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U.S. judge throws out SEC lawsuit over 'suspicious' Onyx trading

Nate Raymond
Friday, 22 Nov 2013 | 4:53 PM ET

NEW YORK, Nov 22 (Reuters) - Two traders have won the dismissal of a U.S. Securities and Exchange Commission lawsuit accusing them of insider trading in Onyx Pharmaceuticals Inc as the company considered a takeover bid from rival Amgen Inc .

The decision by U.S. District Judge Paul Oetken in Manhattan, made public Friday, marked a setback in what has become an increasingly common tactic by the SEC of freezing the accounts of unknown traders engaged in suspicious trading activities.

The SEC filed its lawsuit against unknown traders on July 3, targeting three trades between June 26 and 28 that the commission called "suspicious."

Soon afterward, the agency won orders freezing about $4.6 million held in accounts at Citigroup Global Markets Inc and Barclays Capital Inc holding $4.6 million made on the trades.

Dhia Jafar and Omar Nabulsi, both of Dubai, stepped out of anonymity on July 23, saying they made the trades in the Citigroup account. They denied wrongdoing and requested the lawsuit be dismissed.

Oetken granted their motion to dismiss, saying the facts alleged by the SEC "are insufficient to support a reasonable inference of insider trading" in advance of news of Amgen's $10 billion offer.

"There is no indication that the SEC knows whether material nonpublic information was tipped, who did the tipping, or who received the tip," Oetken said.

According to the SEC, the trades started the day Onyx's board of directors voted to reject an unsolicited offer from Amgen. News of Amgen's offer broke two days later, and Onyx announced the board had rejected the offer on June 30.

Almost a month later, Onyx agreed to be bought by Amgen for about $10.4 billion.

'ALL BELIEF AND NO INFORMATION'

In his ruling, Oetken said many of the SEC's allegations were "all belief and no information" and the facts did not support an inference of insider trading.

The size and riskiness of the trades also did not support the SEC's argument, the judge said. And the SEC had not identified anyone who might have been the tipper, Oetken wrote.

"Even if there was a tip - which it is not reasonable to infer from these facts alone - the SEC's allegations do not support a reasonable inference that the tip was in violation of a fiduciary duty, much less that the Defendants knew or should have known about the violation," Oetken wrote.

The judge, however, said he would permit the SEC to file an amended complaint and left a modified freeze order in place for that period.

If the SEC does not file an amended complaint within 30 days, Oetkin said he will lift the freeze order. The judge modified the order to cover only $2.53 million in the Citigroup account, the amount Jafar and Nabulsi say they made on the trades at issue.

Kevin Callahan, a spokesman for the SEC, said the agency was "pleased the freeze is still in place for 30 days and we're reviewing the decision."

Patrick Smith, a lawyer who represented Jafar and Nabulsi, said the ruling would make it harder for the SEC to pursue cases if once-unknown traders step forward.

"If all the SEC has is the fact of the trade which they argue appears suspicious, they're not going to have adequate basis to allege insider trading," he said. "They're going to need to have something more."

The ruling came in one of several lawsuits the SEC has pursued in recent years seeking asset freezes in cases where it suspects insider trading but cannot immediately identify the individuals responsible.

In February, the SEC filed a similar lawsuit to freeze assets after detecting suspicious options trading before an announcement that Berkshire Hathaway Inc and 3G Capital planned to acquire ketchup-maker H.J. Heinz.

Last month, two brothers from Brazil, Rodrigo Terpins and Michel Terpins, agreed to pay $5 million to settle that lawsuit.

The case is SEC v. One or More Unknown Traders in the Securities of Onyx Pharmaceuticals Inc, U.S. District Court, Southern District of New York, No. 13-04645.

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