Former Investor Relations Executive Sentenced to Prison for Insider Trading
HOUSTON—Stephen B. Gray, 57, of Houston, has been sentenced to federal prison following his conviction for securities fraud in an insider trading scheme, announced U.S. Attorney Kenneth Magidson. Gray pleaded guilty Sept. 26, 2014.
Today, U.S. District Judge Melinda Harmon, who accepted Gray’s plea, handed Gray a sentence of 46 months in federal prison and ordered him to pay a $7,500 fine. Gray collected at least $326,159 as a result of his illegal activity. Judge Harmon ordered Gray to forfeit that amount as part of his sentence.
From at least September 2009 through at least May 2012, Gray engaged in an insider trading scheme to use and trade upon material non-public information he acquired during his employment at an investor relations firm based in Houston. Specifically, Gray, as 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 traded in the firm stock of clients and engaged in trades in options of the stock of firm clients before announcement of material information by these companies via press releases by the firm. Gray obtained advance knowledge of material information that would be detailed in press releases issued by firm clients. He then traded while in possession of such material information 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 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.
Gray knew the prices of client stock were likely to increase or decrease after the information in client company announcements became public and that he would therefore 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 and 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 traded in firm client securities despite the firm’s written policies, which strictly prohibited firm employees from trading in any security issued by a firm client. Gray drafted these policies and was personally responsible for ensuring firm employees received and signed copies of each.
Gray, who had previously been released on bond, was permitted to remain on bond but ordered to voluntarily surrender either to a U.S. Bureau of Prisons facility to be determined in the near future.
The investigation leading up to the arrest was conducted by the Houston office of the FBI with valuable assistance from the Securities Exchange Commission in Fort Worth. Assistant U.S. Attorney Belinda Beek prosecuted the case.