On Monday, the Securities and Exchange Commission announced it has charged three healthcare employees and four others in a New Jersey-based insider trading ring that brought in $1.7 million in illegal profits and kickbacks.

Some of the seven accused attended high school together and the allegations include trading prior to 11 public announcements for mergers, a drug approval application, and quarterly earnings for pharmaceutical companies and medical technology firms, according to an SEC press release.

SEC

The agency named Celgene Corporation’s (NASDAQ:CELG) director of financial reporting, John Lazorchak, Sanofi SA (NYSE:SNY) (EPA:SAN)’s director of accounting and reporting, Mark S. Cupo, and Stryker Corporation’s (NYSE:SYK) marketing employee, Mark D. Foldy as illegally tipping  confidential information about their companies to trade on insider information.

The nonpublic information included upcoming mergers or acquisitions, but Lazorchak also gave confidential information about Celgene’s Corporation (NASDAQ:CELG) quarterly earnings and the status of its application for the expansion of the drug Revlimid.

According to the SEC, the trading was planned to include someone in the role of a “non-trading middleman” who got the nonpublic information via the insider and then told the others. They tried to avoid detection by not having a direct connection between the insiders and the traders; the insiders received compensation for privileged information through installments of cash payments to avoid any red flags for the big cash withdrawals.

This is the interesting part: there’s a common bond between the players, as they attended high school together.

The SEC alleged found that Cupo’s friends, Michael Castelli and Lawrence Grum, a high school friend of Castelli, served as the scheme’s primary traders. Efforts to hide the duo’s illegal conduct came through research binders that served as a ruse for their trading, which included Celgene Corporation (NASDAQ:CELG) stock. Grum had tried to assure Cupo that the discovery of their activities and possible legal action wouldn’t likely happen thanks to “limited government resources to police insider trading activity.”

Grum said via the SEC press release, “At the end of the day, the SEC’s got to pick their battle because they have a limited number of people and a huge number of investors to go after.”

On Monday, Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit and Director of the Philadelphia Regional Office, said, “This is yet another case where wrongdoers believed they could outsmart investigators by creating an elaborate smokescreen to hide their insider trading. Such tactics as using middlemen to pass inside information and compiling research to falsely justify illegal trades will not prevent lawbreakers from getting caught.”

In addition, Lazorchak’s two high school friends, Michael T. Pendolino and James N. Deprado, who live in New Hampshire and Virginia respectively, have also been charged in the case. The rest of the defendants reside in New Jersey, and on Monday, a criminal action had been announced by the U.S. Attorney’s Office for the District of New Jersey with charges against Lazorchak, Cupo, Foldy, Castelli, Grum, and Pendolino.

The SEC’s complaint, filed in U.S. District Court for the District of New Jersey, said the trading scheme started at the end of 2007, when Lazorchak and Cupo, who worked at Sanofi, discussed Lazorchak’s new role at Celgene, which would enable him to gain access to nonpublic information about mergers and acquisitions. Soon, a trading scheme was born and the pair brought in high school friends of Lazorchak.

As for Cupo, the SEC alleged that he started tipping inside information about Sanofi at the end of 2009, when he learned that the company would announce a tender offer to buy another pharmaceutical company, Chattem Inc. Cupo learned of the tender offer just a few days before the public news and so he tipped off Castelli and Grum with confidential information; they both conducted trades on the nonpublic information.

The SEC brought the enforcement action through the coordination of the U.S. Attorney’s Office for the District of New Jersey. It also received assistance from the Federal Bureau of Investigation, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.