Perhaps the Securities and Exchange Commission is mistaking Internal Audit Awareness Month with Internal Audit Malfeasance Awareness Month.
Last Thursday the SEC filed insider trading charges against two internal auditors for allegedly sharing tips that they got from their respective employers. On the same day, the SEC announced that the internal auditor defendants had consented to a final judgment without admitting or denying the charges.
The SEC complaint alleges that Lloyd Schuman, a former internal auditor at Verso Corp., and Dane Janes, who worked as an internal auditor at Ashford Hospitality Trust, repeatedly shared tips about merger plans, share offerings, and earnings news at the two companies. The SEC accused Schuman of insider trading on information he got from his own former company, Verso, and on information he obtained from Janes. On at least one occasion, Schuman, who was close friends with Janes from when they worked together at a prior employer, also shared the ill-gotten information with a relative who then traded on it. Janes was not accused of profiting from the information.
Trading on Inside Deal News
According to the SEC complaint, in 2013 Schuman learned material, nonpublic information that his employer Verso, a publicly traded paper company, was going to acquire a privately held NewPage Holdings. In the weeks preceding the public announcement of the deal, Schuman accumulated an unusually large concentration of Verso shares and also tipped off a close relative, who then also purchased shares.
“Schuman was not one of the employees working on the NewPage acquisition. However, Schuman learned of the forthcoming NewPage acquisition in the fall of 2013 based upon documents and activities he observed around the office, including the PWC Due Diligence Report,” the SEC says in the complaint. At the time, Schuman served as internal audit manager at Verso.
On January 6, 2014, Verso and NewPage publicly announced the $1.4 billion transaction, sending the price of Verso stock up nearly 400 percent. That day, Schuman sold all of his Verso stock, realizing total illicit profits of more than $107,000. The relative of Schuman’s, whom the SEC declined to name, profited more than $2,500 on the sale of the shares that were purchased in advance of the announcement.
Insider Tips Between Friends
The SEC further alleges that Schuman also engaged in insider trading based on tips that he received from Janes about Ashford Hospitality Trust. Janes allegedly obtained confidential information through his employer including plans to issue more shares and early results of a quarterly earnings release.
According to the SEC’s complaint, Janes tipped Schuman with this information before it became public. Schuman allegedly traded based on Janes’s tips, resulting in a total of $15,000 in profits or avoided losses.
“Janes acquired advanced knowledge of January 2014 announcements that AHP would issue eight million additional shares of common stock; an April 8, 2014 announcement that AHT would issue seven million additional shares of common stock; and a May 8, 2014 AHT quarterly earnings release that exceeded analysts’ estimates. Janes tipped Schuman in advance of each of these announcements, and Schuman placed timely, beneficial trades in AHP and AHT on the basis of these tips,” the SEC states in the complaint.
The SEC also acquired phone records and text messages between Schuman and Janes and between Schuman and a colleague regarding the insider trading scheme. During one exchange about AHT issuing new shares, Janes tells Schuman, “It will happen. Hold the line. You got in at the right spot.” It’s clear from the text messages that Janes knew Schuman was trading on the information he was giving him. Schuman shorted shares of his friend’s company and cashed in when the share issue pushed the stock price down.
The final judgment orders Schuman to pay $122,574 in disgorgement, $21,341 in prejudgment interest, and a civil penalty of $125,134. The final judgment further orders Janes to pay a civil penalty of $15,150. Neither defendant admitted to the insider trading charges.
According to LinkedIn, Janes still works at Ashford as vice president of internal audit and compliance. A call to the company wasn’t immediately returned. Schuman left Verso in March of 2017 and now serves as internal audit manager at St. Judes Children’s Research Hospital. Both hold credentials as Certified Fraud Examiners. 