Securities Law - Trading On Inside Information - The Penalty

The SEC sued Khaled Al Hashemi, a citizen of Abu Dhabi, United Arab Emigrates and a current technology manager at an Abu Dhabi oil refinery, charging that he engaged in unlawful trading on the basis of material non-public information concerning the acquisition of Nova Chemicals Corp. by International Petroleum Investment Co.

The case was filed in the Federal Court for the Southern District of New York, Civil Action no. 09-CIV-6650, on November 19, 2009.

The SEC alleged that Al Hashemi purchased approximately 120,000 shares of Nova at an average price of $1.41 per share shortly before a merger was announced and then sold those shares on the day the merger was announced. The price per share of the sale was $5.24, realizing a profit for Al Hashemi of $458,760. It is interesting to note that he purchased 50% of his Nova stock on the last trading day before the announcement of the acquisition by International.

Nova headquartered in Canada, with an office in Pennsylvania, produces plastics and chemicals. The Nova stock was registered with the SEC pursuant to Section 12(b) of the Exchange Act and is traded on the New York Stock Exchange.

International made a cash offer to acquire Nova for $6.00 per share. On the day following the announcement the stock of Nova increased to $5.21 per share, or a 289% increase with a substantially greater volume on the New York Stock Exchange.
Al Hashemi’s sold his entire 120,000 shares of Nova and received a return of 270%, equal to a profit of $458,000.

The SEC in its Complaint alleged that the sale by Al Hashemi of his other securities in order to find sufficient funds to purchase the Nova stock strongly suggested that he knew that the Nova common stock would rise on the news of the prospective purchase. It is further interesting to note that Al Hashemi incurred a loss of 66% on his other investments when he liquidated them (presumably to raise cash for the Nova stock purchase). The SEC alleged that Al Hashemi traded on the basis of material inside information that he misappropriated in violation of his fiduciary duty or similar duty of trust and confidence to the shareholders of Nova, or, to the source of whom he received such inside information.

Specifically, the SEC alleged that Al Hashemi employed devices, schemes or artifices to defraud, made untrue statements of material facts, or engaged in acts to operate as a fraud or deceit in connection with the purchase or sale of a security. Moreover, the SEC alleged that Al Hashemi violated a Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The SEC prayed for a permanent injunction to prevent him from violating Section 10(b) and to order Al Hashemi to disgorge unlawful trading profits and to pay a civil penalty pursuant to the Exchange Act.

Al Hashemi did not admit or deny wrongdoing, but did agree to the injunction and the penalties, including disgorgement of $558,760, $9,620 in pre-judgment interest, and a $406,620 civil penalty.

The SEC typically notices unusual trading volume shortly before the announcement of a cash offer for stock or a merger.

Edward X. Clinton, Sr.
Copyright 2009