A Hong Kong investor agreed to pay $2 million to settle charges that he traded on inside information in the pending takeover of Bethesda's Omnipoint Corp.
The ongoing probe, in which corporate secrets concerning two U.S. companies leaked out halfway across the globe, illustrates the challenges that securities regulators face in the age of foreign investing and instant communications.
Investigators from the Securities and Exchange Commission, which announced the settlement today, got wind of the unusual trading and then worked around the clock to prove their case before the trades were settled and the investor's $1 million in profit headed overseas.
"We are seeing more of these cases," said Paul Gerlach, the SEC investigator who handled the case.
"And they present new challenges, because we have to act very rapidly, before the trades are settled and the money is moved out of the country."
Traditionally it has been difficult for U.S. regulators to reclaim money from foreign investors. In response, the SEC has forged relationships with counterparts overseas and encouraged the New York Stock Exchange and the National Association of Securities Dealers to report suspicious stock movement as quickly as possible, so that the commission can act before such transactions are settled.
VoiceStream Wireless Corp., a telecommunications company based in Bellevue, Wash., on June 23 said it had agreed to pay $4.9 billion to acquire Omnipoint, a wireless phone company, in a bid to create a national cellular phone network. But even before the deal was announced, there was a surge of trading in Omnipoint stock, according to a complaint filed today in United States District Court in New York.
The complaint said that two days before the deal was unveiled, the Hong Kong resident, Samson Hui, opened an account at the Hong Kong office of Merrill Lynch & Co. in the name of a company he part owns, Rich Leader Enterprises Ltd. With that account and one at Wardley Securities Ltd., the complaint said, he purchased 121,000 Omnipoint shares in two days for $19.12 1/2 to $21.62 1/2 a share.
Immediately after the announcement of the acquisition, the stock soared to $29 a share.
In the settlement announced today, Hui and Rich Leader Enterprises did not admit wrongdoing, but agreed to return the $1 million in profit and pay a $1 million fine.
"He did it to spare the expense and inconvenience and distraction of a protracted litigation with the SEC," said Hui's lawyer, David E. Brodsky of Cleary, Gottlieb,Steen & Hamilton.
Investigators believe the information about the deal leaked out in the business community in Hong Kong because of an international connection with VoiceStream. A subsidiary of a Hong Kong conglomerate called Hutchison Whampoa Ltd. owns 24 percent of VoiceStream.
"We believe that due to Mr. Hui's location in Hong Kong, he had advance information about the sale," Gerlach said.
"Clearly, there was information going around Hong Kong."
The investigation is continuing, officials said.
Gerlach said investigators worked closely with counterparts in Hong Kong to prove their case before the transaction was settled and the money was moved out of the country.
"We had to move as fast as we could," he said. "We stayed up around the clock."