It’s not often that you see “hedge fund” and “inability to pay” in the same sentence. But, this was the case when the U.S. Securities and Exchange Commission announced last week that it settled insider trading charges against two individuals for investments made in advance of the April 23, 2007, announcement that AstraZeneca would acquire MedImmune.
According to the regulator, James Self Jr., an executive director of business development at a pharmaceutical company located in New Jersey (and which the Wall Street Journal identified as Merck), tipped off Stephen Goldfield, a former hedge fund manager, about the impending merger. The pair originally met while they were both attending the Executive MBA program at the Wharton School of Business from 1994 to 1996.
According to the SEC, Goldfield — it did not name his firm — made about $14 million after purchasing 17,000 MedImmune call options and 255,000 shares of the biotech company. Goldfield closed out his MEDI position entirely within the four business days immediately following the April 23, 2007 announcement about the acquisition, and realized $13,978,752 in profits.
Without admitting or denying the SEC’s allegations, Goldfield agreed to disgorge his $13,978,752 profit, as well as pay prejudgment interest of $2,666,275, for a total of $16,645,027.
However, under the settlement, the SEC said he must pay only $600,000 “based on Goldfield’s sworn statements in his statement of financial condition and other materials provided to the staff.” Self agreed to pay $50,000. Keep in mind: it is not uncommon for the SEC to waive these fines and related payments if it deems the individual unable to pay.
So, what happened to the $14 million in the slightly more than three years since he reaped those gains? Incredibly, according to the SEC’s complaint, by May 31, 2007 — just five weeks after cashing in on his MedImmune stakes — Goldfield lost all of the profits by aggressively trading index put options.
This is what the SEC says.
So, not only was Goldfield — how ironic is that name? — naive enough to think he would get away with such a brazen trade. His actions also underscored that he was really a big-time gambler disguised as a Wall Streeter. There are probably more of them than we realize. Except, most tend not to leave such a paper trail with regulators.
