In SEC v. Cade, No. 2:18-cv-01323-JEO (N.D. Ala. Aug. 17, 2018), the SEC filed an initial complaint against Catlin Cade (“defendant”) alleging a violation of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and SEC Rule 10b-5 by trading shares of Golden Enterprises, Inc. (“Golden”) on the basis of material nonpublic information.

According to the allegations, a director of Golden learned of nonpublic information pertaining to a contemplated merger between Golden and a second company. The director separately owned and controlled a different privately held company (“Director’s Company”). The director then shared the acquired nonpublic information with an employee of Director’s Company and requested the employee assess the tax consequences of the proposed merger. The employee, having used defendant’s accounting firm for other business in the past, sought defendant’s professional accounting advice on the tax implications of the merger.

The complaint further alleged that on July 18, 2016, the employee sent defendant an email confirming the merger would be publicly announced later that day. Understanding this information had not yet been made public, defendant allegedly purchased 2,000 shares of Golden’s stock through his personal brokerage account. One day later, defendant sold his stock in Golden, realizing a profit of $8,745.

The SEC alleged defendant’s actions violated both Rule 10b-5 and section 10(b) of the Exchange Act.

SEC Rule 10b-5 stipulates that it is unlawful to knowingly or recklessly purchase or sell securities by any means or instrumentalities of interstate commerce to (1) employ any device, scheme, or artifice to defraud, (2) make any untrue statement of material fact or to omit to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading, or (3) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. Section 10(b) of the Exchange Act makes it unlawful to employ any manipulative or deceptive practices with regard to purchasing and selling securities.

The complaint sought a judgment from the court ordering defendant to disgorge all profits received from the Golden trade and pay civil penalties.

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