Two Internal Auditors Thought They Could Get Away with Insider Trading, LOL

Two internal auditor buddies got a starring role in an SEC litigation release after they were charged with insider trading for monkeying around with secret information about their respective employers.

Lloyd Schuman, a former senior internal auditor at Verso Corp., and Dane Janes, an internal auditor with Ashford Hospitality Trust Inc., agreed to pay a total of nearly $285,000 in penalties for their involvement in what the SEC said was “multiple instances” of insider trading and tipping by Schuman and tipping by Janes, in which Schuman made several thousands of dollars in illegal profits.

Neither guy admitted or denied the allegations in the SEC’s complaint, which was filed in the U.S. District Court for the Western District of Tennessee.

In fall 2013, Schuman learned about confidential plans that Verso, a publicly traded paper company then based in Memphis, was going to acquire a privately held paper company, NewPage Holdings Inc. In the weeks before Verso went public with the acquisition, Schuman purchased “an unusually large” amount of Verso shares, and tipped this material, nonpublic information to a close relative, who also purchased Verso shares.

By mid-December 2013, Verso stock comprised about 90% of Schuman’s portfolio, the largest amount of Verso stock that he had ever owned, according to the complaint.

As soon as the deal was announced on the morning of Jan. 6, 2014, Schuman pulled the trigger on all of his Verso shares, realizing more than $107,000 in profits. Schuman’s relative also sold his Verso shares, realizing more than $2,500 in profits.

During the time he was buying a ridiculous amount of Verso shares, Schuman exchanged text messages with his close friend, Janes, who he has known since 2000 when they both worked as internal auditors for the same company, about the pending Verso/NewPage acquisition. For example:

Schuman sent Janes a text message on January 2, 2014, asking “[d]id you or any of your people by [sic] VRS? 159k shares traded in first 30 min.” Janes responded “No. I haven’t mentioned to anyone.” Schuman replied, “[t]hen I would attribute it to evidence of something happening in the near future.”

Speaking of tipping, Janes gave Schuman three juicy ones by text and/or phone call in advance of three material, nonpublic announcements regarding Ashford Hospitality Trust and Ashford Hospitality Prime, two publicly traded real estate investment trusts.

1. January 2014 announcements that Ashford Hospitality Prime would issue 8 million additional shares of common stock.
2. April 8, 2014 announcement that Ashford Hospitality Trust would issue 7 million additional shares of common stock.
3. May 8, 2014 Ashford Hospitality Trust quarterly earnings release that exceeded analysts’ estimates.

For example, ahead of the quarterly earnings release, Janes texted Schuman to tell him that “good news was coming.”

Janes stated that he was trying to find out how good the news would be, but that he knew AHT would at least beat the estimates.

Schuman responded, “do I need to jump in AHT?” Five minutes later, Schuman placed an order to buy 4,000 shares of AHT at $10.27 per share, then sent Janes a text message updating him about the purchase, stating “Got 4K @ 10.27.”

Janes responded that he was not sure how much the share price would “pop” but that it may be up $0.50 to $1.50 per share within one to two days after the earnings release.

On the morning of May 8, 2014, Schuman purchased 2,000 more shares of AHT. After the market closed that day, AHT released a positive quarterly earnings report that exceeded analysts’ estimates for funds from operations by $0.05 per share. That evening, Schuman shared the news of the earnings release with Colleague 1 in a text message, stating “Ashford Hospitality Trust beats by $.05, beats on revenue.”

The next day AHT’s stock price rose 3.9 percent. Schuman sold the 6,000 AHT shares he had purchased in the preceding days, realizing a net profit of $1,547.

After trading on all of Janes’ tips, Schuman avoided $10,478 in losses and realized profits of $4,672, according to the SEC.

The SEC ordered Schuman to pay $122,574 in disgorgement, $21,341 in prejudgment interest, and a civil penalty of $125,134. Janes was ordered to pay a civil penalty of $15,150.