SEC Charges Ex-CEO With Leaking Confidential Information to Restaurant Manager
On Nov. 21, the U.S. Securities and Exchange Commission announced two men had agreed to settle insider trading charges related to the buying and selling of shares of GenTek, Inc., a company that produces chemical products and engine components. Prior to its 2009 acquisition by a private equity form, GenTek was publicly traded on NASDAQ.
William E. Redmond, Jr., was GenTek’s chief executive officer from 2005 up through its 2009 acquisition. According to court documents filed by the SEC, Redmond was close friends with Stefano Signorastri, the manager of a Manhattan restaurant where Redmond frequently dined. The SEC said Redmond “regularly discussed personal and business matters with Signorastri,” which included “frequent disclosures of confidential corporate information” related to GenTek. As an officer of a public company, Redmond had a fiduciary duty under federal law (and company policy) not to discuss GenTek’s confidential matters with third parties unless there was a “legitimate business purpose.”
Nonetheless, according to the SEC, Redmond had “multiple conversations with Signorastri” about GenTek’s looming 2009 acquisition. During August and September of 2008, Signorastri purchased more than $275,000 in GenTek stock. When the deal was finally closed, Signorastri earned a profit of over $164,000.
The SEC said Signorastri also told one of his waiters about the looming GenTek acquisition. The waiter purchased stock and profited from the company’s sale. Redmond also told the manager of another Manhattan restaurant about the GenTek sale negotiations. The manager purchased shares based on this information and eventually earned a profit of about $2,500.
Redmond and Signorastri have agreed to settle the SEC’s civil charges. They must repay the “illicit profits” earned as the result of Redmond’s breach of his fiduciary duty. Altogether, the SEC said it expects to recover about $324,000 from the two men. The SEC will also ban Redmond from serving as an officer or director of any publicly traded company for the next five years.
Insiders Benefit at Shareholders’ Expense
It’s worth noting the SEC argued here that it was not just Redmond, but Signorastri who owed a “fiduciary duty” to GenTek. The SEC’s complaint said the restaurant manager “breached the fiduciary duty, or other duty arising out of a relationship of trust and confidence, that he had assumed from Redmond,” first by buying stock based on insider information, and then by relaying that information to his waiter.
In some cases, a corporate officer may not be liable for insider trading if he relays information to someone he is in a close or confidential relationship with, and that person then commits an illegal trade without the officer’s knowledge. Here, the SEC believed Redmond “expected to gain…a personal benefit from conveying” confidential information, implying he knew Signorastri would buy stock based on Redmond’s tips. It is not clear what the actual benefit to Redmond was, aside from perhaps obtaining better service at the restaurant. But in the end, that may have been enough for the SEC to bring charges.
Insider trading is often an indicator of more serious securities fraud by company executives. Many companies have faced federal class actions from investors left out in the cold while insiders earned illicit profits. If you have been a victim of corporate insider trading, securities fraud, or believe you have purchased an unsuitable investment, contact the offices of Florida stockbroker fraud attorney Gregory Tendrich, P.A., and speak with someone right away.