"SEC Charges Ring of High School Buddies with Insider Trading in Health Care Stocks"

The headline above crossed my radar today, and I assumed this case was going to involve some "Fast Times at Ridgemont High"-type of allegations, with kids cutting out of wood shop class to call their brokers to buy health care stocks. Alas, the "high school buddies" sued by the SEC are not in high school now and, judging by their ages, they have not been since the late 1980s. 

The SEC alleges that three health care company employees and four other friends--who all either knew each other from high school or from a winemaking club-- formed an insider trading ring that ultimately generated $1.7 million in illegal profits and kickbacks. [I guess "SEC Charges Ring of Winemaking Club Members with Insider Trading in Health Care Stocks" did not have as much sex appeal as the headline the SEC chose]. The scheme allegedly involved trading in advance of 11 public announcements involving mergers, a drug approval application, and quarterly earnings of pharmaceutical companies and medical technology firms.

While there is no "Fast Times" angle to this case, there is at least one other allegation that is interesting. According to the SEC, the defendants took some fairly elaborate steps to try to conceal their illegal trading, including contemporaneously creating binders of purported research files that they hoped could justify their trading in the event it was ever questioned. 

This tactic is reminiscent of the fake emails that Raj Rajaratnam reportedly created to provide a defense to his own insider trading. As I discussed here, after a call in which he learned certain inside information about Spansion Inc., Rajaratnam told colleagues at Galleon, “I'll send you an e-mail and say, ‘Have you guys thought about Spansion?'” Rajaratnam  said this would create an e-mail trail, and his colleagues could then email back and say that their supposed research on Spansion "looks good"-- thereby legitimizing the purchase.

Neither Raj's fake emails nor these fake research binders seemed to have worked, but you have to at least admire the effort and foresight.

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