Toronto lawyer settles SEC insider-trading probe for $810K

A Toronto lawyer has agreed to pay US$810,000 to settle a complaint of insider trading by the U.S. Securities and Exchange Commission.

According to the SEC, Phillip MacDonald consented to a final judgment against him entered in the U.S. District Court for the Southern District of New York on Jan. 11. MacDonald didn’t admit or deny any of the allegations in the commission’s complaint against him.

MacDonald was the last of three Canadian defendants to settle in the case in which the SEC alleged he had made more than $900,000 (all figures are in U.S. dollars) out of a total of $1 million in ill-gotten gains.

According to the Law Society of Upper Canada, MacDonald has no disciplinary history but has been under administrative suspension since July 6. Administrative suspensions are normally the result of a failure to pay fees.

MacDonald couldn’t be reached for comment.
In June 2009, the SEC launched its complaint relating to trades that took place between January and June 2005.

It alleged MacDonald had received stock tips from a business associate, Michael Goodman. An employee at a scrap-metal company in Thornhill, Ont., Goodman was married to a woman who was an administrative assistant at Merrill Lynch Canada Inc.

According to the SEC’s allegations, Goodman would collect information on upcoming mergers and acquisitions from his unwitting wife and then pass on the details to MacDonald and another associate, Martin Gollan.

Goodman’s wife worked for the managing directors at Merrill Lynch’s Toronto office who were involved in advising clients on potential takeovers.

She had access to their mail, fax, and e-mail accounts. The SEC said that while Goodman and his wife often discussed her work and spoke during business hours, she expected him to keep the contents of their conversations confidential.

According to the SEC, MacDonald and Goodman became friends after they met at a bar in 2002 and would frequently recommend stocks to one another. The regulator alleged Goodman wanted to “ingratiate himself” with MacDonald and had convinced him to invest in one of his own deals involving steel bins.

The SEC also claimed MacDonald was aware that Goodman’s wife was the source of his tips about unannounced business combinations and that he knew she had learned about them through her work.

According to the allegations, MacDonald purchased the shares through a variety of accounts held in his own name, his wife’s name, in trust for his son, and the names of corporations he controlled. He also used an offshore account at Bank Leu in the Bahamas to buy securities, the SEC claimed.

In one case detailed in the complaint, the SEC said Goodman’s wife received an early morning e-mail about a fairness opinion meeting for Project 29, a code name for the acquisition by Eastman Kodak Co. of Creo Inc., a printer software manufacturer based in Burnaby, B.C. Merrill Lynch was advising Creo.

That afternoon, she called Goodman, who allegedly promptly called Gollan and MacDonald. Over the next 20 minutes, MacDonald purchased 46,500 shares in Creo through his various brokerage accounts, according to the SEC.

The next business day, Jan. 31, 2005, Eastman Kodak formally announced it would buy Creo. In that period, Creo’s stock price had risen by $1.92 per share, which would have increased the value of MacDonald’s shares by almost $90,000.

Nearly three months later, Goodman’s wife received details of another fairness opinion meeting, this time involving Electronics Boutique, a video game retailer based in Delaware that Merrill Lynch was advising, and GameStop Corp.  

Goodman’s wife received the e-mail about the meeting at 3:13 p.m. on April 14, 2005. By 5:07 p.m., Goodman was on the phone to MacDonald, according to the SEC.

The next morning, MacDonald allegedly began purchasing common stock in Electronics Boutique and ended the day with almost 25,000 shares. On April 18, the next business day, GameStop announced its intention to buy Electronics Boutique, whose share price rocketed to $55 from $41.

That would have increased the value of MacDonald’s holdings by almost $350,000.

The SEC alleged MacDonald also purchased stock in six other target companies advised by Merrill Lynch. It claimed he made $900,000 in ill-gotten gains from illegal trading. It also alleged Gollan had made more than $90,000 from the trades.

Goodman co-operated with the SEC and settled on the same day it issued the complaint without admitting or denying any of its claims. According to the final judgment against him, Goodman was found jointly liable for MacDonald and Gollan’s gains of about $1 million.

Gollan settled his case on Jan. 12, 2010, again without admitting or denying the SEC’s allegations but agreeing to pay disgorgement of $91,000 plus prejudgment interest of $22,000.

All of the illegal trades took place on U.S. exchanges, according to the SEC, which said it received assistance from the Ontario Securities Commission in its investigation.

Meanwhile, the OSC is continuing its own probe into another Toronto lawyer’s alleged involvement in insider trading. It named Mitchell Finkelstein, a former partner at Davies Ward Phillips & Vineberg LLP, in a statement of allegations filed on Nov. 11.

In it, the OSC accused Finkelstein of actively seeking out information on corporate transactions through his work at Davies and passing on tips to a former fraternity brother, Paul Azeff, who was a trader at CIBC.

The two were undergraduate students together at the University of Western Ontario. The OSC alleges the “illegal insider tipping and trading scheme” lasted between November 2004 and May 2007 and included deals in which Finkelstein wasn’t acting for the client.

None of the allegations have been proven.  The OSC has allotted time on Feb. 22 to hear a motion on disclosure issues.

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