Jury Told Ex-STEC CEO Made $134 Million Hiding Bad News

Manouchehr Moshayedi, the former chief executive officer of STEC Inc., made $134 million by hiding a sales setback from investors, a lawyer for the U.S. Securities and Exchange Commission told a jury.

Moshayedi, who co-founded the maker of computer-storage cards with his two brothers in 1990, sold 4.5 million STEC shares in an August 2009 secondary offering after learning that a major customer, EMC Corp., would scale back purchases of the company’s ZeusIOPS flash memory product, the SEC alleged in its lawsuit against the ex-CEO.

“He buried the bad news just before he sold his stock so he could make more money,” the lawyer, John Berry, said at the close of a 10-day insider-trading trial in federal court in Santa Ana, California. “By the time the news was disclosed three months later, the stock fell 40 percent, in just one day.”

The Moshayedi case is the latest in a series of SEC cases to go to trial in the past year. So far, the agency has met with mixed results. Wynnefield Capital Inc.’s Nelson Obus defeated the agency last month in a Manhattan court in a suit claiming he relied on an illegal merger tip to make $1.3 million in 2001.

In October, a jury in Dallas decided that Mark Cuban, the billionaire owner of pro basketball’s Dallas Mavericks, didn’t engage in insider trading in 2004.

Wyly Win

The agency last month won a case in Manhattan against Michaels Stores Inc. founders Samuel and Charles Wyly, who were accused of illegally hiding their stock holdings and evading trading limits. The verdict leaves Samuel Wyly and his late brother’s estate potentially liable for as much as $550 million. That case took the regulator more than a decade to bring to trial.

Moshayedi didn’t tell investors that revenue projections wouldn’t meet analysts’ estimates because of a drop in demand, according to the SEC. Instead, to meet the estimates, he entered into a secret side deal with EMC to buy more of the ZeusIOPS product than the customer had intended, in exchange for an undisclosed discount, the agency said.

Moshayedi’s lawyer, Patrick Gibbs, told the jury that the $55 million side deal with EMC was meant to bring uniformity to the operations process because EMC was prone to waiting to the end of quarters, making it difficult for STEC to make accurate forecasts for analysts.

Avoid ‘Chaos’

The deal wasn’t meant to ensure the success of the secondary offering, according to Gibbs, but to “avoid the chaos of EMC ordering late in the quarter.”

STEC’s stock drop wasn’t due solely to news that EMC “might carry inventory,” Gibbs said. It was also based on reports that EMC was implementing a marketing program, which was evidence it was having trouble selling product, the defense lawyer said.

The jury will be asked to decide only whether Moshayedi is liable for insider trading and lying to investors. If he’s found liable, any penalty will be decided at a later stage by U.S. District Judge James Selna.

STEC, based in Santa Ana, California, was acquired by Western Digital Corp. last year.

The case is Securities and Exchange Commission v. Manouchehr Moshayedi, 12-cv-01179, U.S. District Court, Central District of California (Los Angeles).

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