U.S. v. Klein: Ex-Law Firm Partner Convicted of Insider Trading
In United States v. Klein, No. 2:16-cr-00442 (E.D.N.Y. Aug 04, 2016), a grand jury indicted Robert Schulman (“Defendant”), a partner at a law firm (“Law Firm”) for conspiracy to commit securities fraud and securities fraud. According to published reports, Mr. Shulman was eventually of convicted of “securities fraud and conspiracy” in March 2017. See NY jury convicts ex-law firm partner of insider trading on Pfizer-King deal, Reuters, March 15, 2017.
According to the allegations in the indictment, Defendant learned from an associate at his Law Firm of a possible merger between King Pharmaceuticals ("King") and Pfizer Inc. ("Pfizer"). According to the indictment, Defendant met with Klein, President of Klein Financial Services and Defendant’s investment advisor, to discuss his investment portfolio. During this meeting, Defendant allegedly revealed material non-public information about the pending merger (“Information”) to Klein. A few days later, Klein allegedly purchased shares of King stock for himself and for clients of Klein Financial, including shares for Schulman. Klein was alleged to have revealed the Information to a co-conspirator who, on Klein’s recommendation, bought additional shares and call options.
According to the indictment, after the public acquisition announcement, Klein sold all of his and his clients shares in King, earning $319,000 in profits for his clients, $15,500 for Defendant, and a personal profit of $8,800. Under Klein’s direction, the co-conspirator exercised all unexpired call options in King and sold all shares in King, making a profit of more than $109,000. According to the allegations, the co-conspirator paid $28,000 of those profits to Klein through checks made to family members.
The indictment included a count for securities fraud and conspiracy to commit securities fraud. Violations of Rule 10b-5 required a showing that the indicted party “knowingly and willfully” used and employed a manipulative and deceptive device or contrivance by (1) employing one or more devices, schemes or artifices to defraud, (2) making untrue statements of material fact and omitting to state material facts necessary in order to make the statements made not misleading, and (3) engaging in acts, practices and courses of business which would and did operate as a fraud and deceit upon investors in the relevant company.
The indictment alleged that Defendant engaged in securities fraud. As the indictment stated:
In advance of the public announcement of the merger between King and Pfizer, the defendant obtained MNPI [material non-public information] regarding a transaction involving King and, based in whole or in part on that information, caused clients of Klein Financial and others to execute securities transactions in King, directly and indirectly, by use of means and instrumentalities of interstate commerce and mails.
The indictment also placed Defendant on notice of an intent to seek criminal forfeiture in the event of a conviction.
The indictment for this case may be found on the DU Corporate Governance Page.