Former Investor Relations Executive Charged with Insider Trading
HOUSTON—Stephen B. Gray, 57, of Houston, is set to make his initial appearance in federal court for his role in an insider trading scheme, announced U.S. Attorney Kenneth Magidson.
The criminal information filed Friday, Sept. 5, 2014, charges Gray with one count of securities fraud. He is expected to make his initial appearance before U.S. Magistrate Judge George Hanks at 10:00 a.m. today.
From at least September 2009 through at least May 2012, Gray allegedly engaged in an insider trading scheme to trade upon and use substantive non-public information he acquired during his employment at an investor relations firm in Houston. According to the charges, Gray, as the firm’s CEO, had access to press releases and confidential information used to prepare the releases by the firm for its clients prior to their issuance to the investing public. The press releases contained material, non-public information about business events and announcements relating to the businesses of the firm’s clients.
In violation of firm policies and in breach of his duties to the firm and its clients, Gray allegedly traded in the firm’s stock of clients and engaged in trades before announcement of material information by these companies via press releases. According to the allegations, Gray obtained advance knowledge of material information that would be detailed in press releases issued by the firm’s clients. While in possession of such material information, Gray then allegedly traded before the information became public and profited on the movement in the stock price.
Without access to non-public information, trades in options (particularly short- term options) can carry significant risk. This is because the trader is betting that the common stock underlying the options will increase significantly (if buying call options) or decrease significantly (if buying put options), prior to expiration. If the stock does not meet the target price by the expiration date, the options expire out of the money and the trader loses all of the money he paid to purchase the option. The shorter the term of the option, the riskier it is, because the common stock has less time to reach the target price.
According to the allegations, Gray knew the prices of client stock were likely to increase or decrease after the information in client company announcements became public. Therefore, he would allegedly be able to buy or sell his options for a profit.
Gray did not disclose his trades of client securities to the firm or its clients, according to the allegations. He allegedly used the material non-public information he acquired as part of his employment with the firm to make profitable trades, and trades to avoid losses, in his personal brokerage account at TD Ameritrade.
Gray allegedly traded in firm client securities despite the firm’s written policies, which strictly prohibit employees from trading in any security issued by a firm client. According to the criminal complaint, Gray even drafted these policies and was personally responsible for ensuring firm employees received and signed copies of them.
The U.S. is also seeking the forfeiture of $326,159, the profits of Gray’s alleged illegal activity.
If convicted, Gray faces up to 20 years in federal prison and a possible $5 million fine.
The investigation was conducted by the FBI with valuable assistance from the Securities Exchange Commission. Assistant U.S. Attorney Belinda Beek is prosecuting the case.
A criminal information is merely an accusation of criminal conduct, not evidence. A defendant is presumed innocent unless and until convicted through due process of law.