In a SEC investigation led by Brendan P. McGlynn, Patricia A. Paw, John S. Rymas, and Daniel L. Koster of the Philadelphia Regional Office, the Securities and Exchange Commission charged former Microsoft senior manager Brian Jorgenson and his friend Sean T. Stokke with insider trading today.

Microsoft

Pair made close to $400k with insider information

The SEC maintains that the pair made $393,125 in 2012 by betting that Microsoft stock would go up after its fiscal Q1 2014 earnings, which were more than 14% higher than estimates. The pair are also accused of buying Barnes & Noble stock prior to an investment by Microsoft in B&N’s e-reader, the Nook.

According to the Seattle Times, the 32 year-old Jorgenson was at home with his wife and their four children when a phalanx of FBI agents arrived at the couple’s home. “The doorbell rang and I went and opened it and there they were, about a dozen of them,” Jorgenson said. The agents then produced a search warrant before entering the home. “I told my wife to gather up the kids,” he said. “The agents were nice enough to let them leave for a few hours.”

Prosecutors believe that Jorgenson, working as a finance manager at Microsoft, would tip off Mr. Stokke who would trade on the information that Jorgenson provided.

SEC believes pair were planning to start a hedge fund

For some reason, the two maintained a joint brokerage account where they split the illicit profits equally. Presumably, this couldn’t have made SEC investigators work more difficult. The SEC, in its press release, also said that the two were engaged in this illegal trading in order to start their own hedge fund with the profits.

In a parallel action, the U.S. Attorney’s Office for the Western District of Washington today announced criminal charges against Jorgenson and Stokke.

“Abusing access to Microsoft’s confidential information and generating unlawful trading profits is not a wise or legal business model for starting a hedge fund,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit and director of the SEC’s Philadelphia Regional Office.  “We thwarted the misguided plans of Jorgenson and Stokke as they sought to illegally profit at others’ expense.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of Washington, Jorgenson and Stokke made a combined $393,125 in illicit profits in their scheme, which began in April 2012.

The first trade came before a public announcement that Microsoft planned to invest $300 million in Barnes & Noble’s e-reader. The pair allegedly used this information to purchase around $14,000 worth of call options on Barnes & Noble common stock. Following the announcement on April 30, 2012, Barnes and Noble stock increased nearly 52% from the day prior closing at $20.75 netting the pair just shy of $185,000 in profits.

The second trade that the SEC alleges the pair made stems from a written analysis of Microsoft’s fourth-quarter earnings announcement in July 2013 that Jorgenson was charged with writing. Jorgensen estimated that Microsoft, who would announce earnings 11% less than analysts’ expectations, would see a next-day share drop of no less than six percent. He contacted Stokke again who bought nearly $50,000 worth of Microsoft options. Microsoft subsequently lost 11% of its share price the next day giving the two of them another $195,000 in illicit profits.

It seems that Jorgenson was as good an analyst as he was a crook.

Jorgenson and Stokke are charged with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, both directly and pursuant to 20(d) of the Exchange Act.  The SEC seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and financial penalties against Jorgenson and Stokke as well as an officer-and-director bar against Jorgenson.

The SEC’s litigation will be led by John V. Donnelly and G. Jeffery Boujoukos.