SEC Enters into First Non-Prosecution Agreement with an Individual

One of the main questions I get from potential insider trading defendants is some variation of Well, what are we looking at here? That is, if the SEC is able to prove its case, what could the consequences be?  Unfortunately, the answer is usually that it depends on a lot of things.

To preserve some level of predictability in insider trading settlement negotiations, the Commission often likes to settle cases on a “one-and-one” basis.  In other words, the defendant disgorges the illicit profits or losses avoided (the first “one”) and pays a civil penalty equal to that amount (the second “one”), plus prejudgment interest.  It can be a reasonable middle ground.  The penalty obviously stings, but it’s not as much as the treble penalty a defendant theoretically could get after a judgment at trial.

Last Friday, the SEC brought a fairly big insider trading case that runs the gamut of possible outcomes for defendants, and highlights the benefits of cooperating with the Commission once it has credible evidence of violations.  The SEC charged Christopher Saridakis, a former executive of GSI Commerce, with insider trading in advance of eBay’s acquisition of the e-commerce company by tipping friends and relatives with confidential information about the pending deal so they could attain more than $300,000 in illegal profits.  Each defendant was forced to disgorge trading profits.  Here’s how the other sanctions broke down:

• Saridakis – officer-and-director bar and a civil penalty of twice his tippee’s profits

• Jules Gardner – cooperated with the SEC’s investigation; case filed against him, but no civil penalty;

• Suken Shah – a penalty of three times his and his tippee’s trading profits;

• Shimul Shah – a penalty of twice his trading profits;

• Aharon Yehuda – a penalty equal to his trading profits, or a one-and-one;

• Oded Gabay – cooperated with the SEC’s investigation; penalty equal to half of his and Yehuda’s profits;

• An “individual” – cooperated with the SEC’s investigation; non-prosecution agreement and no penalty.

With the first non-prosecution agreement issued by the SEC, “Individual” wins the case, apparently by providing “early, extraordinary, and unconditional cooperation” with the Commission’s investigation.  The penalty agreed to by Suken Shah is especially harsh.  It’s hard for me to figure the sense in settling to a penalty three times the trading profits of yourself and a downstream tippee.  Judges often don’t see penalties the way the SEC does and can impose less than the SEC seeks.  But it does cost a lot of money to go to trial, and maybe the seemingly high figure agreed to by Suken Shah was the price of avoiding those costs.

With the wide range of outcomes here, it looks to me like the SEC is trying to send a signal to those caught in the Enforcement Division’s web: play ball, and things may work out for you.  But if you try to be a hero with the code of silence and all that, they’ll try to make you pay.