Chris Nelson, Big4.com
Fraudulent insider trading and its serious investigation is the focus of all regulators today. The Securities and Exchange Commission especially is going strong in reviewing hedge funds and expert networks to unearth those who have had access to insider information and used it to make loads of money for themselves.
Today, the Big Four are affected in an unusual charge by the SEC.
It is charging a former Deloitte Tax LLP partner and his wife for leaking confidential merger and acquisition information to their family members in the UK who profited by making millions of dollars in an insider trading scheme.
Apparently, Arnold McClellan a Deloitte partner and his wife Annabel, who live in San Francisco , gave information on at least seven confidential acquisitions being planned by Deloitte’s clients to Annabel’s sister and brother-in-law in London . After getting this illegal info, the brother-in-law, James Sanders, bought stock of target companies and made off with US $3 million, of which 50% was send back to Annabel McClellan.
What was incredibly curious and a tip off was trades which were closely timed with telephone calls between Annabel McClellan and her sister Miranda Sanders, and with in-person visits with the McClellans. The UK Financial Services Authority (FSA) has already charged James and Miranda Sanders of London, as also colleagues of James Sanders at his London-based derivatives firm.
Check this out – not only did Sanders make $3 million, his tippees and clients made and additional US $20 million by trading on the inside information.
Arnold McClellan was head of one of Deloitte’s regional M&A teams and had access to highly confidential information as he provided tax and other advice to Deloitte’s clients that were considering corporate acquisitions.
And between 2006 and 2008, James Sanders used the non-public information obtained from the McClellans to purchase derivative financial instruments known as "spread bets" that are pegged to the price of the underlying U.S. stock.
What started out small subsequently became larger (presumably as McClellans tips proved accurate), and eventually James Sanders was taking large positions and passing along information about Arnold McClellan’s deals to colleagues and clients at his trading firm as well as to his father.
Affected transactions included Kronos Inc., a Massachusetts-based data collection and payroll software company acquired by a private equity firm in 2007; aQuantive Inc., a Seattle-based digital advertising and marketing company acquired by Microsoft in 2007;
Getty Images Inc., a Seattle-based licenser of photographs and other visual content acquired by a private equity firm in 2008.
Here’s what the SEC has been able to gather:
November 2006: Arnold McClellan begins advising Deloitte client on planned Kronos acquisition.
Jan. 29, 2007: McClellan signs confidentiality agreement.
Jan. 31, 2007: Following call from Annabel’s cell phone, James Sanders begins buying Kronos spread bets in his wife’s account.
March 11, 2007: Arnold McClellan has two-hour cell phone call with client to discuss acquisition. Less than an hour later, call from same cell phone to Annabel’s family.
March 12-14, 2007: James Sanders increases size of Kronos bets.
March 16, 2007: James Sanders informs another family member that Annabel is the source of his tips; describes his agreement to split profits with her 50/50.
March 23, 2007: Deloitte client publicly announces Kronos acquisition. Kronos stock price increases 14 percent; James Sanders and other tippees reap approximately $4.9 million in U.S. dollars.
This just shows how really none of these phone conversations, emails or subsequent transactions can really remain secret. The SEC has powers to tap almost any kind of content in its investigations, and can piece together a pretty accurate picture of the events.
According to the WSJ, lawyers for Arnold McClellan said he denies the SEC’s charges and will vigorously contest them. "He did not trade on insider information, and there will be no evidence that he passed along any confidential information to anyone," Elliot R. Peters and Christopher Kearney of the law firm Keker & Van Nest LLP said in a statement.
"We are shocked and saddened by these allegations against our former tax partner and members of his family," Deloitte spokesman Jonathan Gandal said in a statement. "If the allegations prove to be true, they would represent serious violations of our strict and regularly communicated confidentiality policies." Deloitte is cooperating with the SEC’s investigation, Mr. Gandal said.
So, there was a massive breakdown somewhere in the information handling process within Deloitte. M&A personnel are privy to many confidential matters on potential acquisitions, but there are generally tight checks and balances on managing information. Clearly, there was a slip and McClellan was able to get this info out to the UK , where he probably thought he was safe.
What is interesting that he is noted as an ex-Partner of Deloitte, we have been able to find a March 2009 Deloitte document where he is listed as a live contact, so his separation must have happened since then, if our readers have a better idea of when this occurred, please comment.
Its evident that the SEC is getting tough and leaving no stone unturned. We would not be surprised by many twists and turns in this case, and perhaps other leaks from folks who have had very confidential info and used it illegally to their financial advantage.