agreed to acquire Sepracor through a cash tender offer, Bennett purchased thousands of dollars worth of call options in Sepracor and again tipped his business partner who did the same.
Following the public announcement, Sepracor’s stock price rose more than 26 percent. Both Bennett and his business partner then liquidated their Sepracor holdings for ill-gotten profits of more than $516,000 and $388,000 respectively.
The SEC’s complaint names Bennett’s wife as a relief defendant for the purposes of seeking disgorgement of unlawful profits in brokerage accounts that Bennett held jointly with her.
The SEC’s complaint charges Scott Allen and John Michael Bennett with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Section 14(e) of the Exchange Act and Rule 14e-3 thereunder. The complaint seeks a final judgment permanently enjoining the defendants from future violations of these provisions of the federal securities laws and ordering them to disgorge their ill-gotten gains plus prejudgment interest and pay financial penalties.