U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19867 / October 13, 2006
Securities and Exchange Commission v. One or More Unknown Purchasers of Call Options for the Common Stock of CNS, Inc., Civil Action No. 06-4540 (E.D. Pa. October 12, 2006)
SEC Files Insider Trading Action and Obtains Emergency Freeze of Proceeds from Sales of CNS, Inc. Call Options Purchased Through Foreign Accounts
On October 12, 2006, the SEC filed a complaint against certain unknown purchasers of call options of CNS, Inc. (the "Unknown Purchasers"), alleging that they engaged in insider trading in advance of the October 9, 2006 public announcement of a $566 million merger between CNS, Inc. ("CNS") and GlaxoSmithKline plc ("Glaxo"). The Commission also applied for emergency relief that included an asset freeze to prevent the defendants from removing the proceeds from sales of the options beyond the jurisdiction of the Court. The Honorable Eduardo C. Robreno, United States District Judge, Eastern District of Pennsylvania, issued a Temporary Restraining Order freezing over $650,000 in sale proceeds and ordering the Unknown Purchasers to appear before the Court on October 20, 2006, to show cause why the Court should not enter a preliminary injunction extending the asset freeze and other ancillary relief entered in the Temporary Restraining Order until a final adjudication of the case may be made on the merits.
In its complaint, the Commission alleges that the Unknown Purchasers purchased near-term, out-of-the money call option contracts for the common stock of CNS through foreign accounts held at U.S. broker-dealers. The foreign accounts were omnibus accounts in the names of Zürcher Kantonalbank (Zurich Cantonal Bank) and Credit Suisse, and were held at U.S. broker-dealers National Financial Services LLC and Swiss-American Securities, Inc., respectively. The Commission also alleges:
In the pending lawsuit, the Commission alleges that the unknown defendants engaged in illegal insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks permanent injunctive relief, the disgorgement of all illegal profits, and the imposition of civil monetary penalties.
The Court's Temporary Restraining Order freezes the proceeds generated through the insider trading of CNS call options in the U.S. brokerage accounts. In addition, the Order requires the Unknown Purchasers to identify themselves, provides for expedited discovery, prohibits the defendants from destroying documents, and permits alternative means of service of process.
The Commission acknowledges the assistance of the Chicago Board Options Exchange in the investigation of this matter.