April 20, 2024

DealBook: Former Nasdaq Executive Pleads Guilty to Insider Trading

Shannon Stapleton/Reuters

Donald L. Johnson had a privileged role at the Nasdaq Stock Market.

When companies that trade on Nasdaq wanted to understand how impending news would affect their share prices, they would consult with Mr. Johnson, who was a senior executive on the exchange’s so-called market intelligence desk.

Over a three-year period, Mr. Johnson took that secret corporate information and, directly from his work computer, traded in an online brokerage account in his wife’s name, reaping illegal profits of about $750,000.

On Thursday, Mr. Johnson pleaded guilty to the brazen insider-trading scheme in Federal District Court in Alexandria, Va. He was also sued by the Securities and Exchange Commission. The 56-year-old Mr. Johnson, who lives in Ashburn, Va., faces up to 20 years in prison.

“He was a gatekeeper,“ Lanny A. Breuer, assistant attorney general of the Justice Department’s criminal division, said at a news conference. “This was a particularly shocking abuse of trust.“

Nasdaq’s failure to protect its corporate clients’ secret information is an embarrassment for the exchange, which competes fiercely with the New York Stock Exchange and foreign exchanges for public company listings.

“We’re cooperating with authorities,“ said a Nasdaq spokesman, who declined to comment further on the case.

The Nasdaq has an insider trading policy that prohibits employees from trading on confidential information about its listed companies, and requires that they disclose all brokerage accounts and holdings that they control. The government says that Mr. Johnson did not disclose his wife’s brokerage account to Nasdaq.

Jonathan Simms, a lawyer for Mr. Johnson, did not immediately return a phone call seeking comment.

Mr. Johnson’s case is the latest in the government’s far-reaching investigation into insider trading, which has not only rattled Wall Street but reached beyond its canyons to ensnare doctors, management consultants and railroad workers. Last month, the Justice Department brought criminal charges against a longtime Food and Drug Administration chemist and his son for using sensitive information about drug approvals to earn millions of dollars in profits. Another case was brought against a corporate lawyer, who was accused of feeding confidential data about merger deals to traders over a 17-year period.

Earlier this month, the United States attorney in Manhattan won the highest-level conviction to date in their recent efforts when a jury found Raj Rajaratnam, a billionaire hedge fund manager, guilty of earning more than $50 million in illegal trading profits.

“The Department of Justice is watching you and we will find you and prosecute you to the fullest extent of the law,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia.

Such tough talk from federal prosecutors has been backed up with aggressive tactics being used to prosecute white-collar crime, including wiretapping traders’ phones.

Here, federal prosecutors worked with the S.E.C. and the Financial Industry Regulatory Authority, Wall Street’s own regulatory authority, to catch Mr. Johnson. The agencies pursued the case after observing suspicious trading activity in Mr. Johnson’s wife’s account surrounding market-moving news about several publicly traded companies.

Mr. Johnson traded on confidential information in nine separate cases from 2006 to 2009, according to the S.E.C.

In one instance, on Oct. 30, 2007, Mr. Johnson had a phone conversation with the chief financial officer and general counsel of United Therapeutics about the successful completion of a drug trial. The next day, Mr. Johnson bought 10,000 shares of United Therapeutics stock in his wife’s brokerage account. After the company issued a statement on Nov. 1 announcing the news, Mr. Johnson began selling the stock from his office computer, booking $175,000 in profits.

In another example, Mr. Johnson met with a senior executive at Digene, who told him about the pending resignation of the company’s president and the senior executive’s promotion to chief financial officer. Suspecting that the news would hurt the company’s stock price, Mr. Johnson sold short about 10,000 shares of Digene stock in his wife’s account, meaning that he bet the price of the stock would drop. After the public announcement, which drove down Digene’s shares, Mr. Johnson covered his short position and booked a $34,000 gain.

The government says that other companies Mr. Johnson illegally traded include the Central Garden and the Pet Company and Idexx Laboratories.

Federal authorities said that Mr. Johnson made the illegal trades only episodically over the three-year period in the hopes that authorities would not detect a questionable pattern of trading in his wife’s account. The S.E.C. named his wife, Dalila Lopez, a “relief defendant,“ meaning that the agency has not sued her, but will seek to recover the illicit profits in her possession.

Mr. Breuer, the assistant attorney general, and Robert Khuzami, director of the S.E.C.’s enforcement division, used identical metaphors in their statements to describe Mr. Johnson’s activity.

“This case is the insider-trading version of the fox guarding the henhouse,“ Mr. Khuzami said.

U.S. v. Donald Johnson

S.E.C. v. Donald L. Johnson

“Mr. Johnson was a fox in a henhouse,“ Mr. Breuer said.

Article source: http://feeds.nytimes.com/click.phdo?i=34a57f7a337af460a4ee5c62a9cdeec9

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