Former CEO Of Sunnyvale-Based Company Charged With Insider Trading In His Company’s Securities
Trading in advance of an acquisition generated illegal profits in excess of $800,000
SAN JOSE – Peter C. Chang was arrested today following the filing of a federal complaint charging him with securities fraud and fraud in connection with a tender offer, announced United States Attorney Brian J. Stretch and Federal Bureau of Investigation Special Agent in Charge John F. Bennett.
According to the complaint unsealed upon his arrest this morning, Chang, 59, of Los Altos, Calif., was the President, Chief Executive Officer (CEO), and Chair of the Board of Directors of Alliance Fiber Optic Products, Inc. (AFOP), a manufacturer of fiber optic components based in Sunnyvale, Calif. and publicly traded on the NASDAQ. According to the complaint, Chang engaged in an insider trading scheme in which he traded AFOP stock based on material nonpublic information he obtained from AFOP through his position at the company. In particular, according to the complaint, Chang acquired confidential information about AFOP’s financial performance and potential strategic transactions before these were publicly announced, including information that AFOP was in negotiations to be acquired by another company.
According to the complaint, corporate policies and agreements limited Chang’s ability to trade AFOP securities and required him to keep certain corporate information confidential. Nevertheless, the complaint alleges, Chang controlled and accessed two brokerage accounts in the names of his wife and his brother, and Chang bought and sold AFOP stock in these nominee accounts. Through this trading, the complaint alleges, Chang avoided losses and made profits using information he gathered in his positions with AFOP.
For example, the complaint alleges Chang learned AFOP’s revenues in the third quarter of 2015 would be lower than expected due to a decline in customer orders. The complaint alleges Chang sold more than 152,000 shares of AFOP stock in the nominee accounts in advance of the earnings announcement on October 28, 2015. In this way, the complaint alleges, Chang avoided more than half a million dollars of losses. Similarly, according to the complaint, Chang avoided another $379,000 in losses by selling 129,000 shares of AFOP stock in February of 2016, prior to the February 19, 2016 announcement of the previous quarter’s earnings.
Finally, the complaint alleges that from March 4, 2016 to March 21, 2016, Chang purchased AFOP stock in the nominee accounts. At the time of these purchases, according to the complaint, Corning was negotiating a tender offer for the shares of AFOP. After the acquisition was publicly announced on April 7, 2016, the complaint alleges that Chang sold the shares held in these nominee accounts for profits of more than $800,000.
In connection with the allegations described in the complaint, Chang is charged with one count of securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 C.F.R. §§ 240.10b-5 and 240.10b5-2, and one count of fraud in connection with a tender offer, in violation of 15 U.S.C. §§ 78n(e) and 78ff and 17 C.F.R. §§ 240.14e-3(a) and 240.14e-3(d).
A criminal complaint merely alleges that crimes have been committed, and the defendant is presumed innocent until proven guilty beyond a reasonable doubt. If convicted, Chang faces a maximum statutory penalty for securities fraud and fraud in connection with a tender offer of 20 years in prison and a fine of $5 million, per count. Additional fines, periods of supervised release, and restitution also may be ordered; however, any sentence following conviction would be imposed by the court only after consideration of the U.S. Sentencing Guidelines and the federal statute governing the imposition of a sentence, 18 U.S.C. § 3553.
The defendant is scheduled to appear before the Honorable Howard R. Lloyd, U.S. Magistrate Judge, at 1:30 p.m. this afternoon in San Jose for an initial appearance.
In a separate civil action, the United States Securities and Exchange Commission filed civil charges against Chang, alleging he engaged in insider trading and failed to report stock transactions.
Assistant U.S. Attorney Lloyd Farnham is prosecuting the case with the assistance of Patricia Mahoney and Claudia Hyslop. The prosecution is the result of an investigation by the FBI, with the assistance of the San Francisco Regional Office of the Securities and Exchange Commission.