- Includes WTT Analysis July 23, 2003 -- The Securities and Exchange Commission announced that it has filed a civil injunctive action in the United States District Court for the Southern District of New York against eighteen defendants on charges of insider trading in the shares of PrimeSource Corporation ("PSRC"), a graphic arts dealer. The complaint alleges that the defendants purchased PSRC stock after receiving confidential information that Fuji Photo Film, U.S.A., Inc. ("Fuji") was planning to acquire PSRC. The defendants are individuals associated with two other Fuji graphic arts dealers - H.A. Metzger, Inc. ("Metzger") and London Litho Aluminum Company, Inc. ("London Litho") - and their tippees. The Commission's complaint also names two relief defendants who received profits from the illicit trades. To settle the case, the eighteen defendants have consented to be permanently enjoined from violating the antifraud and insider trading provisions of the Securities Exchange Act of 1934 ("Exchange Act"), to disgorge illicit profits plus prejudgment interest, and to pay civil penalties. The relief defendants have consented to disgorge their illicit profits plus prejudgment interest. The complaint alleges that the defendants, who traded before Fuji announced its takeover of PSRC on August 31, 2001, essentially comprise two insider trading rings. Trading by the defendants and the relief defendants resulted in illicit per-person profits ranging from as much as $89,500 to as little as $4,200. In some cases, the defendants mistakenly believed that they would avoid detection if they or their tippees limited their illegal trades to low-volume purchases. - The full release is available at http://members.whattheythink.com/home/sec.cfm Trouble with the Department of Justice (WTT) -- In separate action, Carl Stevens and Michael Susi, no longer with Metzger, entered guilty pleas before U.S. District Judge Harold A. Ackerman on Friday. Each face a maximum prison sentence of ten years, and a fine of up to $1 million. Stevens and Susi purchased PrimeSource stock at prices ranging from approximately $3.99 to $4.57 per share. Once it was announced that Fuji would pay $10.00 per share, Stevens and Susi sold their entire holdings of PrimeSource stock, receiving profits of approximately $89,410 and $27,421, respectively. On the same day or shortly thereafter, those individuals who were tipped by Stevens and Susi also sold their PrimeSource stock according to the U.S. Attorney’s Office in Newark, New Jersey. A source familiar with the matter says Stevens and Susi are the only individuals that have been or will be charged by the Department of Justice. WTT Analysis: Good People in the Cross-hairs? The SEC’s crackdown on Wall Street trading houses, investment banks and even individuals has been well publicized in recent days. The settlement between the named individuals and the SEC is probably “a good thing” as Martha Stewart would say. The press release above marks the end of an expensive investigation that people close to the matter (and acquaintances of those named) describe as overdone. Premium Access Members may remember our analysis of Fuji’s acquisition of PrimeSource in September 2001. (Buying the Middleman, How Fujifilm and PrimeSource Came to Terms - 9/25/01) The report discussed how the unusual trading activity of PrimeSource’s stock prompted a press release announcing the deal. The report noted that PrimeSource’s thinly traded stock usually averaged less than 5000 shares a day. However, four days before the announcement volume skyrocketed averaging just over 21,000 shares per day. PrimeSource’s stock price rose from $4.02 per share on August 22nd to $5.60 the day before the announcement, a 28% increase. Fuji acquired the company for $10 per share. It is common for volume to rise just before an acquisition announcement as rumors swirl. However, it appears that much of the buying by these individuals occurred well before the announcement was made. By all accounts, Fuji was never a target of this investigation. In fact the Department of Justice says Fuji has been cooperative and assisted in their investigation. The SEC noted that Fuji executed non-disclosure agreements with the key players. Important because non-disclosure documents involving publicly traded companies are usually different than those signed between privately held firms. The document usually explains additional legal issues and enforcement measures because of the company’s publicly traded structure. Besides the threat of a civil suit, individuals face much more if the company is publicly traded for violating a non-disclosure agreement. And that appears to be the case here. While the disclosed information did not harm Fuji or their negotiations with PrimeSource, it allowed individuals to profit from illegal stock trading activity according to the SEC. Peers of the accused, familiar with the investigation, say the events described within the SEC’s press release are overblown and confuses illegal behavior with personal indiscretion. Said one person, “The SEC is under pressure to tally fines and make cases, so they concentrate on less well off individuals and apply pressure. The SEC dodges those executives who have crushed companies like Worldcom and Enron with premeditated fraud.” Through Enovation, Fujifilm acquired London Litho on July 7th. Eric London is well-known and a highly regarded industry veteran. It is our understanding that he will have a significant role within Enovation. At press time, we were unable to reach Eric London or Fuji for comment. We were told by a person familiar with the investigation that the individuals have signed agreements barring them from speaking about the case.