The SEC charged a Baltimore-based consultant and his Cleveland-based uncle with trading on material, nonpublic information obtained from the consultant's fraternity brother, who got it from his own San Diego-based brother.  In a parallel criminal proceeding, the U.S. Attorney's Office for the Southern District of California filed criminal charges on the traders.

The consultant, Brett Cohen, allegedly received coded e-mails from his fraternity brother (unnamed) - that used references from the movie "Wall Street."  Cohen then would tip Uncle David Myers - using only outdoor pay phones - who then traded on the inside information to the tune of $600,000 in illicit profits.  The information originated with the frat brother's own brother, a patent agent who learned about 2 corporate events involving his employer, Sequenom, prior to their public announcements:  (i) in January 2009, Sequenom offered to acquire Exact Sciences Corporation; (ii) in April 2009, Sequenom announced that previously announced test data from its Down syndrome screening test could no longer be relied upon.

    Alleged Tipping on the EXAS Transaction.   After getting the tip on the EXAS transaction from his brother, the fraternity brother communicated with Cohen.  One was an email asking, "[a]ny word related to Blu H@rsesh0e?  La Jolla says the times are ripe."  [Characters in "Wall Street" used the phrase, "Blue Horseshoe loves Anacot Steel," as a code for insider trading.  "La Jolla" referred to the tipper, the patent agent brother.] 

After at least a dozen phone calls among the 4 participants in the succeeding days, Uncle Myers made his first-ever purchase of EXAS securities, buying 15,000 shares - the first stock purchase in Myers's brokerage account since at least January 2007.  Myers later purchased an additional 20,000 shares.  Sequenom announced the acquisition after the close on 1/9/09;  the following day, EXAS stock rose 50%, as trading volume increased 466%.  Over the next few weeks, Myers sold nearly all his EXAS stock for an illegal profit of $34,000.

    Alleged Tipping on the Down Syndrome Test Data.   After learning that investors could no longer rely on previously disclosed data related to its Sequenom's Down syndrome test, the patent agent brother tipped his brother ahead of the company's announcement.  Following that news, the price of Sequenom's shares dropped by more than 75% in a single day.  Cohen illegally obtained and tipped the inside information just prior to the company's announcement through a series of communications.  In one such call placed from a pay phone near his workplace, Cohen relayed the information to Uncle Myers, who immediately purchased risky Sequenom put options just minutes before the markets closed on 4/29/09.  He sold the entire position the next morning, for $570,000 in illegal profits.

The SEC credits Sara Kalin, Diana Tani, and Marc Blau with conducting the investigation;  John Bulgozdy will lead the SEC's litigation efforts.  Assistance was provided by the U.S. Attorney's Office for the Southern District of California and the FBI, as well as FINRA and the Options Regulatory Surveillance Authority. 

The SEC's investigation continues.   [SEC Release 10-241, 12/8]