SEC Complaint: Brett A. Cohen; David V. Myers; Aaron J. Scalia
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Case 3:10-cv-02514-L -WMC Document 5 Filed 02/15/11 Page 1 of 15 1 JOHN B. BULGOZDY, Cal. Bar No. 219897 Email: [email protected] 2 SARA D. KALIN, Cal. Bar No. 212156 Email: [email protected] 3 Attorneys for Plaintiff 4 Securities and Exchange Commission Rosalind R. Tyson, Regional Director 5 Michele Wein Layne, Associate Regional Director 5670 Wilshire Boulevard, 11th Floor 6 Los Angeles, California 90036 Telephone: (323) 965-3998 7 Facsimile: (323) 965-3908 8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10 SECURITIES AND EXCHANGE COMMISSION, Case No. 3:10-CV-02514-L-WMC 11 Plaintiff, FIRST AMENDED COMPLAINT FOR 12 VIOLATIONS OF THE FEDERAL vs. SECURITIES LAWS 13 BRETT A. COHEN; DAVID V. MYERS; AARON 14 J. SCALIA; AND STEPHEN J. SCALIA, 15 Defendants. 16 17 Plaintiff Securities and Exchange Commission (“Commission”) alleges as follows: 18 SUMMARY 19 1. This case involves unlawful insider trading in the securities of two molecular 20 diagnostics companies, Sequenom, Inc. (“Sequenom”) and Exact Sciences Corporation 21 (“EXAS”). Aaron J. Scalia (“A. Scalia”), a patent agent formerly employed by Sequenom, 22 learned material nonpublic information about the development of one of Sequenom’s diagnostic 23 products, and separately about Sequenom’s proposed acquisition of EXAS, and illegally tipped 24 his brother, Stephen J. Scalia (“S. Scalia”). S. Scalia in turn tipped defendant Brett A. Cohen 25 (“Cohen”), his fraternity brother, who tipped defendant David V. Myers (“Myers”), Cohen’s 26 uncle. Myers traded on the basis of A. Scalia’s material nonpublic information and realized 27 illicit profits of approximately $607,640 on the purchase and sale of EXAS securities, and the 28 purchase and sale of put options on Sequenom, and unrealized profits on 1,000 shares of EXAS Case 3:10-cv-02514-L -WMC Document 5 Filed 02/15/11 Page 2 of 15 1 stock. 2 2. By engaging in the conduct alleged in this Complaint, the defendants violated the 3 antifraud provisions of the federal securities laws. The Commission requests that the Court 4 permanently enjoin each of the defendants from further violations of these laws, impose a civil 5 penalty on each defendant, and require the defendants to disgorge all profits realized from their 6 unlawful tipping and trading, plus prejudgment interest on those amounts. 7 JURISDICTION AND VENUE 8 3. This Court has jurisdiction over this action pursuant to Sections 21(d)(1), 21(e), 9 21A, and 27 of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. §§ 78u(d)(1), 10 78u(e), 78u-1, and 78aa. Defendants, directly or indirectly, made use of the means or 11 instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities 12 exchange in connection with the transactions, acts, practices and courses of business alleged in 13 this Complaint. 14 4. Venue is proper pursuant to Sections 21(d), 21A, and 27 of the Exchange Act, 15 15 U.S.C. §§ 78u(d), 78u-1, and 78aa, because certain of the transactions, acts, practices, and 16 courses of business constituting violations of the federal securities laws occurred within this 17 d is t r ic t . 18 THE DEFENDANTS 19 5. Brett A. Cohen (“Cohen”), age 39, resides in Baltimore, Maryland, and is the owner 20 of BAC Consulting LLC, a business consulting company. Cohen is Myers’ nephew and a fraternity 21 brother of S. Scalia. 22 6. David V. Myers (“Myers”), age 54, resides in Cleveland, Ohio. Myers is the 23 executive vice president at I.SO Italia USA Inc., a tanning bed sales company. Myers is Cohen’s 24 uncle. 25 7. Aaron J. Scalia (“A. Scalia”), age 35, resides in San Diego, California. A. Scalia was 26 employed as a patent agent for Sequenom between 2002 and 2010. A. Scalia is S. Scalia’s younger 27 brother. 28 8. Stephen J. Scalia (“S. Scalia”), age 38, resides in Baltimore, Maryland. S. Scalia 2 10cv02514 Case 3:10-cv-02514-L -WMC Document 5 Filed 02/15/11 Page 3 of 15 1 owns and operates Old Glory Harley-Davidson/Buell, a motorcycle company. S. Scalia is A. 2 Scalia’s older brother and a fraternity brother and friend of Cohen. 3 RELATED ENTITIES 4 9. Sequenom is a Delaware corporation located in San Diego, California. Sequenom 5 is a diagnostic testing and genetics analysis company. Sequenom’s common stock is registered 6 with the Commission pursuant to Section 12(b) of the Exchange Act, and its shares trade on The 7 Nasdaq Global Market under the symbol “SQNM.” Sequenom’s options trade on multiple 8 exchanges, including the Chicago Board Options Exchange. 