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Securities and Exchange Commission v. One or More Unknown Traders In Securities of Onyx Pharmaceuticals, Inc.

United States District Court, S.D. New York

September 29, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ONE OR MORE UNKNOWN TRADERS IN THE SECURITIES OF ONYX PHARMACEUTICALS, INC., Defendants.

OPINION AND ORDER

J. PAUL OETKEN, District Judge.

The Securities and Exchange Commission brought this action against unknown traders who purchased call options for shares of Onyx Pharmaceuticals, Inc. shortly before Onyx made a public announcement causing its shares to jump 51% in value. The SEC alleges that these purchases were insider trades in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. After the Court dismissed the original complaint for failure to state a claim, the SEC filed an amended complaint naming Omar Nabulsi and Dhia Jafar as Defendants. The Court has frozen all assets related to the Onyx trades in question pending review of the amended complaint. Jafar and Nabulsi have moved to vacate the order freezing their assets and to dismiss the amended complaint for failure to state a claim, or, in the alternative, to modify the order freezing their assets. For the reasons that follow, their motion is denied.

I. Background

The Court's opinion granting the first motion to dismiss, 296 F.R.D. 241 (S.D.N.Y. 2013) (Dkt. No. 42), summarizes the facts alleged in the original complaint. The amended complaint reiterates these facts, along with new allegations about the circumstances of the Onyx trades, as well as allegations that Jafar and Nabulsi are liable for insider trading in shares of another biotechnology company, Life Technologies Corp. The new allegations are summarized below.

A. Onyx Trades

Amgen, Inc. began discussing the possibility of purchasing Onyx in March 2013. The potential offer was code-named "Project Nike, " and all Amgen employees familiar with the project were required to sign a confidentiality agreement. When Amgen finally made its offer, Onyx, too, required all employees familiar with the offer to sign a confidentiality agreement. The small group of Onyx executives working on the Amgen offer referred to the offer as "Project Titan."

Onyx's board of directors did not meet to discuss the proposal until June 26, 2013, when Amgen's CEO sent a private message to Onyx's CEO asking for a reply. Onyx's board ultimately rejected the proposal. That same day, Jafar began purchasing Onyx securities. Two days later, Onyx's CEO told Amgen's CEO about the rejection - and both Jafar and Nabulsi bought more Onyx securities. A few hours later, shortly after the market closed, a reporter named Barry Critchley published an article about Amgen's offer in the Financial Post.

Jafar and Nabulsi's trades were unusual. Jafar was the only person to purchase July 80 call options on June 26. And when Jafar placed his two orders for July 85 call options, his purchase accounted for 78% of the trading volume so far that day. His first order was so significant that it "moved the market"; he had to pay a higher premium on his second order just 19 minutes later. (Pl.'s Opp. at 13, Dkt. No. 62.) By the end of the day, Jafar's orders of July 85 call options still constituted 42% of the day's trading volume in that series. Many of the Defendants' trades on June 28 were also outliers. Nabulsi's purchase was 16% of the total volume of July 90 call options purchased on June 28; he also bought 5, 000 contracts for difference (CFDs). Jafar purchased call options in three different series; in two of the series, his purchase was more than half of the total volume for the day. He was one of only two people to purchase July 80 call options on June 28. Altogether, before the Critchley article was published, Jafar had spent $172, 770 on Onyx call options. In response to inquiries from his bank following the Onyx trades, Jafar stated that he typically avoids CFDs on biotechnology stock. Nabulsi stated that his average purchase was $10, 000 to $100, 000 per transaction.

B. Life Technologies Trades

The amended complaint links Jafar and Nabulsi to another fortuitous series of trades in a biotechnology company. Life Technologies first considered the possibility of a leveraged buyout in June 2012. The board had already hired investment bank Moelis & Company in January 2011. In anticipation of the potential buyout, the board also retained Cravath, Swain and Moore as outside counsel and Deutsche Bank Securities, Inc. as an independent financial advisor. The board officially delegated authority to oversee the potential buyout to its Governance and Nominating Committee, which nicknamed the plan "Project Liberty" to maintain the confidentiality of the project. The few employees who worked on Project Liberty were prohibited from trading in Life stock between December 15, 2012 and February 7, 2013. All outside parties who knew of Project Liberty - employees of Moelis, Cravath, Deutsche Bank, and any potential buyers - were required to sign a confidentiality agreement.

The G&N Committee began to contact potential buyers on December 4, 2012. Beginning January 1, 2013, buyers that signed the confidentiality agreement had access to a secure online data room in which Life provided limited nonpublic information to facilitate the potential buyout.

Thermo Fisher Scientific, Inc. was a potential buyer. About a dozen high-level executives at Thermo Fisher consulted with counsel about acquiring Life. Their discussion was "highly confidential." (Am. Compl. ¶ 26, Dkt. No. 45.) On January 8, Thermo Fischer's CEO called Life's CEO and offered to buy 100% of Life's outstanding equity. Thermo Fischer's CEO followed up the same day with a letter to Life's CEO labeled "Strictly Private & Confidential." Five days later, Life's G&N committee had a confidential meeting with Deutsche Bank and Moelis to discuss Thermo Fischer's offer. Three days after that, on January 16, Life's board of directors discussed the offer in a private conference call. Only nine people were on the line: six directors, the CFO, the Chief Legal Officer, and a partner from Cravath.

Despite all the foregoing measures that both Life and Thermo Fischer took to keep their negotiations secret, some of the information leaked. Shortly after the market closed on January 17, 2013, Barry Critchley - the same journalist who would later report on Amgen's offer to Onyx - published an article about Life's overtures to potential buyers. The article reported that Life had retained Deutsche Bank and Moelis to facilitate a buyout, named four potential buyers by name, described the confidential online data room, and referred to "documents" and "confidentiality agreements" that had been exchanged between Life and the potential buyers. The article claimed that Life could ultimately sell for $65 to $75 per share, which was more than $10 per share higher than the price at which Life was trading on January 17. ( Id. ¶ 53.)

Life's executives and directors were surprised by Critchley's article. The board immediately convened a meeting to discuss how to handle the situation, and they decided to issue a press release before the market opened the next day. Life executives met shortly thereafter to issue a brief statement acknowledging that the company had retained Deutsche ...


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