In SEC v. Scammell, No. 2:11CV06597, 2011 WL 3506153 (C.A.C.D. Aug. 11, 2011), the Securities and Exchange Commission (“SEC”) brought charges against Toby G. Scammell for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5.
According to the SEC’s allegations, Scammell purchased 659 Marvel Entertainment, Inc. (“Marvel”) call options for $5,465 between August 13, 2009 and August 28, 2009. The Walt Disney Company (“Disney”) announced the planned acquisition of Marvel on August 31, 2009. In the nine days following the announced acquisition, Scammell sold all of the Marvel call options for a total profit of $192,496.61.
The following facts are based on the allegations in the SEC’s complaint. During the time period in question Scammell worked for an investment fund in San Francisco and Scammell’s girlfriend had an externship in Disney’s corporate strategy department in Burbank, California. From mid-July until August 2, 2009, Scammell lived in his girlfriend’s apartment. The two spoke and emailed each other about the ‘big project’ she was working on. During this time, Scammell had access to his girlfriend’s Blackberry. On August 2, Scammell moved away to work for the investment fund but continued to speak to his girlfriend several times a day. The SEC alleged that, by August 10, Scammell knew the timing of the acquisition announcement because his girlfriend mentioned that the timing would allow them to attend her friend’s wedding. The SEC also alleged that by August 13, Scammell found out the identity of the acquisition target, Marvel Comics, either by overhearing conversations or seeing electronic documents meant for his girlfriend.
Over two weeks Scammell purchased 659 call options for Marvel using an Ameritrade account. Scammell’s purchases in some cases represented over 90% of the daily market volume of Marvel options. At the time he purchased call options for $45 and $50, Scammell knew Marvel stock had never closed above $41.74.
Scammell took some of the funds used for the options from his brother who had given him a power of attorney in financial matters and did not know about the trades. Typically, Scammell only purchased long term investments in his brother’s account, with the Marvel purchases representing only the second time he had ever traded call options. All of the options purchased with his brother’s funds were short term, risky, and “represented an amount that was more than fourteen times the normal monthly investment.” He never told anyone of the profit he made and placed his profit under his brother’s name into a new account. The SEC included in the complaint that on or about August 16, 2009, Scammell “searched the internet for the terms ‘insider trading,’ ‘tender offer,’ ‘Williams Act,’ ‘Rule 10b-5,’ and ‘material, non-public information.’”
The SEC claimed Scammell violated Section 10(b) of the Exchange Act and Rule 10(b)-5. The SEC stated that due to the nature of their relationship Scammell “owed his girlfriend a duty of trust and confidence” and breached this duty by “trading Marvel options while he was aware of material non-public information he misappropriated” from her; thus he knew, or was reckless in not knowing, the information was confidential and he could not use it to his benefit. The complaint also alleged that Scammell acted with scienter when he purchased Marvel options based on confidential, material and non-public information.
The SEC seeks permanent enjoinment of Scammell from violating Section 10(b) of the Exchange Act, 15 USC §78j(b) and Rule 10b-5. It also seeks orders to disgorge all illegal trading profits plus prejudgment interest, as well as civil penalties under Section 21A of the Exchange Act.
The primary materials for this case may be found on the DU Corporate Governance website.