The Securities and Exchange Commission charged a CPA and his son in New York on Thursday, accusing them of conducting an insider trading scheme involving tips on nonpublic information that they sent in coded email messages disguised as discussions about golf.
The SEC alleges that Sean R. Stewart, who is currently a managing director at a prominent investment bank, routinely tipped his father Robert K. Stewart with confidential information about future mergers and acquisitions involving clients of two investment banks where he has worked during the past few years.
The elder Stewart, who is a CPA as well as the CFO of a technology company, allegedly cashed in on the tips by placing and directing highly profitable securities trades ahead of at least a half-dozen merger and acquisition announcements. The scheme generated approximately $1.1 million in illicit proceeds in a four-year period.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against the Stewarts.
According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Robert Stewart recruited a trading partner to help him hide his illegal trading and the connection to his son as the source of the nonpublic information about investment bank clients. Trades were conducted in the partner’s account, and the illicit profits were shared in the form small cash payments to Robert Stewart to avoid creating a clear paper trail of the kickbacks. They also spread trades over numerous stock options series in an attempt to avoid raising red flags with regulators.
“Serial insider traders assume a huge risk that we will detect their pattern of trading and connect them to their source of confidential information,” said Daniel M. Hawke, chief of the SEC Division of Enforcement’s Market Abuse Unit. “We have integrated new technological tools to quickly and easily identify relationships among traders and spot suspicious trading across multiple securities.”
According to the SEC’s complaint, there were additional ways the elder Stewart and his fellow trader attempted to conceal the scheme and evade detection when sharing nonpublic information obtained from Sean Stewart about investment bank clients.
They primarily met in-person or used coded e-mail messages to discuss the scheme and trading plans. Among examples of e-mail text using golf terminology were “saw local story about high cost of golf reservations since a foreign company purchased all- even more expensive than imagined” and “might have an opportunity to play golf- but would need to book the reservation as soon as the office opens Tuesday morning.”
The SEC’s complaint charges Robert and Sean Stewart with violations of the antifraud provisions of the federal securities laws.
Robert Stewart was arrested on conspiracy and insider trading charges this morning at his home in North Merrick, Long Island. Sean Stewart surrendered to the FBI on the same charges in Middleton, Wis., and is expected to appear in Manhattan federal court on Monday.
“The Stewarts father and son alike allegedly engaged in insider trading together to the tune of more than $1 million,” said Manhattan U.S. Attorney Preet Bharara in a statement. “And, as alleged in one instance, the son’s tip to his father became a gift to himself when his father kicked back some of the proceeds of the insider trading to pay for his son’s wedding. I would like to thank our partners at the FBI for their excellent investigative work on this and so many other financial fraud cases.”
In early 2011, Sean Stewart, who at the time held the position of vice president in the Healthcare Investment Banking Group of a global bank headquartered in Manhattan, began tipping his father, Robert, with nonpublic information about upcoming mergers and acquisitions. The first of these deals involved the acquisition of Kendle International Inc. by INC Research, LLC, which was announced publicly on May 4, 2011. Sean Stewart worked on the deal, representing Kendle. His father Robert made about $7,900 in profits on purchases of Kendle stock executed in February and March of 2011. When questioned by the Securities and Exchange Commission about his Kendle trades in May 2013, the elder Stewart reported that he used the proceeds of those trades to pay expenses related to his son Sean’s June 2011 wedding.
The second deal about which Sean Stewart tipped his father Robert was the acquisition of Kinetic Concepts, Inc. by Apax Partners, announced on July 13, 2011. Although the elder Stewart purchased some stock in KCI based on his son’s tip, he sold that stock before the acquisition was announced, around the same time that Sean Stewart learned the Financial Industry Regulatory Authority was conducting an inquiry into his father’s Kendle trading.
Also around this time, in the spring of 2011, the elder Stewart expressed a concern to a co-conspirator and cooperating witness not named in the criminal complaint that Robert was “too close to the source” to be trading in KCI stock his own account, and asked the cooperating witness to make purchases of KCI call options for Robert in CW-1’s brokerage account. The witness agreed to do so, and also mirrored for his own benefit the KCI trades that the elder Stewart was directing.
When the KCI/Apax Partners deal was announced, the elder Stewart and the cooperating witness reaped profits totaling approximately $107,790. At around this time, Stewart told the witness that the source of the KCI tip and the earlier Kendle tip had been his son. Later, around the spring of 2012, Robert clarified for the witness that the son in question was Sean Stewart, who worked on the “sell side” on Wall Street.
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