While all eyes are fixated on the federal investigation of possible insider trading by top hedge funds, the SEC is also moving forward with other insider trading cases, as it reported today.
The Securities and Exchange Commission today charged a former Deloitte Tax LLP partner and his wife with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.
The SEC alleges that Arnold McClellan and his wife Annabel, who live in San Francisco, provided advance notice of at least seven confidential acquisitions planned by Deloitte's clients to Annabel's sister and brother-in-law in London. After receiving the illegal tips, the brother-in-law took financial positions in U.S. companies that were targets of acquisitions by Arnold McClellan's clients. His subsequent trades were closely timed with telephone calls between Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be funneled back to Annabel McClellan.
This is yet another striking case of smart and well-educated people trying to make money in a way that isn't just unethical, but amazingly stupid.
"The McClellans might have thought that they could conceal their illegal scheme by having close relatives make illegal trades offshore. They were wrong," said Robert Khuzami, Director of the SEC's Division of Enforcement. "In this day and age, whether it's across oceans or across markets, the SEC and its domestic and foreign law enforcement partners are committed to identifying and prosecuting illegal insider trading."
Marc J. Fagel, Director of the SEC's San Francisco Regional Office, added, "Deloitte and its clients entrusted Arnold McClellan with highly confidential information. Along with his wife, he abused that trust and used high-placed access to corporate secrets for the couple's own benefit and their family's enrichment."
According to the SEC's complaint, Arnold McClellan had access to highly confidential information while serving as the head of one of Deloitte's regional mergers and acquisitions teams. He provided tax and other advice to Deloitte's clients that were considering corporate acquisitions.
The SEC alleges that between 2006 and 2008, James Sanders used the non-public information obtained from the McClellans to purchase derivative financial instruments known as "spread bets" that are pegged to the price of the underlying U.S. stock. The trading started modestly, with James Sanders buying the equivalent of 1,000 shares of stock in a company that Arnold McClellan's client was attempting to acquire. Subsequent deals netted significant trading profits, and eventually James Sanders was taking large positions and passing along information about Arnold McClellan's deals to colleagues and clients at his trading firm as well as to his father.
Of course, given how often insider trading and other financial crimes go unpunished, maybe it's no surprise that this crew thought that they could beat the odds.
More details on the Arnold and Annabel McClellan case surfaced today in the San Francisco Chronicle. At this point, it looks like the McClellan's themselves didn't make the big money off the alleged scheme. Instead, it was Annabel's sister, Miranda Sanders, and her husband James Sanders -- who were both busted by Britain's Financial Services Agency (FSA) -- who mainly benefited. As the Chronicle reports:
The transatlantic scheme netted more than $23 million, according to the SEC, from trading in seven U.S. companies just ahead of their announced takeover, including those mentioned above. The carefully timed trades in financial instruments called "spread bet" contracts were made based on inside information received from the McClellans, according to court documents.
The proceeds were shared mostly among the Sanderses; the brokerage, Blue Index Ltd., since put out of business by the FSA; and some of the firm's clients, according to investigators. "Annabel McClellan tipped others for her own personal benefit, as a gift to a friend or relative, and to confer a benefit on family members," according to the SEC.
According to the SEC, the insider trading snowballed over time. That is typical of how greed works. You get a taste of easy money and start thinking about getting more. And, when it seems like nobody is looking, you find it impossible to keep your hand out of the cookie jar.
The weird thing in all of this is just what, exactly, Arnold McClellan thought that he was getting out of his alleged actions. If you wade through the full SEC complaint against the McClellans you will not find any concrete evidence that the monies generated by the scheme were circulating back to the McClellans. Some funds did apparently go the Annabel's father, but the couple itself appear not to have benefited.
Of course, it could be a matter of time before more information surfaces about this angle in the case. But if no evidence does, than observers will surely be left scratching their heads: What kind of guy risks his career and prison time to help out his in-laws?