In In Re Hedayati, Securities Exchange Act Release No. 80238 (admin proc Mar. 14, 2017), the Securities and Exchange Commission (“SEC”) issued an order instituting public administrative and cease-and-desist proceedings against Nima Hedayati (“Hedayati”) for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. In anticipation of the proceedings against him, Hedayati submitted, and the SEC accepted, an Offer of Settlement (“Offer”), in which he neither admitted nor denied the allegations.   

According to the SEC’s allegations, Hedayati was an audit staff member employed by Lam Research Corporation’s (“Lam”) independent audit firm. In October 2015, Hedayati, in the course of his employment, acquired material nonpublic information concerning a planned acquisition of KLA-Tencor Corporation (“KLA”) by Lam. Shortly thereafter, Hedayati purchased 20 contracts for out-of-the money KLA call options in his account and an additional 20 KLA call options in the account of his fiancée. Hedayati also advised his mother to trade in KLA stock and, based on his advice, Hedayati’s mother purchased 1,400 shares of KLA common stock. After KLA and Lam announced their merger on October 21, 2015, KLA shares rose nineteen percent. Following the merger announcement, Hedayati liquidated the 40 KLA options, realizing profits of $27,971.59. His mother realized profits of $15,056. 

Rule 10b-5 prohibits any person from employing any device, scheme or artifice to defraud in connection with the purchase or sale of any security. 17 CFR 240.10b-5.  This includes the purchase or sale of a security on the basis of material, nonpublic information about that security, in breach of a duty of confidence that is owed, directly or indirectly, to the issuer of that security.

The SEC determined Hedayati received training on, and was familiar with, his employer’s code of conduct that required him to safeguard confidential client information and prohibited Hedayati “from using that information for his own personal benefit.” The code of conduct specifically prohibited employees from trading on the basis of material, nonpublic information. Additionally, the SEC claimed Hedayati knew the information about the proposed merger was material, nonpublic information. The SEC determined Hedayati knowingly or recklessly breached his duty of trust and confidence to his employer when he traded in KLA options and advised his mother to trade in KLA on the basis of material, nonpublic information. Based on these findings, the SEC charged Hedayati with willfully violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

For the above reasons, the SEC determined to accept the Offer from Hedayati and ordered Hedayti to cease-and-desist from committing any further violations of Section 10(b) of the Exchange Act, prohibited him from appearing or practicing before the SEC as an accountant, with a right to seek reinstatement after 5 years, and ordered Hedayati to pay disgorgement of $43,027.59, plus prejudgment interest of $1,269.70, and a civil penalty of $43,027.59.

The primary materials for this case may be found on the DU Corporate Governance website.