SEC Charges 5 with Insider Trading
The Securities and Exchange Commission has charged two financial advisors and three others in their circle of family and friends with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm.
Timothy J. McGee and Michael W. Zirinsky, who are registered representatives at Ameriprise Financial Services, illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on nonpublic information about the company’s impending merger with Tokio Marine Holdings. McGee obtained the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous (AA) about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement on July 23, 2008, and made a $292,128 profit when the stock price jumped 64 percent that day.
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Pennsylvania, McGee tipped Zirinsky, who purchased PHLY stock in his own trading account as well as those of his wife, sister, mother, and grandmother. Zirinsky tipped his father Robert Zirinsky and his friend Paulo Lam, a Hong Kong resident who in turn tipped another friend whose wife Marianna sze wan Ho also traded on the nonpublic information. The Zirinsky family collectively obtained illegal profits of $562,673 through their insider trading. Lam made an illicit profit of $837,975 and Ho, also a Hong Kong resident, profited by $110,580.
Lam and Ho each agreed to settle the SEC’s charges and pay approximately $1.2 million and $140,000 respectively.
“McGee stole information shared with him in the utmost confidence, and as securities industry professionals he and Zirinsky clearly knew better,” said Elaine C. Greenberg, Associate Director of the SEC’s Philadelphia Regional Office. “As this case demonstrates, we will follow each link in a tipping chain all the way to Hong Kong if necessary.”
According to the SEC’s complaint, McGee met the PHLY executive at AA in 1999. By spring and early summer 2008, while the PHLY executive was participating in the merger negotiations and under significant pressure to ensure a successful sale, he and McGee had known each other for almost a decade and forged a close relationship in which they routinely shared confidences about each other’s personal lives and problems impacting them professionally.
Their relationship eventually extended beyond AA as they occasionally trained together for triathlons, and McGee even suggested that the PHLY executive should invest his money with him because he knew his personal history. McGee, who lives in Malvern, Pa., assured the PHLY executive on many occasions that he would keep the information they discussed confidential.
The SEC alleges that in early July 2008, immediately after an AA meeting, the PHLY executive confided to McGee that he was under considerable pressure as a result of ongoing confidential negotiations to sell PHLY. In response, McGee expressed interest in the details of the PHLY sale and questioned him about the details of the impending deal. McGee learned that Tokio Marine would be the acquirer, the sale was getting close, and that the price would be approximately three times the book value of the company.
McGee had successive conversations with the PHLY executive both face-to-face and by phone during this critical juncture of the negotiations. After learning about the impending merger on July 14, McGee entered an order for PHLY stock and bought additional shares on July 17, 18, and 22. McGee bought the majority of his PHLY stock on margin and funded the remaining purchases with sales of existing securities and money market funds. Two days after the public announcement, McGee sold approximately one-third of his PHLY stock and held the balance until the merger closed on December 1.
Subsequent to the merger announcement, McGee admitted to the PHLY executive that he had traded on the basis of the confidential information told to him about the merger and made money as a result.
According to the SEC’s complaint, McGee has worked in the same office as Zirinsky for more than 15 years and they have become friends and business associates. McGee learned confidential information about the mergers and tipped Zirinsky with the details.
For instance, after a brief conversation with the PHLY executive on July 16 at 5:09 p.m., McGee and Zirinsky spoke later that evening. The next morning at 8:26 a.m., McGee placed another call to the PHLY executive, and just several minutes after that conversation ended he called Zirinsky on his cell phone.
Only seconds after that call between McGee and Zirinsky ended, Zirinsky attempted to reach his father at three different telephone numbers. He also called his sister. Later that morning, Zirinsky began purchasing PHLY stock in three of his Ameriprise accounts and the Ameriprise accounts of his wife, sister, mother, and grandmother. He also entered trades in IRA accounts held by his father and mother.
Meanwhile, Robert Zirinsky, who lives in Quakertown, Pa., purchased additional shares of PHLY stock in an account at another broker. None of Michael Zirinsky’s family members had ever purchased PHLY shares prior to that day, when they bought more than $700,000 of stock in the company.
The SEC alleges that Zirinsky, who lives in Schwenksville, Pa., contacted Lam in Hong Kong via text message and two phone calls amid speaking with McGee on the morning of July 17. Within hours, Lam began buying shares in PHLY stock, which he had never previously owned.
Lam also tipped a friend in Hong Kong, who is married to Marianna sze wan Ho. Shortly after that conversation, Ho made purchases of PHLY stock that were triple the value of any equities previously purchased in the account. She sold all of the PHLY shares on the day of the merger announcement.
The complaint seeks a final judgment ordering disgorgement of ill-gotten gains together with prejudgment interest from the defendants and relief defendants, and permanent injunctions and penalties against the defendants.
Of the various defendants, two individuals who received the tips, Lam and Ho, each agreed to settle the case, without admitting or denying the allegations, by disgorging all their illicit gains and paying a penalty, as well as agreeing to the entry of a final judgment permanently enjoining them from violating Section 10(b) of the Exchange Act and Rule 10b-5. In particular, Lam agreed to pay $837,975 in disgorgement, $123,649 in prejudgment interest, and a penalty of $251,392. Ho has agreed to pay $110,580 in disgorgement, $16,317 in prejudgment interest, and a penalty of $16,587. The settlements are subject to court approval.
The SEC’s investigation was conducted by Philadelphia Regional Office enforcement staff Brendan P. McGlynn, Patricia A. Paw and Daniel L. Koster. The SEC’s litigation will be led by Scott A. Thompson, Nuriye C. Uygur, and G. Jeffrey Boujoukos.