SEC Enforcement News: With Friends Like These …

• Posted on: May 13 2019

On May 7, 2019, the Securities and Exchange Commission (“SEC” or “Commission”) announced (here) that it had settled an insider trading action against Brian Fettner (“Fettner”), a Nevada resident who obtained confidential, inside information about a potential corporate merger from a lifelong friend and used it to generate more than $250,000 in illicit trading profits.

The action involved unlawful trading in the securities of G&K Services, Inc. (“G&K”) prior to an August 16, 2016 announcement that Cintas Corporation (“Cintas”) had reached an agreement with G&K to purchase all of G&K’s outstanding common stock for a substantial premium over the stock’s then publicly-traded price. While the acquisition was being negotiated, and before it had been publicly announced, Fettner obtained non-public information about the transaction in breach of a duty of trust and confidence to his friend, and purchased G&K stock in a brokerage account of his ex-wife, Relief Defendant Liselotte Sandberg, and in a brokerage account of a former girlfriend, Relief Defendant Kathy M. Micali. Fettner also persuaded others to purchase shares of G&K common stock before the public announcement of the transaction.

In December 2015, officers of Cintas approached G&K about a possible business combination. Talks broke off in January 2016, but resumed in May 2016 when Cintas submitted a revised offer to G&K. Only a few Cintas senior officers were aware of and participated in the negotiations with G&K. One such officer was the Senior Vice President, Secretary, and General Counsel of Cintas (the “General Counsel”).

In mid-June 2016, G&K provided the General Counsel with a draft non-disclosure and standstill agreement (“Non-Disclosure Agreement” or “Agreement”) for his review. The General Counsel took home a folder that included the Agreement and a few other merger-related documents. The folder was labeled with the code name for the prospective merger and was kept on the desk in the General Counsel’s home in a room that served as the General Counsel’s home office and den. On Monday, June 20, 2016, the General Counsel executed the Non-Disclosure Agreement on behalf of Cintas.

Fettner was a long-time friend of the General Counsel. Whenever Fettner visited Cincinnati, he stayed at his friend’s home, even when visiting family. Cintas is headquartered in Cincinnati. On June 14, 2016, Fettner stayed at the General Counsel’s home for several days while he played golf at a charity outing.

According to the SEC’s complaint (here), on June 15, 2016, while Fettner was a guest in the General Counsel’s home, he surreptiously viewed documents contemplating the acquisition of G&K by Cintas, including the draft Non-Disclosure Agreement.  Fettner did not tell the General Counsel that he had seen the merger documents.

Based on that information and without telling his friend, Fettner purchased G&K stock in the brokerage accounts of his ex-wife and a former girlfriend and persuaded his father and another girlfriend to purchase G&K shares.  Fettner did not purchase G&K stock in any account of his own. He did not receive proceeds from any of the G&K trades he placed or from any of the G&K trades he persuaded others to place.

On August 16, 2016, prior to the opening of the U.S. financial markets, G&K and Cintas announced that the companies had entered into an Agreement and Plan of Merger, pursuant to which Cintas would acquire G&K for $97.50 in cash per share of G&K common stock.

On the day of the announcement, G&K common stock closed at $96.70 per share, up approximately 17.7% from a closing price of $82.30 the previous day, resulting in illicit profits from Fettner’s alleged misconduct of more than $250,000.

The SEC filed its complaint in the U.S. District Court for the Southern District of Florida. SEC v. Fettner, Case 9:19-cv-80613 (May 7, 2019). The SEC alleged that Fettner violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder.  Without admitting or denying the allegations in the complaint, Fettner consented to the entry of a final judgment permanently enjoining him from violating the charged provisions of the federal securities laws and imposing a penalty of $252,995. The Relief Defendants also consented to the entry of a final judgment agreeing to disgorge their profits with prejudgment interest.  The settlement is subject to court approval.

“Those who illegally use confidential information to financially benefit others will be held liable for their misconduct,” said Carolyn M. Welshhans, Associate Director of the SEC’s Division of Enforcement.  “The penalty in this action takes such improper trading profits into account.”

The SEC press release can be found here.

The SEC Complaint can be found here.

Tagged with: Enforcement Proceedings, Insider Trading, SEC, SEC Enforcement Proceedings, Securities and Exchange Commission, Securities Regulation