If the insider trading charges levied against five Florida defendants were not so serious, the foolish behavior of the experienced professionals in SEC v. Spallina would almost be comical. Robert Spallina and Donald Teascher are partners in a three person law firm in Boca Raton. Steven Rosen is a CPA and a director in a seven person accounting firm in Plantation, Florida. Brian Markowitz and Thomas Palermo are close friends of Mr. Spallina; and work in the investment industry. Not surprisingly, Spallina, Markowitz and Palermo belonged to the same golf club.
Spallina, Teascher and Rosen were longtime advisors to an unnamed board member of Pharmasset Inc.; a pharmaceutical company based in New Jersey. Pharmasset had agreed to be acquired by Gilead Sciences, headquartered in California. The Board Member owned a substantial block of Pharmasset stock. On November 8, 2011, before the transaction between Pharmasset and Gilead was announced, Spallina, Teascher and Rosen met with Board Member for a year-end tax planning session, including a confidential discussion regarding the gain Board Member might realize from the Pharmasset transaction. Spallina, Teascher and Rosen could not contain themselves, and, within a few hours following the meeting, rushed out and purchased Pharmasset securities. Spallina separately tipped Markowitz and Palermo about the transaction, and apparently received a “benefit” from each of them for revealing the confidential inside information. On November 21, 2011, before the opening bell, Gilead and Pharmasset issued a joint press release announcing the acquisition and the share purchase price, which was significantly higher than Pharmasset’s prior day’s close. The five insiders sold their shares almost immediately after the market opened. Together they netted profits of less than $240,000.
Obviously the SEC learned of these allegedly illegal actions of the five insiders, and launched an investigation leading up to the filing of a complaint (and a proposed settlement) on September 28, 2015. The quintet were charged with illegally trading securities based on material non-public information. Spallina, Teascher and Rosen were charged with breaching their fiduciary and other duties of trust and confidence not to disclose or use, for their personal gain, the confidential information they learned at the November 8th meeting with the Board Member. Spallina was separately charged with illegally tipping Markowitz and Palermo. In addition to disgorging their profits, the five agreed to pay civil penalties and interest – all in, $489,000 to settle the SEC’s claims.
It is impossible to believe that these seasoned legal, accounting and investment professionals did not understand that securities trading based on material, nonpublic information was an almost certain violation of the securities laws. What were they thinking? Apparently they thought they could get away with it. Not only did the quintet lose the small amount they had hoped to gain from their ill-advised trading, but they agreed to pay that amount again in penalties and interest – this is, of course, in addition to their legal defense costs and expenses. Perhaps more importantly, there is the personal and professional toll this lack of judgement has taken and will take on the defendants and their families. In addition to the reputational damage and embarrassment, it seems probably that the state and federal licensing bodies will sanction, suspend or revoke the licenses to these five men. Careers, reputations and important personal and professional relationships have been ruined – all for a potential gain of less than $240,000.
The lessons from the Spallina case for accountants is abundantly clear. Accountants frequently have access to material and confidential information about their clients’ business that would meet the definition of “inside information.” Trading on this nonpublic information is illegal, as it gives the insiders an unfair advantage in the securities market. Especially accountants and lawyers, given their unique positions of trust and confidence, must refrain from misusing the information entrusted to them by their clients.