Washington, D.C., Aug. 3, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission has charged a London, England resident with insider trading ahead of the July 14, 2006, announcement that San Diego-based Petco Animal Supplies, Inc. would be purchased by two private equity firms.
The Commission filed an amended complaint in federal court in San Diego on August 1, 2007, charging Taher Suterwalla, 30, with insider trading in the securities of Petco. The Commission’s amended complaint identifies Suterwalla as the “one or more unknown purchasers” of Petco described in the Commission’s initial complaint that was filed just three days after the Petco acquisition announcement. The proceeds from the trading have been frozen ever since as a result of a court order granted in response to the Commission’s emergency request.
The amended complaint alleges that in the three weeks preceding Petco’s acquisition announcement, Suterwalla purchased Petco call options from a Swiss financial institution, which filled his orders by purchasing Petco call options in the United States. The options generally were out of the money, representing a bet that the price of Petco stock would rise substantially, and were set to expire within weeks of the purchase date, representing a bet that the price rise would happen soon. The amended complaint further alleges that Suterwalla purchased from brokerage houses in the United Kingdom certain derivative instruments known as spread bets, which caused the brokers to purchase Petco common stock and options in the United States.
“Insider trading ahead of mergers and acquisitions is one of the Commission’s top priorities,” said Linda Thomsen, Director of the Commission’s Division of Enforcement. “We will aggressively pursue people who commit such violations. The geographical distance between perpetrators and the markets they defraud will not preclude us from taking action.”
Andrew Petillon, Associate Regional Director of the Commission’s Los Angeles Regional Office, said, “This case demonstrates how nontraditional financial instruments such as spread bets can be used to defraud the U.S. markets, and how the Commission will act to prevent such fraud. This case also exemplifies the cooperation that exists between domestic and foreign regulators in protecting their respective markets.”
The amended complaint alleges that Suterwalla entered into the transactions while aware of material nonpublic information regarding the pending acquisition of Petco, and that he took highly leveraged and speculative positions in the price of Petco’s securities, which exposed him to the potential for millions of dollars in losses if Petco’s price declined. The amended complaint further alleges that Suterwalla made all of his purchases within 17 days of Petco’s acquisition announcement, that he made a number of his purchases the day before the announcement, and that his illicit profit from these transactions was more than $3 million.
On July 18, 2006, the United States District Court for the Southern District of California entered a temporary restraining order freezing assets of certain then-unknown purchasers of call options for the common stock of Petco and prohibiting the unknown purchasers from obtaining the options or the proceeds from the sale of the options. In addition to freezing approximately $862,000 in assets, the court issued orders that provide for expedited discovery and prohibit the defendants from destroying evidence. On Aug. 4, 2006, the court entered a preliminary injunction that extended the temporary restraining order and asset freeze.
The Commission alleges that Suterwalla engaged in insider trading in violation of the antifraud provisions of the Securities Exchange Act of 1934. The Commission is seeking a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest thereon, and the imposition of civil penalties.
The Commission acknowledges the Chicago Board Options Exchange, the United Kingdom Financial Services Authority, the Swiss Federal Banking Commission, and the Ontario Securities Commission for their continuing assistance in this matter.