On June 6, 2014, the SEC lost another enforcement action jury trial in SEC v. Moshayedi, Case No. 12-CV-01179, in federal court for the Central District of California. Moshayedi was an insider trading case; it followed the loss just a week earlier in another insider trading case, SEC v. Obus. See “SEC Enforcement Takes Another Blow in SEC v. Obus.”
Moshayedi, however, was a very different kind of case than Obus. It involved alleged stock trading by an insider himself – indeed, by the CEO and his brother, who were co-founders of sTec, Inc., which manufactured and sold to solid state drives (SSDs) to computer makers. The SEC alleged that the CEO knew that one of sTec’s key customers bought more SSDs than it needed in the third quarter of 2009 (under pressure from sTec to do so) and was going order fewer SSDs going forward, at least in the short run. The CEO and his brother went ahead and sold $268 million in shares in a secondary stock offering without disclosing this alleged knowledge. The SEC alleged that when the customer’s decreased demand for SSDs was revealed, sTec’s stock price dropped precipitously, which showed how important the information was.
Based on the information available in the court records, it is hard to take issue with the SEC’s decision to bring the case and take it to trial. Unlike Obus, the facts and circumstances did not, on their face, undercut the insider trading theory. (In Obus, the supposed culprit was an investor who allegedly revealed his nonpublic information in a call to the CEO, which made no sense at all if he was a supposed insider trading schemer.) As far as one can tell in reviewing the court record, there was substantial evidence that the CEO may have known about a likely change in future SSD orders from its key customer when he sold his stock. To be sure, there were legitimate disputes about what he precisely knew and how important that was to investors, but the fact pattern and the arguably huge loss avoided by the CEO provided strong reasons for the SEC to take the matter to the mat. Without some highly disputed issues of fact, cases like this never go to trial. But overall, this case seems like one the SEC is justified in bringing.
At this stage, it is hard to know why the jury rejected this SEC’s claims, finding the CEO and his brother not liable. It is certainly troubling that in a case in which the cards seem to be stacked in the SEC’s favor, it was unsuccessful. One would not expect the CEO’s argument in these circumstances – that what he knew was not that important, or that what appeared to have a large stock price impact was really something he didn’t know – would have a lot of jury appeal. It is possible that most of the witnesses, many of whom were former sTec employees (sTec has since been acquired by Western Digital) were well-disposed to the defendants and made it difficult for the SEC lawyers to make their case. The SEC is essentially forced to make its case through the testimony of company employees, and one should not underestimate the importance of whether witnesses appear willing, or reluctant, to present the SEC’s evidence. But at least based on what we can tell now, this does not appear to be another example of inexplicable overreaching by the SEC’s Enforcement Division. It would probably be a mistake simply to add this case to the growing list of recent SEC enforcement trial losses as evidence that the SEC enforcement litigation program is seriously askew.
June 9, 2014
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