Manhattan U.S. Attorney And FBI Announce Insider Trading Charges Against Managing Director Of Investment Bank And His Father
Preet Bharara, the United States Attorney for the Southern District of New York, and Diego Rodriguez, the Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of a criminal Complaint in Manhattan federal court charging SEAN STEWART, a Managing Director at an investment advisory firm headquartered in Manhattan, and his father, ROBERT STEWART, with using inside information to trade and cause another to trade in the securities of five different health care companies, the acquisitions of which were announced between 2011 and 2014. ROBERT STEWART was arrested on conspiracy and insider trading charges this morning at his home in North Merrick, Long Island. SEAN STEWART surrendered to the FBI on the same charges in Middleton, Wisconsin, and is expected to appear in Manhattan federal court on Monday.
Manhattan U.S. Attorney Preet Bharara said: “The Stewarts – father and son alike – allegedly engaged in insider trading together to the tune of more than $1 million. And, as alleged in one instance, the son’s tip to his father became a gift to himself when his father kicked back some of the proceeds of the insider trading to pay for his son’s wedding. I would like to thank our partners at the FBI for their excellent investigative work on this and so many other financial fraud cases.”
Assistant Director-in-Charge Diego Rodriguez said: “The defendants today stand charged with violations of our securities laws. The cash payments and cryptic communication, as alleged in the complaint, show the seriousness of the allegations. We will continue to police our markets to ensure they are legal, fair, and equitable.”
According to the Complaint* unsealed today in Manhattan federal court:
In early 2011, SEAN STEWART, who at the time held the position of Vice President in the Healthcare Investment Banking Group of a global bank headquartered in Manhattan (“Investment Bank A”), began tipping his father, ROBERT STEWART, with nonpublic information about upcoming mergers and acquisitions. The first of these deals involved the acquisition of Kendle International Inc. by INC Research, LLC, which was announced publicly on May 4, 2011. SEAN STEWART worked on the deal, representing Kendle. ROBERT STEWART made about $7,900 in profits on purchases of Kendle stock executed in February and March of 2011. When questioned by the Securities and Exchange Commission about his Kendle trades in May 2013, ROBERT STEWART reported that he used the proceeds of those trades to pay expenses related to SEAN STEWART’s June 2011 wedding.
The second deal about which SEAN STEWART tipped ROBERT STEWART was the acquisition of Kinetic Concepts, Inc. (“KCI”) by Apax Partners, announced on July 13, 2011. Although ROBERT STEWART purchased some stock in KCI based on SEAN STEWART’s tip, he sold that stock before the acquisition was announced, around the same time that SEAN STEWART learned the Financial Industry Regulatory Authority was conducting an inquiry into ROBERT STEWART’s Kendle trading.
Also around this time, in the spring of 2011, ROBERT STEWART expressed a concern to a co-conspirator and cooperating witness not named in the criminal Complaint (“CW-1”) that ROBERT STEWART was “too close to the source” to be trading in KCI stock his own account, and asked CW-1 to make purchases of KCI call options for ROBERT STEWART in CW-1’s brokerage account. CW-1 agreed to do so, and also mirrored for his own benefit the KCI trades that ROBERT STEWART was directing.
When the KCI/Apax Partners deal was announced, ROBERT STEWART and CW-1 reaped profits totaling approximately $107,790. At around this time, ROBERT STEWART told CW-1 that the source of the KCI tip and the earlier Kendle tip had been ROBERT’s son. Later, around the spring of 2012, ROBERT STEWART clarified for CW-1 that the son in question was SEAN STEWART, who worked on the “sell side” on Wall Street.
In October 2011, SEAN STEWART left Investment Bank A. A few months later, he joined an investment banking advisory firm headquartered in Manhattan (“Investment Bank B”) as a Managing Director.
During SEAN STEWART’s tenure with Investment Bank B, based on tips concerning nonpublic acquisition-related information supplied by SEAN STEWART, ROBERT STEWART had CW-1 conduct options trading in advance of the public announcements of three more deals: (1) the acquisition of Gen-Probe Inc. by Hologic, Inc., announced on April 30, 2012; (2) the acquisition, by tender offer, of Lincare Holdings Inc. by Linde AG, announced on July 1, 2012; and (3) the acquisition of CareFusion Corp. by Becton, Dickinson & Co. (“Becton”), announced on October 5, 2014. Investment Bank B represented Hologic in connection with its acquisition of Gen-Probe; Linde in connection with its acquisition of Lincare; and CareFusion in connection with its acquisition by Becton. The profits that ROBERT STEWART and CW-1 reaped from illegal insider trading in advance of the announcements of these three deals totaled over $1 million. In the midst of the scheme, in December 2012, ROBERT STEWART transferred at least $15,000 to SEAN STEWART.
To try to avoid detection for their crimes, ROBERT STEWART and CW-1 refrained from speaking explicitly about their trading over the phone or e-mail, sometimes using “golf”-related code. For example, shortly after the announcement of Lincare’s proposed acquisition by Linde, a German company, ROBERT STEWART wrote to CW-1 that he had seen a news story about the “high cost of golf reservations since a foreign company purchased all- even more expensive than imagined.” Other steps ROBERT STEWART and CW-1 took to avoid detection included trying to discuss their trading at face-to-face meetings and adopting a profit-splitting mechanism that had CW-1 paying ROBERT STEWART his portion of the illegal proceeds in small increments, over time, typically in cash.
In March and April of 2015, CW-1 recorded meetings he had with ROBERT STEWART. During one such meeting, ROBERT STEWART accepted a payment of $2,500 cash from CW-1, which was the balance of the proceeds owed to ROBERT STEWART for profitable trading executed in CW-1’s account in advance of the CareFusion acquisition announcement. Also during this meeting, ROBERT STEWART admitted that SEAN STEWART once chastised him for failing to make use of a tip, saying, “I can’t believe I handed you this on a silver platter and you didn’t invest in it.”
* * *
SEAN STEWART, 34, of New York, New York, and ROBERT STEWART, 60, of North Merrick, New York, have each been charged in the Complaint with one count of conspiracy to commit securities fraud and fraud in connection with a tender offer (Count One), one count of conspiracy to commit wire fraud (Count Two), six counts of securities fraud (Counts Three through Eight), and one count of fraud in connection with a tender offer (Count Nine). The securities fraud, tender offer fraud, and wire fraud conspiracy charges each carries a maximum prison term of 20 years. The charge of conspiracy to commit securities fraud and tender offer fraud carries a maximum prison term of five years. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.
Mr. Bharara praised the investigative work of the FBI and also thanked the Securities and Exchange Commission, which has brought civil actions against the defendant.
The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force. The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it’s the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations. Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants. For more information on the task force, please visit www.StopFraud.gov.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Sarah E. McCallum and Brooke E. Cucinella are in charge of the prosecution.
The charges contained in the Complaint are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
*As the introductory phrase signifies, the entirety of the text of the Complaint and the description of the Complaint set forth below constitute only allegations and every fact described should be treated as an allegation.