The Securities and Exchange Commission today announced insider trading charges against four individuals stealing confidential information from investment banks and their public company clients in order to trade in advance of secondary stock offerings.  The scheme allegedly involved at least 15 stocks and generated more than $4.4 million in illegal trading profits.

The SEC alleges that a former day trader living in California, Steven Fishoff, schemed with two friends and his brother-in-law to pose as legitimate portfolio managers and induce investment bankers to bring them “over the wall” and share confidential information about an upcoming secondary offering.  After promising they wouldn’t disclose the nonpublic information to others or trade an issuer’s stock before an offering was announced, they violated the agreements and tipped each other about the upcoming offerings expected to inherently depress the price of the issuer’s stock.  The tippees then shorted the stock before an offering was publicly announced and assured themselves profits on the short sales after the stock price dropped.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, they eventually expanded the scope of their scheme from short selling to buying stock in advance of a positive corporate news announcement based on confidential information obtained about secret negotiations between two large pharmaceutical companies. 

Charged along with Fishoff in the SEC’s complaint is his brother-in-law Steven Costantin of New Jersey, his friend and California neighbor Ronald Chernin, and his friend Paul Petrello, also a former day trader who resides in Florida.  In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Fishoff, Petrello, Chernin, and Costantin.

“We allege an insider trading scheme based on a short-selling business model designed to systematically profit on confidential information obtained under false pretenses,” said Sanjay Wadhwa, Senior Associate Director for Enforcement in the SEC’s New York Regional Office.  “But the defendants’ short selling proved to be short-sighted as they overlooked the fact that their trading patterns would be detected and they would be caught by law enforcement.”

The SEC’s complaint charges Fishoff, Petrello, Chernin, and Costantin as well as seven entities they collectively controlled with illegal insider trading in violation of the antifraud provisions of the Securities Act of 1933 and Securities Exchange Act of 1934.  The complaint also charges Fishoff, Petrello, Chernin, Costantin, and three associated entities with violations of Rule 105 of Regulation M of the Exchange Act in connection with certain short sales made in advance of public securities offerings in which they purchased shares.

The SEC’s investigation is continuing and being conducted by Dominick Barbieri, David Austin, Matthew Lambert, Stephen Johnson and George Stepaniuk.  The litigation will be led by Todd Brody, Dominick Barbieri, and David Austin.  The case is being supervised by Mr. Wadhwa.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority, U.S. Attorney’s Office for the District of New Jersey, Federal Bureau of Investigation, and Options Regulatory Services Authority.