U.S. Securities and Exchange Commission
Litigation Release No. 18673 / April 22, 2004
Securities and Exchange Commission v. Alfred S. Teo, Sr., et al.
Civil Action No. CV 04-1815 (WGB)
SEC Charges Alfred S. Teo, Sr. and Others with Insider Trading
NEW YORK The Securities and Exchange Commission announced today that it filed securities fraud charges against Alfred S. Teo, Sr., and ten of his relatives, friends and colleagues who collectively received approximately $1.8 million in illicit profits from insider trading in the securities of Musicland Stores Corporation ("Musicland") and C-Cube Microsystems, Inc. ("C-Cube"). Teo, a major Musicland shareholder, learned about a proposed tender offer for Musicland, and then purchased Musicland stock on the basis of this information prior to the company's public announcement of the acquisition on December 7, 2000 ("Musicland Announcement"). Teo also tipped eight other defendants with this information, who then purchased Musicland stock prior to the Musicland Announcement. Additionally, Teo and two other defendants filed false Forms 13D with the Commission that materially understated their ownership of Musicland stock, so that Teo could continue to buy Musicland stock, but avoid triggering Musicland's "poison pill." By making these secret purchases of Musicland stock, and then subsequently selling these shares, Teo made approximately $22 million in illicit profits. Teo also engaged in insider trading in the securities of C-Cube. Teo, a director of Cirrus Logic, Inc. ("Cirrus"), which had been negotiating to take-over C-Cube, misappropriated material, non-public information about C-Cube and then purchased C-Cube stock shortly before C-Cube announced on March 26, 2001 that it had agreed to be acquired by another company ("C-Cube Announcement"). Teo also tipped another defendant with this information, who then purchased C-Cube stock prior to the C-Cube Announcement.
The Complaint named the following as Defendants:
- Teo, age 57, is a resident of Kinnelon, New Jersey and Fisher Island, Florida. He is the Chairman of several companies which produce industrial plastics. Teo's companies are the largest producer of plastic bags in North America. Teo has been a director and audit committee member of two public companies: Navarre Corp. ("Navarre"), from May 1, 1998 to present; and Cirrus, from July 21, 1998 to April 10, 2001.
- Teren Seto Handelman ("Teren Seto"), age 41, is a resident of Montclair, New Jersey. She is Teo's sister-in-law and the sole trustee of the MAAA Trust.
- MAAA Trust is a New Jersey trust that Teo established for the benefit of his four sons.
- John D. Reier ("Reier"), age 44, is a resident of Montville, New Jersey. He is the CFO of Alpha Industries Corp., a company Teo controlled.
- Charles D. Fortune ("Fortune"), age 56, is a resident of Norwalk, Connecticut. He sold plastic resin to Teo's plastic manufacturing companies.
- Jerrold J. Johnston ("Johnston"), age 57, is a resident of Trumbull, Connecticut. A salesman in the plastics industry, he has had business relationships with Fortune and Teo.
- Mark J. Lauzon ("Lauzon"), age 43, is a resident of Flemington, New Jersey. He sold raw material plastic to Teo's companies.
- Philip Sacks ("Phil Sacks"), age 74, is a resident of Englewood, New Jersey and Fisher Island, Florida. He and Teo reside in the same luxury apartment building in Fisher Island.
- Mitchell L. Sacks ("Mitchell Sacks"), age 40, is a resident of Demarest, New Jersey. Mitchell Sacks is Phil Sacks' son and worked in Teo's offices running a hedge fund in which Teo and Phil Sacks invested.
- Richard A. Herron ("Herron"), age 61, is a resident of Fisher Island, Florida. He and Teo docked their yachts next to one another at Fisher Island.
- Lawrence L. Rosen ("Rosen"), age 59, is a resident of Old Tappan, New Jersey and Fisher Island, Florida. He was the founder and former CEO of N2K, a publicly traded company that owned music websites, and was later merged into another company that sells CDs over the Internet.
- David M. Ross ("Ross"), age 56, is a resident of Manitowoc, Wisconsin. His company manufactured Teo's 118-foot luxury yacht.
The Complaint alleges the following:
Teo (i) engaged in insider trading in securities of Musicland Stores Corporation ("Musicland") and tipped other defendants who also traded, (ii) engaged in insider trading in securities of C-Cube Microsystems, Inc. ("C-Cube"), and (iii) failed to file required reports and made false and misleading disclosures in reports filed with the Commission concerning the true extent of his ownership and control of Musicland stock.
On December 7, 2000, Musicland announced that it would be acquired by another company through a tender offer. The price of Musicland stock rose more than 30% following the announcement. As the largest shareholder of Musicland, Teo had learned of the acquisition through several confidential communications with Musicland senior management during the fall of 2000. After learning of the tender offer, but before it was publicly announced, Teo purchased 45,000 shares of Musicland stock. Teo sold those shares after the announcement and realized a profit of approximately $185,275. Teo also tipped defendants Teren Seto, Reir, Fortune, Lauzon, Phil Sacks, Herron, Rosen and Ross (and Fortune then tipped defendant Johnston), all of whom purchased Musicland stock prior to the announcement. Collectively, Teo's tippees realized profits in excess of $1.1 million.
On March 26, 2001, C-Cube announced that it would be acquired by another company. The price of C-Cube stock rose more than 40%. Teo learned before the announcement that C-Cube was discussing a potential merger because he was a director of Cirrus Logic, Inc. ("Cirrus"), one of the companies that was discussing acquiring C-Cube, and Teo attended confidential Cirrus board meetings at which a potential acquisition was discussed. After learning of a potential acquisition of C-Cube, but before it was announced, Teo purchased 35,000 shares of C-Cube stock. Teo sold these shares after the announcement and realized a profit of approximately $180,012. Teo also tipped defendant Mitchell Sacks, who also purchased C-Cube stock prior to the announcement and realized profits of approximately $115,155.
Teo also engaged in securities fraud by failing to file required reports and by making false and misleading disclosures in reports filed with the Commission concerning the extent of his ownership and control of Musicland stock. For instance, Teo, the MAAA Trust (a trust for Teo's children), and Teren Seto, as the MAAA Trust's sole trustee, filed Schedules 13D that falsely under-reported the number of shares of Musicland stock that Teo owned and controlled. Teo sought to conceal the true extent of his ownership and control of Musicland stock in order to avoid the risk of triggering Musicland's shareholder rights plan, or "poison pill." Teo thereby concealed his purchase of nearly 6 million shares of Musicland stock above the poison pill trigger. Teo thereafter sold those shares realizing a profit of approximately $22 million.
The Commission charged violations of Sections 10(b), 13(d), 14(e) and 16(a) of the Securities Exhange Act of 1934 and Rules 10b-5, 12b-20, 13d-1, 13d-2, 14e-3, and 16a-3 thereunder. The Commission seeks the following relief from the defendants: (a) permanent injunctions; (b) disgorgement of all illicit profits; (c) civil penalties; and (d) and officer and director bars against Teo and Rosen. The Commission filed its complaint in the United States District Court for the District of New Jersey.
The Commission also announced that it reached settlements with Fortune, Johnston and Rosen. Without admitting or denying the allegations in the Commission's Complaint, Fortune Johnston and Rosen each consented to final judgments that permanently enjoined them, ordered them to disgorge their illicit profits plus prejudgment interest, and imposed a civil penalty equal to the illicit profits they obtained. Rosen also agreed to the entry of an order barring him from serving as an officer or director for five years.
The Commission expresses its appreciation to New York Stock Exchange, Inc. for their assistance in the investigation of this matter.
SEC Complaint in this matter