SEC Sues Couple for `Suspicious' Dow Jones Trades (Update7)
By David Scheer and David Glovin
May 8 (Bloomberg) -- The U.S. Securities and Exchange Commission sued a Hong Kong couple for using inside information to make $8.2 million from purchases of Dow Jones & Co. stock before News Corp.'s $5 billion bid for the company.
Kan King Wong and Charlotte Ka On Wong Leung bought 415,000 shares valued at more than $15 million in April before the bid by Rupert Murdoch's New York-based media company became public May 1, the SEC said in a civil lawsuit filed at Manhattan federal court today. Dow Jones's stock price jumped 55 percent the day the offer was announced.
``This is an insider trading case involving highly profitable and highly suspicious purchases' of Dow Jones shares, the SEC wrote in a court filing. ``Defendants acquired a massive position,' exceeding their earlier bets, it said.
The case is at least the third since March in which U.S. regulators have targeted foreign investors' trading before U.S. takeover bids. The SEC sued a Credit Suisse Group banker May 3 for allegedly feeding tips on nine transactions to investors in Pakistan. In March, the agency accused a London couple of using secret knowledge for trades before a $32 billion bid for TXU Corp.
Options Spike
News Corp.'s offer for Dow Jones was also preceded by increased trading in call options, including the biggest surge in more than 18 months one day before the announcement, Bloomberg data show. The company said May 5 it's cooperating with an SEC inquiry and related subpoena from New York Attorney General Andrew Cuomo.
``Our investigation into trading by others in Dow Jones is active and continuing,' Cheryl Scarboro, the SEC enforcement official overseeing the probe, said in an interview. ``Cases like this are clearly a priority for us.'
Scarboro, who is based in the SEC's Washington headquarters, declined to say how the couple may have obtained advance notice of the News Corp. bid.
Jeffrey Lerner, a spokesman for New York Attorney General Andrew Cuomo, declined to comment. Hong Kong's Securities and Futures Commission spokesman Eddy Chan said the regulator is aware of the case, and declined to elaborate immediately.
Dow Jones spokesman Howard Hoffman declined to comment on the lawsuit filed today. An attorney for the couple couldn't be located.
Bloomberg LP, owner of Bloomberg News, competes with Dow Jones in providing financial news and information.
$3.2 Million Loan
Wong left the couple's apartment in Hong Kong's Mid-Levels district for work early morning May 9 local time and Leung and the maid weren't home, a security guard at the building who declined to be identified said. No one answered the intercom at about 10:30 a.m. local time.
The SEC said in its court filing that the agency personnel ``received information' on May 4 about suspicious trading in two accounts in the Hong Kong branch of Merrill Lynch & Co. Merrill alerted the SEC to the Leung's suspicious trading, according to two people with knowledge of the situation.
``People looking to capitalize on information may be hoping to go somewhere beyond the reach of U.S. processes,' said J. Bradley Bennett, a former SEC enforcement lawyer, now at Baker Botts LLP in Washington. ``There's very few places in the world where that's the case any more. I think it's a misperception about how easily detectable insider trading is.'
The couple didn't originally have enough money available in their Merrill Lynch account to fund the transactions, the SEC said. They spent more than a week amassing the funds, obtaining $3.2 million from the wife's father, who isn't named as a defendant, according to the SEC. They wired another $4 million from an account in Brussels.
Unusual Pattern
``Insider trading is a violation of both the law and Merrill Lynch policy, and we cooperate fully with the authorities investigating suspected cases,' Merrill Lynch spokesman Mark Herr said.
Prior trading in the couple's Merrill Lynch account made the Dow Jones trades look more suspicious, the SEC said. Before April 13, they hadn't traded Dow Jones securities in the account, which mainly held fixed-income assets, the SEC said. The account's only U.S. equities were 2,500 shares of Intel Corp., valued at about $54,000, the SEC said.
On May 4, the husband placed an order to sell the Dow Jones stake, asking his broker how long it would take for the money to become available in his account, the SEC said.
The SEC won a court order temporarily freezing their accounts to prevent them from withdrawing the sale proceeds.
Federal prosecutors may also try to trace the leak and look for criminal violations, said John Carney, a former prosecutor now at Baker & Hostetler in New York, who's not involved in the case.
`Very Beginning'
``This is the very beginning,' Carney said. ``I would be surprised if the U.S. Attorney's office doesn't take a good hard look at this thing.'
Rebekah Carmichael, a spokeswoman for U.S. Attorney Michael Garcia in New York, declined to comment.
The SEC suit asks U.S. District Judge Shira Scheindlin to bar the defendants from making illegal trades and seeks to recover profits and impose unspecified fines.
The suit is SEC v. Kan King Wong, 07-cv-3628, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: David Scheer in Washington dscheer@bloomberg.net ; David Glovin in U.S. District Court in New York at dglovin@bloomberg.net .
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