Three high-powered New Jersey pharmaceutical executives from Celgene (NASDAQ: CELG), Sanofi (NYSE: SNY), and Stryker (NYSE: SYK) were charged today with insider trading by the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office. The SEC said in a statement that the three were part of a ring of former high school buddies and wine club members who generated $1.7 million in illegal gains over five years from insider trading on 11 corporate events.
The SEC charged that Summit, NJ-based Celgene’s director of financial reporting, John Lazorchak; Sanofi-Aventis director of accounting and reporting Mark Cupo; and Stryker marketing executive Mark D. Foldy illegally tipped others about upcoming mergers and acquisitions, earnings, and the status of a Celgene application to expand the use of its drug lenalidomide (Revlimid). Stryker is in Kalamazoo, MI, while Sanofi is headquartered in France, with a large operation in Bridgewater, NJ.
According to the SEC’s complaint, Lazorchak, and Cupo met while working together at Sanofi. They hatched the scheme in 2007 shortly after Lazorchak took a job at Celgene and told Cupo he had access to confidential information, the complaint said. Lazorchak then brought in Foldy, a high school buddy. The SEC said two more of Lazorchak’s pals from high school, Michael Pendolino and James Deprado, were also brought in on the scheme, as was Michael Castelli, who knew Cupo from a winemaking club. Castelli in turn looped in Larry Grum, a licensed securities trader—and one of his own high school friends.
The SEC filed its complaint against the seven men today in U.S. District Court in New Jersey. In a parallel criminal action, the U.S. Attorney’s Office for the District of New Jersey today announced multiple securities fraud and criminal conspiracy charges against Lazorchak, Cupo, Foldy, Castelli, Grum, and Pendolino. Those six men surrendered to FBI agents today and were expected to be arraigned in Newark federal court, the U.S. Attorney’s Office said in its statement.
According to the SEC complaint, the group started out by trading on Lazorchak’s insider knowledge of Celgene’s $2.9 billion acquisition of Pharmion, announced in November 2007. The SEC said Cupo discussed Lazorchak’s information with Castelli, and Castelli brought in Grum, whom he considered a sophisticated trader. The agency alleged that Cupo, as the middleman, tipped Castelli and Grum so they could illegally trade, and that they in turn paid Cupo for his tips, and gave Cupo money to pass along to Lazorchak.
The U.S. Attorney’s office said in its statement that Celgene received a suspicious trading inquiry about the Celgene-Pharmion deal from the Financial Industry Regulatory Authority in April 2008, but when Celgene showed Lazorchak a list of individuals that had traded ahead of the announcement he claimed he did not know anyone on it, even though it included his high school friends Foldy and Pendolino. “Although the 2008…inquiry raised the threat that Lazorchak’s web of insider trading would be revealed, Lazorchak and his coconspirators continued their scheme,” the U.S. Attorney’s office charged.
The U.S. Attorney’s office also said the elaborate scheme had Lazorchak and Foldy using code phrases, such as “fat man” to refer to insider information, and the men used cash to pay kickbacks, frequently in installments, to avoid detection. The SEC said in its complaint that after Foldy obtained illicit profits of $14,500 from the Pharmion tips, Lazorchak repeatedly demanded that Foldy compensate him for the insider information. Foldy ultimately paid Lazorchak at least $500 and later returned the favor with illegal tips about a tender offer involving his employer, Stryker, the SEC said.
The SEC charged that in late 2009 Cupo began tipping insider information about Sanofi’s $1.9 billion bid for Chattem, a consumer health and beauty products manufacturer. Cupo learned of the imminent deal a few days prior to the public announcement and tipped Castelli and Grum with the confidential details, the SEC said.
Castelli and Grum tried to cover their illegal trades by compiling binders of research to serve as a false basis for their trading, and actively traded in Celgene to create a pattern of long-standing positions in the stock, the SEC said. The detailed SEC release even quoted Grum, while reassuring Cupo that they were unlikely to be discovered, that “at the end of the day, the SEC’s got to pick their battle because they have a limited number of people and a huge number of investors to go after.” The SEC did not disclose how it got the quote.
Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit and Director of the Philadelphia Regional Office, said in a statement that “this is yet another case where wrongdoers believed they could outsmart investigators by creating an elaborate smokescreen to hide their insider trading. Such tactics as using middlemen to pass inside information and compiling research to falsely justify illegal trades will not prevent lawbreakers from getting caught.”
The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and officer and director bars for Lazorchak, Cupo, and Foldy. And the potential penalties on the criminal side are stiff. Each conspiracy count carries a maximum potential penalty of five years in prison, a $250,000 fine, or twice the aggregate loss to victims or gain to the defendants. Each count of securities fraud carries a maximum potential penalty of 20 years in prison and a $5 million fine.