Yahoo Finance Greed was not good — a Florida man’s insider trading of ADT stock cost him $524,000
Trading a national security firm’s securities turned a $320,908 profit for a Boca Raton man. Until, that is, the Securities and Exchange Commission found out the illegal way he made such savvy trades and turned that profit into a $524,065 loss.
Legally, in Tuesday’s final judgment in West Palm Beach federal court, Charles Baugh neither admits nor denies he violated federal securities laws’ anti-fraud provisions by insider trading ADT stock using confidential information from a relative. But, money talks and that judgment also says Baugh agreed to pay the U.S. government the $320,908 profit; $50,405 interest on that profit; and a $473,660 civil money penalty.
According to the SEC’s complaint, this involves Baugh, family, Boca-based ADT and Google.
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Asking about family business
A close relative of Baugh’s — “The two regularly confided in each other concerning personal issues, often discussing matters that they would not share with other members of the family” — was a senior employee at ADT in 2019, when the securities firm began discussing a partnership with Google.
By the end of February 2020, the companies had a non-disclosure agreement about the partnership, which would include a Google investment. Google began doing standard due diligence of ADT in May 2020.
Baugh’s relative signed a non-disclosure agreement that month, but ran his mouth during a July 4 family get-together when Baugh asked how work was going.
“The family member confided to Baugh that Google was exploring making an investment in ADT, and the family member shared his personal excitement about the potential partnership between the two companies,” the complaint said.
The complaint said Baugh’s relative thought their relationship meant he felt secure that any ADT-Google information stopped at Baugh. As for Baugh, the complaint said he knew or “was reckless in not knowing” that he’d received “material, non-public information that (he) had a duty to keep confidential.”
When it comes to securities law and trading, “keep confidential” doesn’t just mean don’t talk. It means don’t act.
Trading on information
A stock option, the complaint explains, is “a financial contract that gives an investor the right – but not the obligation – to buy or sell a stock at an agreed upon price and date. Call options give the buyer the right to purchase a stock, bond, or other asset as a specified price within a specific period.
“A call buyer profits when the underlying stock increases in price, such as when positive company news is released.”
July 4 fell on a Saturday in 2020. When the markets opened that Monday, Baugh began a buying run of $66,000 of ADT call options over several days five different online brokerage accounts. When the market closed on Friday, July 31, ADT stock sold at $8.61 per share.
Before trading opened on Monday, Aug. 3, 2020, ADT announced a long-term deal with Google, which was getting 6.6% of ADT for $450 million and splitting $300 million cost of “co-marketing, product development, technology and employee training.”
ADT closed that day at $13.48 per share.
“Immediately after the announcement on Aug. 3, 2020, Baugh began selling his ADT call positions,” the complaint said. “He sold all his ADT call positions by August 4, 2020, for a realized profit of$320,908 — nearly a 500% return on his $66,000 investment.”
Sean O’Neill and Glenn Gordon of the SEC’s Miami office supervised the investigation. Teresa Verges out of the Miami regional office handled the litigation.
