[ by Howard Haykin ] Close friends of well-positioned executives are privy to confidential information that they really have no business hearing about.  Sometimes a person takes business calls in the presence of others - and may be too embarrassed to ask that friend to excuse him- or herself for the duration of the call.  At other times, friends simply tire of talking about golf, or collectibles, or the features on their new BMWs.   Whatever the circumstances, negligent oversight will lead to passing along confidential information to a non-insider, at which point the dark side of that person's nature - be it jealousy, inferiority, hubris - takes over and dictates what comes next. Late Tuesday, the SEC filed charges against the close friend of a CEO with insider trading in the stock of a Houston-based employment services company, by exploiting confidential information he learned while the friends spent time together. SEC Findings and Allegations. Ladislav "Larry" Schvacho, a Georgia resident at the time of his illegal trading, learned that Comsys IT Partners Inc. would be acquired by another staffing company.  That information then was allegedly used by Schvacho to trade Comsys securities - which netted him $511K in illicit profits. Schvacho gleaned that information from telephone conversations that his friend, the CEO of Comsys, had with other Comsys executives regarding the acquisition, as well as through confidential, merger-related documents to which Schvacho had access.

"As a result of Schvacho’s time with the CEO, he learned nonpublic details and stockpiled Comsys shares until it became by far the largest stock investment that he’d ever made into a single company.  The Comsys CEO confided in Schvacho, who exploited that trust and stole information for a half-million-dollar payday."  -- William Hicks, Assoc. Regional Director, SEC’s Atlanta Regional Office.

Schvacho first met Larry Enterline when they worked for the same company in the 1970s.  Enterline went on to become the Comsys CEO in 2006.  The two maintained their close friendship even after Enterline moved to Houston to run Comsys, speaking frequently on the phone and maintaining a longstanding tradition of Friday evening dinner and drinks when Enterline visited Atlanta, where he still had a home. The two often shared confidential information with one another. Schvacho allegedly purchased about 72,000 shares of Comsys stock in the weeks leading up to the 2/2/10 public announcement that Comsys was to be acquired by Manpower Inc. Given their close relationship and long history of sharing confidences, Enterline made no significant effort to shield information from his friend.  Enterline reasonably expected that Schvacho would refrain from disclosing or otherwise misusing such confidential information. Here are several scenarios where Enterline disclosed information about the pending deal:

On 11/6/09, during one of their Friday evening dinners at a restaurant in Atlanta, Enterline spoke on the phone with other Comsys executives about the potential acquisition, in Schvacho’s presence.  The very next business day, Monday, 11/9, Schvacho began purchasing Comsys stock based on what he had heard.

From 12/11-14/10, while vacationing with Enterline, Schvacho allegedly heard or learned further nonpublic information about the deal.  Enterline discussed the possible acquisition in Schvacho’s presence during a phone conversation with another Comsys senior executive.  Schvacho also had access to Enterline’s merger-related documents during that vacation.  Several days later, Schvacho used the new information to buy additional Comsys stock.

On 12/19, Enterline again discussed the transaction in front of Schvacho, and again Schvacho was inspired to purchase even more Comsys shares.

On or about 1/20/10, Schvacho converted his 401(k) account to create a self-directed account so that he could buy even more Comsys shares, using all available cash in his brokerage accounts to purchase those shares.

Following the public announcement on 2/2/10, the price of Comsys shares jumped 31%, and Schvacho immediately sold half of his Comsys shares.

SEC Atlanta Staff Credits. Investigation by Debbie Hampton and Matthew McNamara. Paul Kim will lead the litigation. For further details, go to:  [SEC PR 12-143, 7/25/12] and [SEC Complaint].