[ by Howard Haykin ]

The SEC on Thursday charged a former West Coast analyst working for an East Coast investment bank with illegally issuing tips about clients participating in mergers and acquisitions. 

Profiles of Defendant and Relief Defendants. Named in the SEC complaint:

• Jauyo ("Jason") Lee, 28, resides in New York, NY.  Worked in Investment Banking unit of Leerink Swann LLC in San Francisco from June, 2009 to April, 2011.  Currently works in the financial industry for another finn.
• Victor Chen, 28, resides in Sunnyvale, CA.  Currently works as an engineer.
• Jennifer Chen, 26, resides in Sunnyvale, CA.  Is sister of Victor Chen. During the period in question, Ms. Chen and Jason Lee had condominiums in same building complex.
• Leerink Swann LLC is an investment banking firm with a specialization in healthcare companies.  It's headquartered in Boston, MA, with an office in San Francisco, CA.
• Candela Corporation, a medical-device company in Massachusetts, was a publicly-traded company before being acquired by Syneron.
• Syneron Medical Ltd., a medical-products company based in Israel, engaged Leerink in 2009 to assist with its acquisition of Candela.
• Somanetics Corporation, a medical-device company in Michigan, was a publicly-traded company before being acquired by Covidien in 2010.  Somanetics engaged Leerink to assist with the Covidien deal.
• Covidien plc, a healthcare products company, incorporated in Ireland, with offices in Massachusetts.

Lee and Chen attended the same university, were friends in college, graduated one year apart, and maintained a social relationship since graduation - largely through emails, telephone calls, texts, and social media, as well as socializing in person.  Chen knew that Lee worked in the investment banking departtnent of Leerink.

SEC Findings and Allegations. During his employment at Leerink, Jason Lee gleaned sensitive nonpublic information about the deals from unsuspecting co-workers involved with those clients and by reviewing various internal documents about the transactions.  Jason tipped Victor Chen with the confidential information.  Chen traded heavily on the information Lee provided - trading in stock and call options of the target company - and made more than $600,000 in illicit profits - a 237% return on his initial investment.  Bank records reveal a pattern of large cash withdrawals by Lee followed by large cash deposits by Chen, who then used the money for the insider trading.

Lee first became privy to information about Leerink client Syneron Medical which, in 2009, was negotiating to acquire Candela Corporation.  Later, in 2010, he learned that Leerink client Somanetics Corporation was in the process of being acquired by Covidien plc.  As Lee collected nonpublic details about each of the deals, he communicated with Chen repeatedly, exchanging dozens of phone calls and text messages. Some of the calls took place from Lee’s office telephone at Leerink. 

Chen had never previously bought securities in these companies, yet he suddenly spent a significant portion of his available cash to buy the Candela and Somanetics securities. Chen proceeded to sell most of his Candela and Somanetics holdings right after the deals were publicly announced.  Some of his trades were made in his sister Jennifer's account. 

SEC Alleged Rule Violations and Sanctions. Lee and Chen allegedly violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder.  The SEC seeks to disgorge them of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against Lee and Chen.  The SEC also seeks to disgorge relief defendants of illicit profits.

SEC Staff Credits.   Investigation by Chicago Regional Office personnel Kara Washington and John Kustusch;  supervised by Peter Chan and Steven Klawans.  Litigation to be handled by Steven Seeger.

For further details, go to: [SEC PR 12-201, 9/27/12] and [SEC Complaint].