A former managing director at SG Cowen Securities Corp. pleaded guilty to insider trading for selling shares of HealthExtras Inc. short in 2001 after he learned the company planned a private-equity offering.
Guillaume Pollet, 40, pleaded guilty in federal court in Brooklyn, New York, U.S. Attorney Roslynn R. Mauskopf said in a statement. Pollet faces up to 10 years in prison.
In a related action, the U.S. Securities and Exchange Commission filed a civil lawsuit against Pollet, accusing him of fraud and insider trading. The SEC claimed he engaged in short selling of shares of 10 companies that were involved in private investment in public equity, or PIPEs. In some cases, SG Cowen structured the transaction for clients, the SEC said.
``Today's plea shows that there are criminal penalties for financial insiders who exploit their privileged positions at the expense of investors,'' Mauskopf said in her statement.
The SEC's fraud suit against Pollet is the agency's first attempt to punish alleged abuses in the PIPEs market, said Mark Schonfeld, the director of the SEC's New York office. Public companies seeking to raise cash quickly sometimes turn to investment bankers to arrange a PIPEs deal, in which a small group of investors, such as a hedge fund, buys newly created securities, often at a discount to the prevailing market price.
Pollet couldn't be reached for comment. Ronald Fischetti and Joseph Tacopina, lawyers representing Pollet, didn't return calls for comment.
In some cases, the securities later convert into common stock, diluting the market value of the companies' shares. Public disclosure of a PIPE transaction will often cause the company's common shares to drop, an opportunity for short sellers.
Selling short is a practice of selling a security that the seller does not own with a commitment to repurchase it at a later date in hopes the price will be less by then, creating a profit.
PIPEs financing is frequently seen as a last-ditch effort to shore up cash-strapped businesses. It has drawn regulatory scrutiny because of its potential for abuse through short-selling strategies.
Pollet's short-sales ``locked in'' more than $4 million in trading profits for SG Cowen, the SEC said in a statement.
``While PIPE transactions may help a company meet its financing needs, they also create opportunities for fraud,'' Schonfeld said in the agency's statement. ``This case sends the message that we will actively patrol this area.''
Pollet's trading was ``particularly egregious,'' said David Rosenfeld, the SEC enforcement official handling the SG Cowen case. ``There were specific representations made to the PIPE issuers that SG Cowen would not or had not engaged in short selling prior to the close of the transaction.''
At least one official at Societe Generale in Paris was alerted in about February 2001 that Pollet had engaged in short selling before a company's planned PIPE offering, according to the SEC's complaint. The official, identified as a co-head of the bank's global equity derivatives group, ``expressed astonishment'' at Pollet's trading, and he subsequently tried to hide similar trades from bank officials, the SEC complaint said.
Jean Calleja, a spokesman for SG Cowen, said in a statement that the company has ``cooperated fully'' with authorities. Calleja said Cowen fired Pollet after hiring outside counsel to conduct an internal investigation and voluntarily reported the matter to regulators.
``As the criminal complaint made clear, Pollet took affirmative steps to conceal his trading activity from SG Cowen,'' Calleja said in a statement. ``We have cooperated fully with the authorities for the past three years and will continue to do so.''
SG Cowen hired Aaron Marcu, a partner at the Covington & Burling law firm, to conduct the internal probe. Marcu, a former federal prosecutor, continues to represent SG Cowen in the SEC's ongoing investigation. He declined to comment today on the case or the SEC's allegations.
Pollet engaged in improper short selling of 10 companies, in addition to HealthExtras, according to the SEC's complaint. The other companies are: The viaLink Company; Computer Motion Inc.; Daleen Technologies Inc.; Hollywood Media Corp. (HOLL); SangStat Medical Corp.; EntreMed Inc. (ENMD); DMC Stratex Networks Inc.; Sorrento Networks Corp.; Aradigm Corp. (ARDM); and Proxim Inc.
Rockville, Maryland-based HealthExtras, a medical benefits provider, sued Cowen in December 2002, accusing it of profiting when Pollet sold its shares short in the months before a September 2001 PIPEs offering.
During August and September 2001, Pollet was personally responsible for 25 percent of all of the trades in HealthExtras stock, the suit said. His trades alone drove the share price down by as much as $3.23 a share, the suit said. In the weeks prior to the PIPEs offering, HealthExtras shares dropped 36 percent, the suit said.
Cowen settled the HealthExtras suit last year, the company said in a 10-Q filing in May 2004. The terms of the settlement were confidential, though HealthExtras said in the regulatory filing that it expected an after-tax gain of about $1 million.
The criminal case is U.S. v. Pollet, 05-00287, U.S. District Court, Eastern District of New York (Brooklyn). The SEC case is SEC v. Pollet, 05-CV-1937, U.S. District Court, Eastern District of New York (Brooklyn).