STEC CEO Faces Insider Trading Suit
The chairman and CEO of a Santa Ana, Calif.-based computer storage device company has been charged with insider trading in a secondary offering of his stock shares sold to a major client to the disadvantage of the investing public.
The US Securities and Exchange Commission alleges that Manouchehr Moshayedi took advantage of a dramatically upward trend in the stock price of STEC Inc. by deciding to sell a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder.
“With the conclusion of the investigation, we remain confident that an independent trier of fact will find that the commission’s allegations against [Manouchehr] Moshayedi, our chief executive officer, are without merit,” STEC’s lead independent director Kevin C. Daly said.
The secondary offering was set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for the third quarter.
However, in the days leading up to the secondary offering, Moshayedi allegedly learned critical nonpublic information that was likely to have a detrimental impact on the stock price. Moshayedi did not call off the offering and abstain from selling his shares despite the negative information that would have adverse effect to the investing public. Instead, he allegedly engaged in a fraudulent scheme to hide the truth through a secret side deal, and proceeded with the sale of 9 million shares from which he and his brother reaped gross proceeds of approximately $134 million each.
“Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office. “Company insiders are strictly prohibited under the securities laws from exploiting corporate dealings for private gain, particularly in the secretive and manipulative manner that Moshayedi did.”
From January to August 2009 STEC’s stock price increased more than 800 percent with reports of higher revenues, sales, and margins for its products, particularly its flagship flash memory product called “ZeusIOPS,” a solid state drive (SSD).
The stock rise also came on the heels of STEC’s July 2009 announcement of a unique agreement with its largest customer, EMC Corporation, which agreed to buy $120 million worth of ZeusIOPS in the third and fourth quarter of 2009. Moshayedi touted the sales growth of ZeusIOPS and said the agreement with EMC was “part of the expected growth” for STEC going forward.
But as the Aug. 3, 2009 date for the secondary offering approached, Moshayedi learned that EMC’s actual demand for the ZeusIOPS was lower than previously expected. First, Moshayedi learned that EMC’s actual demand for the ZeusIOPS product in the third quarter would only be approximately $34 million – not nearly enough to ensure that STEC’s third quarter revenue guidance could even measure up to consensus analyst estimates spurred by its announcement of the agreement with EMC. Second, EMC informed Moshayedi that it would never again enter into a similar agreement with STEC.
According to the SEC’s complaint, Moshayedi responded by entering into a secret side deal with EMC in order to meet third quarter consensus revenue estimates. Moshayedi allegedly convinced EMC on July 29 to take $55 million of ZeusIOPS product in the third quarter in exchange for an undisclosed additional $2 million price discount on the product in the fourth quarter. After securing this deal, STEC announced the orchestrated guidance figures that amounted to approximately $21 million more than EMC’s actual forecasted demand for the quarter.
And even though EMC unequivocally informed Moshayedi on the morning of August 3 that it would not make further volume commitments, he hid this critical information from investors prior to his secondary offering while at the same time touting in public documents the future growth of the ZeusIOPS product and the importance of the STEC-EMC $120 million agreement.
The SEC’s complaint charges Moshayedi with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him to disgorge his own ill-gotten gains and the trading profits of his brother Mehrdad Mark Moshayedi, pay prejudgment interest and financial penalties, and be permanently barred from future violations and from serving as an officer and director of any registered public company.
The SEC will not bring an enforcement action against the company or any of its other executive officers, STEC said in a statement.
The SEC’s investigation was conducted by Finola H. Manvelian and Douglas Kobayashi in the Los Angeles Regional Office, and John W. Berry will lead the litigation.