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Don’t Expect a Mulligan From The SEC

SEC charges Nevada man for trading on confidential information taken from lifelong golf buddy

The Securities and Exchange Commission (SEC) has settled insider trading charges against Brian Fettner, a Nevada man who obtained confidential information about a pending corporate merger from a lifelong friend and used it to generate more than $250,000 in illicit trading profits.

The SEC’s complaint, filed in U.S. District Court for the Southern District of Florida, alleges that Fettner violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5. Fettner has accepted the final judgment permanently enjoining him from violating the charged provisions of the federal securities laws (again!), and imposing a penalty of $252,995.

The Commission also named Fettner’s ex-wife and a former girlfriend as relief defendants, as both profited when he used their brokerage accounts to place his illicit trades.

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

Now for Fettner’s illegal trading details

According to the SEC’s complaint, while Brian Fettner was a guest in the home of a longtime friend who was also the general counsel of Cintas Corporation. Officers of Cintas approached another company, G&K, in December 2015 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. Fettner’s friend, the Senior Vice President, Secretary, and General Counsel of Cintas, was one of only a few Cintas senior officers aware of and participating in the negotiations with G&K during this time.

In mid-June 2016, G&K provided the General Counsel with a draft nondisclosure and standstill agreement for his review. The General Counsel took home a folder that included that document and a few other merger-related documents. The folder was labeled with the code name for the prospective merger and left on the desk in his home in a room. On Monday, June 20, 2016, the General Counsel executed the nondisclosure agreement on behalf of Cintas.

The next day, Fettner, a long-time friend, who had middle school and high school with the General Counsel, came to Cincinnati to play in a charity golf tournament with the General Counsel. He stayed at the General Counsel’s home, and the two played several rounds of golf over the next four days. Early on the morning of June 15, Fettner went into the General Counsel’s den to change into his golf shoes. While there, Fettner saw the folder with the merger documents on the desk and read at least some of the draft nondisclosure agreement between Cintas and G&K. He said nothing to his friend about having seen the merger documents in his house, and the two left for the golf course.

Illicit trades via an ex-wife

Later that day, Fettner used a mobile device to purchase 4,000 shares of G&K common stock in a brokerage account of his ex-wife based on what he had learned from the merger documents. (Sandberg). The shares had an aggregate cost of just over $300,000. The next day, he spent $160,000 to purchase another 1,500 shares of G&K in her account. The charity golf tournament ended on Saturday, June 19, and Fettner flew to Las Vegas the next day and spent $235,000 to purchase yet another 3,100 shares of G&K in his ex-wife’s account. On June 21, he invested an additional $52,000 to purchase 700 more shares of G&K in her account.

Illicit trades via a current girlfriend

Following his 700-share purchase, Fettner went out to lunch with his girlfriend. At his request, she purchased 300 shares of G&K common stock at an aggregate cost of $21,855 on Monday, June 27, 2016. She had an understanding with Fettner that he would reimburse her if she lost money because of his trading advice.

Illicit fatherly trades

Two days later, Fettner asked his father to purchase 2,000 shares of G&K common stock at an aggregate cost of approximately $149,000, which he did.

Illicit trades via a former girlfriend

Leaving no stone or trading option unturned, in July, Fettner purchased 200 shares of G&K common stock in a brokerage account of a former girlfriend at an aggregate cost of $16,000. As with his ex-wife’s account, Feltner was not designated as having authority to trade in his former girlfriend’s account, but he is the only one who traded in it. The former girlfriend also had the understanding that Fettner would reimburse her if she lost money on a trade in her account based on his trading.

On July 25, 2016, Feltner returned to his ex-wife’s account to purchase an additional 300 shares of G&K common stock at an aggregate cost of $24,300. He never purchased G&K stock in any of his accounts. 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. Nor did he tell his friend, the General Counsel, about any of the G&K stock purchases that he made.

On August 16, 2016, G&K and Cintas announced that the companies would merge and that Cintas would acquire G&K for $97.50 in cash per share of G&K common stock. G&K common stock closed at $96.70 per share, up approximately 17.7% from the previous day’s closing price of $82.30. Fetner gained at least $250,000 in illicit profits from his unlawful trades.

How can compliance protect your firm from “friendly” bad actors?

With great difficulty. But you can protect yourself from other non-trading regulatory exposures. That’s where Patrina can help. We’ve built our business based on helping organizations keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.