The SEC and the DOJ have waged an aggressive battle against insider trading for years, resulting in a string of courtroom victories, guilty pleas and settlements as well as significant sanctions which are supposed to deter future wrongful conduct. Nevertheless, corporate executives keep trading on inside information as evidenced by the SEC’s most recent insider trading action, SEC v. Donnelly, Civil Action No. 4:14-cv-01970 (E.D. Mo. Filed November 25, 2014).
This action centers around the acquisition of Solutia, Inc. by Eastman Chemical Company, announced on January 27, 2012. Solutia is a manufacturer of performance materials and specialty chemicals. Eastman is a manufacturer of a range of advanced materials, additives and functional product, specialty chemicals and fibers. D. Michael Donnelly was the chief operating officer of Solutia.
In July 2011 the CEO of Eastman contacted his counterpart at Solutia regarding a possible transaction between the two companies. The next month, the two executives met and over dinner. Eastman’s CEO expressed an interest in acquiring Solutia.
At a second dinner on October 25, Eastman’s CEO made an offer of $23 per share for Solutia. On the same day Mr. Donnelly and a small group of company executives were made aware of Eastman’s offer to purchase the company. Although that offer represented a 46% premium to market on the day it was made, on November 2, 2011 Solutia’s CEO told Eastman’s CEO that the company was not for sale at that price. Eastman expressed continuing interest.
On November 18, 2011 Eastman’s CEO sent a letter to Solutia’s CEO proposing that the acquisition be completed at an implied value of $25.75 per share. The offer was composed of cash and stock. It represented a 60% premium over the prior day’s closing price. That same day Mr. Donnelly learned that an improved offer was going to be submitted. He began purchasing shares of the firm in the brokerage accounts of his children. By November 22 he had acquired 8,130 shares. When the offer was considered by the Solutia board and its advisers at meeting held on December 5 and 6 it was rejected as inadequate. That decision was communicated to Solutia’s CEO on December 7, 2011.
Since Eastman’s CEO continued to express an interest in the deal, a confidentiality agreement was executed two days later. Due diligence was scheduled to begin in January. Toward the end of that month Solutia’s board met and authorized the firm’s CEO to respond to Eastman with a price between $28 and $28.50 per share. After a series of discussions the parties arrived at a price of $27.65 in cash and securities. On the evening of January 26, 2012 the boards of each company approved the deal. The next morning a joint press release announcing the transaction was issued. The stock price close up 41% at the end of the day. Mr. Donnelly sold all of the shares he had purchased early in February 2012, yielding a profit of $104.391. The complaint alleges violations of Exchange Act Section 10(b).
Mr. Donnelly settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of Exchange Act Section 10(b). In addition, he agreed to pay disgorgement in the amount of his trading profits, prejudgment interest and a penalty equal to the amount of the disgorgement. He also agreed to the entry of a bar prohibiting him from serving as an officer and director of a public company. See Lit. Rel. No. 23142 (Nov. 25, 2014).
