“Stupid is as stupid does,” so says Forrest Gump. The phrase captures my reaction to yet another insider trading action recently prosecuted by the SEC – SEC v. Watson. Unlike the case we reported a month ago, Florida Quintet-Face the Music on Insider Trading, The Watson case did not involve accountants, but is nonetheless instructional. The simple facts are these.
Apollo Tyres and Cooper Tire and Rubber were involved in serious negotiations regarding the acquisition of Cooper by Apollo. Apollo’s general counsel disclosed the potential transaction to her now former husband, a private equity investor; who in turn told two close friends, including Mr. Watson. Watson purchased Cooper shares and options, and liquidated his position after the proposed transaction was publically announced. Watson netted $170,000 in profits. The husband received $22,000 from Mr. Watson for his tip. (The husband also received $220,000 for tipping another friend who reaped $1.1M from by illegal transactions. Both the $22,000 and the $220,000 were deposited into a dummy charitable foundation to mask the kickback.) In a separate actions, the husband and the other tippee were charged with securities violation. There is little doubt all of these individual knew exactly what they were doing.
The lesson for accountants is pretty obvious. Treat inside information (material nonpublic information) about a client’s business very carefully. Do not use it for personal gain or otherwise; and do not disclose it to anyone, not even to close relatives. The consequences can be very severe. The cost of defending prosecution by the SEC and criminal authorities. Civil fines and penalties, and potentially criminal liability. Loss of business and personal reputation. Revocation of license(s). Ruined careers and families. Insider trading is just stupid.