Last week, the SEC filed suit against a securities broker in New Jersey Federal Court for alleged securities violations. The broker came across material, non-public information regarding the auction sale of Pharmasset Inc., an NJ pharmaceutical company, to Gilead Sciences. The information was disclosed to him by a Portfolio Manager of the brokerage firm whose customer-client, a board member of Pharmasset Inc., informed him of the pending sale. The broker was instructed by the Portfolio Manager, in accordance with the firm’s policies and procedures, that he would be prohibited from recommending or trading Pharmasset securities based on this material, non-public information. The broker had been trained and went through the firm’s verification process regarding these policies and procedures.
Prior to the announcement of the sale, the broker offered the inside information to two outside penny stock promoters. Using the information, these individuals profited a combined total of $708,327 after the sale of Pharmasset, Inc. was made public. The SEC claims that the broker was subsequently given a $35,000 cashier’s check and private jet-ski dock for providing them with this information. A Criminal suit has also been filed by the US Attorney’s Office for the District of New Jersey.
Of particular note in this case is that the brokerage firm has not been named in either suit and for now appears to have avoided any liability for their registered representative’s alleged actions. In fact, the name of the firm is not even mentioned in the underlying case, but instead just generally calls it a brokerage firm. From our research into the broker, it appears that he was with Morgan Stanley. The lack of Morgan Stanley’s culpability is evidence that following your firm’s policies and procedures can be a defense to a rogue representative’s actions.