[ by Howard Haykin ]

Share purchases allegedly based on insider information.

The SEC on Thursday obtained an order to freeze the assets of a stockbroker who allegedly used material nonpublic information obtained from a customer to trade in Burger King shares ahead of a significant announcement. 

Profile of the Accused Broker. Waldyr Da Silva Prado Neto, 42, a Brazilian citizen with an L-1 B visa, had resided in Miami, FL, before recently fleeing back to Brazil.  Prado also recently put his Miami condo up for sale. From 1999 through May 2012, Prado was employed as an RR with Wells Fargo or its predecessor entities.  In May 2012, Prado switched over to Morgan Stanley Smith Barney, where he worked until he was terminated on 9/13 for job abandonment.  He holds Series 7, 53, 63, and 65 licenses.

SEC Findings and Allegations. In 2010, while working at Wells Fargo, Prado is alleged to have learned from a brokerage customer that  Burger King Holdings, Inc. would be acquired by affiliates of 3G Capital Partners Ltd., a New York-based private equity firm, for $24 per share. 

The brokerage customer had been with Prado for more than 10 years and often shared his confidential financial information with the understanding that it was to remain confidential.  It was in March 2010 that the customer entered into a commitment with 3G Capital Partners to invest $50 million in a fund that the PE firm was to use for acquiring Burger King.  Thereafter, the customer was kept apprised of the status of negotiations between 3G Capital and Burger King.   The customer shared this information with Prado, beginning in March 2010.

The 2 parties finally came to an agreement on 8/31/10, whereby 3G Capital would acquire Burger King for $24 a share.  On 9/2/10, before the opening of trading, Burger King and 3G Capital issued a joint press release announcing that they had entered into a definitive agreement under which affiliates of 3G Capital would acquire Burger King stock at $24 per share, or $4 billion, including the assumption of the company's outstanding debt. The offer price represented a 46% premium to Burger King's share price on 8/31/10.

After the announcement on 9/2/10, the Customer satisfied his commitment to invest in the Fund by transferring at least $50 million to a Wells Fargo brokerage account, and those funds were then transferred to a 3G Capital account.  Prado acted as the RR for this Wells Fargo brokerage account.  When Wells Fargo questioned Prado about the large transfer of funds by the Customer, Prado was well aware of the reason for the transfer - he explained "[t]his client is buying 10% of a company with this money" and attached several documents regarding the Fund that identified 3G Capital.

According to the SEC’s complaint, Prado’s insider trading in Burger King stock occurred from 5/17/10 until 9/1/10.  During that time, Prado repeatedly contacted the customer by phone and e-mail, as well as in person in Brazil.  Based on the material nonpublic information Prado learned and misappropriated from the Customer, Prado purchased Burger King stock and/or call options in May, June, August
and September 2010.  Prado sold all of his Burger King stock and options positions on 9/2/10, the date of the Announcement, generated total illicit profits in excess of $175,000. 

According to the SEC’s complaint, Prado also went on to tip at least four of his customers who eventually traded in Burger King stock based on nonpublic information about the impending acquisition.  One customer's insider trading profits amounted to more than $1.68 million.

SEC Intended Sanctions. The SEC’s complaint against Prado seeks a permanent injunction from violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, disgorgement with prejudgment interest and monetary penalties.  The investigation continues.

SEC Staff Credits.   Investigation by the following members of the SEC Enforcement Division’s Market Abuse Unit:  Megan Bergstrom, David Brown, Diana Tani (in L.A.), and Charles Riely (in NY).  Investigation was supervised by Unit Chief Daniel Hawke and Deputy Chief Sanjay Wadhwa.

For further details, go to:  [SEC PR 12-195, 9/20/12] and [SEC Complaint].