9 10. EXAS is a Delaware corporation located in Madison, Wisconsin. EXAS is a 10 molecular diagnostics company that focuses on the early detection and prevention of colorectal 11 cancer. EXAS’ common stock is registered with the Commission pursuant to Section 12(b) of 12 the Exchange Act, and its shares are traded on The Nasdaq Capital Market under the symbol 13 “EXAS.” 14 THE DEFENDANTS’ FRAUDULENT CONDUCT 15 I. A. Scalia’s Duty of Confidentiality to Sequenom 16 11. A. Scalia was a patent agent at Sequenom between 2002 and 2010, and worked in 17 the company’s legal department on intellectual property matters. As an employee of Sequenom, 18 A. Scalia had a duty not to disclose any confidential information he learned in the course of his 19 employment and not to use the information for his benefit or the benefit of others. At all times 20 during his employment at Sequenom, A. Scalia was aware of this duty of confidentiality. 21 12. In 2002, at the time A. Scalia was hired by Sequenom, he signed an 22 “Acknowledgment of Receipt of Employee Handbook,” in which he agreed to familiarize 23 himself with the information in the Handbook and to observe the policies set forth in it, including 24 Sequenom’s Insider Trading Policy. 25 13. Sequenom made available to employees its Insider Trading Policy on its internal 26 internet site and periodically required employees to acknowledge in writing their knowledge and 27 awareness of the Insider Trading Policy. The Policy explicitly warned that “[f]ailure to comply 28 with these procedures could result in a serious violation of the securities laws by you and/or 3 10cv02514 Case 3:10-cv-02514-L -WMC Document 5 Filed 02/15/11 Page 4 of 15 1 Sequenom and can involve both civil and criminal penalties.” The Policy defined the term 2 “insider”: “An ‘insider’ is a person who possesses, or has access to, material information 3 concerning Sequenom that has not been fully disclosed to the public.” The Policy explained that 4 a “person can be an insider for a limited time with respect to certain material information even 5 though he or she is not an officer or director. For example, a secretary who knows that a large 6 contract has just been received or that an acquisition is about to occur may be an insider with 7 respect to that information until the news has been fully disclosed to the public.” The Policy 8 states that “information should be regarded as material if there is a likelihood that it would be 9 considered important by an investor in making a decision regarding the purchase or sale of 10 Sequenom stock.” 11 14. Sequenom’s 2008 Code of Business Conduct and Ethics reiterated the duty of 12 confidentiality owed by employees and the restrictions on use of material nonpublic information 13 by Sequenom employees. The 2008 Code explicitly stated, with regard to Insider Trading: 14 “Employees who have access to confidential (or ‘inside’) information are not permitted to use or 15 share that information for stock trading purposes, or for any other purpose except to conduct 16 Company-related business.” It further stated: “To use material non-public information in 17 connection with the buying or selling of securities, including ‘tipping’ others who might make an 18 investment decision on the basis of this information, is not only unethical, it is illegal.” 19 15. From time to time throughout his employment, A. Scalia received written copies 20 of these policies and/or was required to review them on Sequenom’s internal internet site, and A. 21 Scalia acknowledged his obligation to comply with these policies and maintain the 22 confidentiality of Sequenom’s confidential information, which included information regarding 23 proposed acquisitions and new project or product announcements. 24 II. The Insider Tipping and Trading 25 A. Insider Tipping and Trading in EXAS Securities 26 16. In mid 2008, Sequenom explored the acquisition of EXAS. In late September 27 2008, Sequenom executives flew to EXAS’ headquarters to conduct due diligence. Around the 28 same time, A. Scalia began conducting due diligence on EXAS’ intellectual property. Other than 4 10cv02514 Case 3:10-cv-02514-L -WMC Document 5 Filed 02/15/11 Page 5 of 15 1 Sequenom’s directors and executive officers, A. Scalia was one of the few Sequenom employees 2 aware of the potential acquisition due to his position as a patent agent and his assignment to 3 conduct due diligence on EXAS’ intellectual property. A. Scalia knew that the subject of the 4 proposed acquisition was confidential. Internal Sequenom documents regarding the potential 5 acquisition were marked “CONFIDENTIAL,” and the EXAS acquisition was given a code name 6 to maintain it s confidentiality. 7 17. In or about October 2008, Cohen had a telephone conversation with S. Scalia.