That was fast! The Securities and Exchange Commission didn’t waste much time going after investors who bought shares of Dow Jones & Co in the weeks prior leading up to the public revelations that News Corp had offered to buy the company at a steep premium. Yesterday, the SEC filed a lawsuit against a Hong Kong couple, Kan King Wong and Charlotte Ka On Wong Leung, accusing them of insider trading. The couple had purchased $15 million of Dow Jones shares prior to the May 1st announcement.
“It was their first purchase of Dow Jones shares -- and a profitable one,” the Wall Street Journal reports today. “After the unsolicited offer was disclosed May 1, Dow Jones shares rose more than 50%. Three days later, the couple had their broker sell their entire position in the stock for a profit of $8.2 million.”
The close timing of the purchases with the announcement make it highly unlikely that this was simply a case of lucky timing on the part of the Wongs. Adding to the suspicion that the couple had insider information is the risk they took on buying the $15 million of stock. Prior to the transactions, the Wongs reportedly had only $433,000 in their Merrill Lynch account available for purchasing equities. They borrowed money from Ms. Wong’s father and used margin loans to buy the stock. Another stock purchase was funded by a money transfer from an unknown person using a JP Morgan Chase account in Brussels. The stock purchases—the couple accumulated the stock over the course of a couple of weeks beginning April 13—were also a stark departure from the usual investment pattern of the Wongs. “The SEC said that prior to their Dow Jones stock purchases, the Wongs owned mostly fixed-income securities, as well as equities valued at $606,600,” the Journal writes.
The questions everyone is asking is: what did the Wongs know and how did they know it?
The Wall Street Journal’s Asian edition is published from Hong Kong, and its European edition is published in Brussels, raising the possibility that knowledge of the deal could have been leaked from within Dow Jones, which owns the Wall Street Journal.
Both the Journal and the New York Times report that the SEC is expected to investigate the possibility that the information came from Dow Jones director David Li, who is a business associate of Ms. Wong’s father, Michael Leung Kai Hung. Both papers report that Leung is on the board of the Canadian subsidiary of the Bank of East Asia, where Li is the chairman and chief executive. They also serve on the board of a Hong Kong social-service agency, and were minority shareholders in two companies that did business in China.
Neither Li nor Leung have been charged with any wrong doing. And Li denies having disclosed the information he had about News Corp’s bid to anyone—even his wife, according to the Journal.
Both the Times and the Journal both expend some precious newsprint case making it clear that they are not prematurely accusing anyone of insider trading, and make good stabs at explaining insider trading liability.
The New York Times is short and sweet:
“It is possible that the Wongs learned about the offer from somewhere else. And the possession of insider information is by itself not illegal. Regulators, however, have sometimes brought charges against the sources of a leak, even if the individual did not personally trade.
The Journal is far more complete:
A person who discloses inside information in violation of a duty -- even if he didn't trade on the information -- can be held liable for insider trading if the person he tipped traded securities. The SEC has filed charges against tippers who didn't trade, and has sought permanent injunctions and penalties. Regulators would have to show that the tipper knew that the person given the information would trade, or that he was reckless in not knowing that the person would trade.
If the person who trades has no idea that the information was provided in breach of a duty, then he may not be liable for insider trading. The further removed that person is from an initial source of information, the harder it can be to make the case.
Mysteries still remain. The SEC notes that it is likely that there were several others making highly unusual trades in the Dow Jones stock prior to May 1st, when News Corp’s bid became public knowledge. And, of course, we still have all that pesky unusual options trading to deal with.
Insider Trading Alleged in Shares Of Dow Jones [Wall Street Journal]
Scrutiny Seen of Trading in Dow Jones [New York Times]