(Bloomberg) -- An investment adviser was indicted for allegedly trading on inside information after his client, fueled by a few glasses of wine, spilled a secret about Pfizer’s pending $3.6 billion acquisition of King Pharmaceuticals six years ago, according to authorities.
Tibor Klein, 43, of Melville, N.Y, the founder and president of Klein Financial Services, and his client, Robert Schulman, 58, of McLean, Va., are charged with securities fraud and conspiracy. They face as long as 20 years in prison if convicted.
Schulman, a former partner in a Richmond, Va.-based law firm, learned Pfizer was going to make the deal because he represented King, prosecutors said. He passed on the information when Klein visited his home on a weekend in August 2010, according to the government. The SEC claimed in a 2013 lawsuit that Klein and a stockbroker friend, Michael Shechtman, traded on information provided by Schulman, who allegedly passed on the tip after getting drunk on several glasses of wine.
"It would be nice to be King for a day," Schulman allegedly blurted out, intending to imply he was a "big shot" who had information about King Pharmaceuticals, according to the SEC complaint. Schulman had represented the company in a patent case starting in May 2009 and had learned about the deal because it had the potential to affect litigation in which he was involved.
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ILLEGAL PROFITS
Klein bought more than $585,000 worth of stock for himself and clients and told Shechtman to buy stock and options, according to the SEC suit. On the day Pfizer announced the acquisition, Klein sold all his shares, generating a profit of more than $328,000, including more than $8,000 for his personal benefit and more than $15,000 for Schulman, according to the suit.
Shechtman, who the SEC said made more than $100,000, was charged separately with conspiracy to commit securities fraud in November 2014. He pleaded guilty and has yet to be sentenced.
Shechtman has been cooperating with the government, said Christopher Bruno, an attorney representing Klein.
Bruno said he’s surprised prosecutors decided to go forward with criminal charges, especially as the U.S. Supreme Court prepares to hear an appeal in another case that could affect how insider-trading cases are prosecuted in the future.
SUPREME COURT
The highest court in the U.S. in January agreed to hear an appeal from a California man convicted for trading on information provided by a relative, who didn’t get anything in return.
The Supreme Court’s decision to hear the case was significant because it had earlier refused to review a ruling from a federal appeals court in New York that had set the bar higher for insider-trading convictions, saying a person passing inside knowledge had to at least get some benefit of value.
Insider-trading related charges against 14 defendants in New York were dropped or thrown out as a result of the 2014 appeals court ruling.
Klein pleaded not guilty Wednesday during a court appearance in Central Islip, N.Y., and was freed on a $100,000 bond, Bruno said.
“We are extremely disappointed by the government’s decision to charge Mr. Klein,” Bruno said, adding that they’ll fight the charges.
Schulman was scheduled to appear in court in Alexandria, Va., on Wednesday.
“The evidence at trial will demonstrate that my client is innocent,” his lawyer, Christopher Mead, said in an e-mail.
Pfizer announced on Oct. 12, 2010, that it had agreed to buy Bristol, Tenn.-based King Pharmaceuticals for $14.25 a share to add abuse-resistant narcotics as the New York-based drugmaker sought to expand its share of the painkiller market.
