Apple: Anatomy of three inside trades (full text)

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Gene Daniel Levoff, the lawyer in charge of Apple’s insider-trading policy, has been charged with insider trading. Here’s how he did it.

 

From the SEC complaint filed Wednesday:

The July 21, 2015 Earnings Announcement

27. On Friday, July 10, 2015, Levoff and the other Disclosure Committee members received draft earnings materials regarding Apple’s fiscal third quarter, including draft third quarter financials, press release, and prepared executive remarks. The email stated that the materials were “for review prior to our meeting on Monday morning.” The materials showed iPhone unit sales that fell short of analysts’ expectations.

28. Later that day, Levoff received a version of the draft Form 10-Q. The email stated that the draft Form 10-Q “will also be discussed at the next Disclosure Committee meeting,” and instructed members of the Disclosure Committee that they are “required to review the entire Form 10-Q” and should pay “particular attention” to specific disclosures regarding “material factors affecting the Company’s operating results.”

29. The Disclosure Committee met the following Monday, July 13, 2015. Levoff, acting as co-chair, participated by phone. The Committee discussed material nonpublic information regarding the earnings materials and draft disclosures, as well as draft prepared remarks by the Chief Executive and Chief Financial Officers.

30. On Friday, July 17, 2015, Apple reported that it would release its fiscal third quarter results on July 21.

31. Between July 17 and the public release of Apple’s quarterly earnings information on July 21, Levoff sold over 70,000 Apple shares held in brokerage accounts in his name for gross proceeds of approximately $10 million.

32. On Tuesday, July 21, 2015, at 4:30 pm Eastern Time, Apple released its earnings for the fiscal third quarter. The market reaction to the release of this information was sharply negative. On July 22, 2015, a Bloomberg article stated that iPhone unit sales had fallen short of analyst expectations and estimates, “rekindl[ing] concerns over whether the company can keep making must-have products.”

33. By the end of trading on July 22, Apple’s stock price had fallen more than four percent, eliminating roughly $32 billion in market value.
34. By liquidating his Apple holdings, Levoff avoided approximately $345,000 in losses.

The October 27, 2015 Earnings Announcement

35. On August 27, 2015, Levoff received an email notice stating that Apple had instituted a blackout period that would begin September 1 and last “until 60 hours after earnings are released in October 2015.”

36. On Monday, October 12, 2015, Levoff and other members of the Disclosure Committee received an email attaching Apple’s fiscal year 2015 draft annual report on Form 10- K. The draft Form 10-K contained financial information which showed results that beat analysts’ expectations for revenue and earnings per share.

37. On Tuesday, October 13, 2015, the Disclosure Committee, including Levoff, received additional draft earnings materials regarding Apple’s fiscal fourth quarter, including draft fourth quarter financials, press release, and prepared executive remarks. On Friday, October 23, 2015, Apple reported that it would release its quarterly earnings results on October 27.

38. On Monday, October 26, 2015, Levoff bought 10,000 shares of Apple stock at $115.70 per share in his personal brokerage account.

39. Apple released its quarterly earnings on Tuesday, October 27, 2015, at 4:30 pm Eastern Time. The market reacted positively to the announcement. As a Fortune magazine article put it, Apple “beat[] market expectations for both revenues . . . and earnings . . ., driven by solid uptake for its large-screen iPhones and robust growth in Greater China.”

40. Between Apple’s announcement on October 27 and the close of trading on October 28, Apple’s share price increased more than four percent.

41. On October 28, Levoff sold the 10,000 shares he purchased two days earlier, netting an illicit profit of roughly $4,700.

The April 26, 2016 Earnings Announcement

42. On February 25, 2016, Levoff received an email notice stating that a blackout period would commence on March 1 and would last “until 24 hours after earnings are released in April 2016.”

43. On Friday, April 8, 2016, the Disclosure Committee received an email attaching Apple’s draft Form 10-Q for its fiscal second quarter. The draft Form 10-Q contained material nonpublic information about the company’s quarterly financial results that revealed its first year over year revenue decline since 2003.

44. On Friday, April 15, 2016, the Disclosure Committee received additional draft earnings materials regarding Apple’s fiscal second quarter, including draft second quarter financials, press release, and prepared executive remarks. Later that day, Levoff and the Disclosure Committee met to discuss the draft earnings materials.

45. On Thursday, April 21, 2016, Levoff sold over 4,000 shares of Apple stock – virtually all of the Apple shares in his personal brokerage account. The next day, Apple reported that it would release its fiscal second quarter results on April 26.

46. On Tuesday, April 26, 2016, Apple publicly released its quarterly earnings. The next day, Apple’s stock closed down more than 6%, erasing tens of billions from its market capitalization.

47. By selling over 4,000 Apple shares just six days earlier – during the blackout period when he knew that Apple was about to disclose its first revenue decline in thirteen years – Levoff avoided approximately $32,000 in losses.

My take: I remember all three of these trading opportunities. Levoff, 45, must have known the risk of getting caught. I wonder how the SEC got wind of it. The complaint does not say.