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Securities and Exchange Commission v. Saleem Khan, et al., Civil Action No. 3:14-cv-02743 (U.S. District Court for the Northern District of California)
SEC Charges Four California Residents in $12 Million Insider Trading Scheme
The Securities and Exchange Commission today charged four Northern California residents with insider trading in Ross Stores stock options based on nonpublic information about monthly sales results leaked by one of the retailer’s employees.
The SEC alleges that Saleem Khan was routinely tipped by his friend Roshanlal Chaganlal, who was a director in the finance department at Ross headquarters in Dublin, Calif. Khan used the confidential information to illegally trade on more than 40 occasions ahead of the company’s public release of financial results. Besides trading in his own brokerage account, Khan traded in his brother-in-law’s account as well as an account belonging to another acquaintance. Khan also tipped his work colleagues Ranjan Mendonsa and Ammar Akbari so they too could trade in Ross stock options based on the nonpublic information. The insider trading resulted in collective profits of more than $12 million.
The SEC further alleges that at the outset of the scheme, Chaganlal gave $17,000 to Khan for the purpose of insider trading in Ross securities using the brother-in-law’s account. They attempted to disguise the exchange by using two cashier’s checks for $8,500 purchased in the name of Chaganlal’s wife of a different surname. Khan later funneled $130,000 of the generated trading profits back to Chaganlal by using third-party intermediaries. For example, Khan wrote Akbari a check for $35,000, and Akbari in turn wrote two checks totaling $35,000 to Chaganlal’s wife. Another $75,000 was routed in a roundabout way to a title company so it could be credited at closing toward Chaganlal’s purchase of a newly-built home.
According to the SEC’s complaint filed in federal court in San Francisco, Khan separately made approximately $450,000 in illicit profits by insider trading in stock options of software company Taleo Corporation ahead of its 2012 acquisition by Oracle Corporation. Khan began purchasing large numbers of options in Taleo six days before the merger announcement based on nonpublic information he received from an insider he knew at Oracle. Khan had never previously traded in Taleo securities.
The SEC alleges that the serial insider trading involving Ross securities began in August 2009 and continued until December 2012, when Chaganlal was terminated by the company. He had access to confidential sales figures on an internal webpage limited to a relatively small group of Ross employees. Chaganlal regularly communicated the confidential details to Khan so he could trade ahead of impending monthly sales announcements by Ross. Khan generated $5.4 million in profits in his own account, and $6 million in profits in his brother-in-law’s account. Khan’s supervisor Mendonsa made approximately $800,000 in insider trading profits based on the nonpublic information that Khan in turn tipped to him. Akbari made approximately $2,000 by insider trading on Khan’s illegal tips.
The SEC’s complaint names two relief defendants - Khan’s acquaintance Michael Koza and Khan’s brother-in-law Shahid Khan - for the purposes of recovering insider trading profits in their brokerage accounts through trades conducted by Khan. They each have agreed to settle the matter by paying the court the entire amount of insider trading profits remaining in their accounts, which total $240,741 for Shadid Khan and $31,713 for Koza.
The SEC’s complaint charges Saleem Khan, Chaganlal, Mendonsa, and Akbari with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits plus interest, and financial penalties. The complaint also seeks an officer-and-director bar against Chaganlal.
The SEC’s investigation, which is continuing, has been conducted by Victor Hong and Elena Ro. The case has been supervised by Steven Buchholz and Jina L. Choi of the Market Abuse Unit and San Francisco Regional Office as well as Joseph G. Sansone of the Market Abuse Unit. The SEC’s litigation will be led by Aaron Arnzen. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority.
By Steven Tenn and Brett Wendling, Bureau of Economics June 13, 2014.
In a recently published article, we discuss our finding that generic drug companies successfully use low-pricing strategies to discourage entry by new competitors in certain circumstances. We identify the effect of potential competition using a unique feature of a federal law that regulates drug competition, commonly referred to as the “Hatch-Waxman Act.” Under certain conditions, Hatch-Waxman awards 180 days of marketing exclusivity to the first generic firm filing for FDA approval, temporarily protecting the FDA-designated incumbent from entry by other generic competitors.
We compare generic drug prices in the exclusivity period to generic drug prices in the following period, when Hatch-Waxman no longer prohibits entry. The analysis controls for other factors that vary between the two periods, including the number of actual competitors. Because the remaining difference between the two periods is the ability of other generic firms to enter, lower prices outside of the exclusivity period are interpreted as a response to potential competition, or “entry threats.”
The results show that generic drug companies’ responses to potential competition vary by the market size of the drug. In drug markets with lower dollar sales, incumbents employ a strategy of reducing price in response to an increase in potential competition. This price reduction is an effective entry deterrent. In drug markets with higher dollar sales, however, the incumbent accommodates entry by lowering price only after competing manufacturers enter the market. This pricing strategy leads to a significant increase in the number of generic competitors after the Hatch-Waxman exclusivity period ends. Overall, the paper shows that price can be an effective entry deterrent in certain circumstances where the cost of deterring entry is not too high.
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