SEC investigates insider trading scheme concerning Freescale, ATI

Freescale Semiconductor’s move to private equity and AMD’s ATI buy are two acquisition targets a former partner at Ernst & Young tipped a friend on, according to the SEC.

By Suzanne Deffree, Managing Editor, News -- Electronic News, 5/30/2008

The Securities and Exchange Commission (SEC) has charged a former partner at Ernst & Young LLP and two others in an alleged insider trading scheme concerning Freescale Semiconductor Inc and ATI Technologies Inc.

According to the SEC complaint filed Thursday,  James E Gansman, a former partner in Ernst & Young's transaction advisory services department, from approximately summer 2006 through fall 2007 tipped his friend Donna Murdoch about the identities of at least seven different acquisition targets of clients who sought valuation services from his firm.

Among those seven targets were Freescale and ATI. Freescale became the largest leveraged buy-out (LBO) in the history of the technology industry with a $17.6 billion price tag in December 2006, when the chip maker was acquired by private equity firms. July of that same year, Advanced Micro Devices announced plans to buy graphics chip maker ATI for approximately $5.4 billion.

The SEC complaint further charges that Murdoch used the non-public information to trade in the securities of the target companies; to tip her father, who also traded; and to make recommendations to two others, who traded, as well.

The SEC estimates that the activity resulted in nearly $600,000 in illicit profits.

"This case underscores how important it is for deal advisers and due diligence providers retained by acquirers and their targets to respect the confidentiality of the information shared with them," said Linda Chatman Thomsen, director of the SEC's division of enforcement, in a statement.

Ernst & Young did not return calls to Electronic News for comment.

According to the SEC's complaint, Gansman misappropriated the information about pending acquisitions on numerous occasions in breach of a duty of confidentiality owed to Ernst & Young and its clients. Murdoch was a registered securities professional and managing director of a Philadelphia-based broker-dealer and investment banking firm during the alleged period of insider trading. The complaint claims that she used the non-public information provided by Gansman to tip her father, Gerald L Brodsky, who also is named as a defendant by the SEC, and to make recommendations to two others.

According to the complaint, Murdoch’s trading based on the non-public information from Gansman resulting in at least $392,035 in illegal profits. The SEC claims that she provided information about one of the pending acquisitions, Freescale, to Brodsky, who traded on this information through a nominee account. Brodsky’s illegal profits totaled $63,400, the SEC estimated. The complaint further alleges that Murdoch recommended trading in the securities of two of the target companies, Freescale and ATI, to other individuals who traded for profits of $140,760.

The SEC complaint asserts that Gansman, Murdoch, and Brodsky violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that defendants Gansman and Murdoch also violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder.

The SEC said it is seeking injunctions against future violations of the federal securities laws, disgorgement of unlawful trading profits with prejudgment interest, and civil monetary penalties. The SEC reminded that the investigation in its allegations is ongoing.