On September 20, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint (“Complaint”) against Peter C. Chang (“Chang”), alleging Chang violated Sections 10(b), 14(e), and 16(a) of the Exchange Act and Rules 10b-5, 14e-3, and 16a-3 thereunder. The SEC asserted Chang knowingly engaged in an insider-trading scheme and failed to disclose his ownership of securities in accordance with federal securities laws.

According to the Complaint, Chang served as the Chief Executive Officer, Chairman of the Board, and President of Alliance Fiber Optic Products, Inc. (“AFOP”) from its formation in 1995 until its acquisition by Corning, Inc. (“Corning”) in 2016. In 2015 and 2016, through his position with AFOP, Chang acquired material nonpublic information about AFOP’s earning results and financial performance, as well as the intended acquisition by Corning. Chang traded AFOP shares in two nominee accounts held in his wife’s and brother’s names in advance of AFOP’s two public earnings’ announcements and the Corning acquisition announcement. Chang also allegedly informed his brother to trade AFOP shares on the basis of the same material, nonpublic information.  

The SEC asserted that as an officer and director at AFOP, Chang was subject to restrictions designed to limit his ability to trade AFOP shares, to disclose any such trading, and to keep confidential information regarding AFOP. AFOP also had an insider trading policy that prohibited all employees from trading on the basis of material nonpublic information regarding AFOP and trading during blackout periods around the earnings release for each quarter, and a nondisclosure agreement in connection with the proposed acquisition by Corning. Chang was further required to file statements reflecting his ownership, pursuant to Section 16 of the Exchange Act.

To properly claim violation of rules, the SEC must allege the defendant directly or indirectly: 1) employed devices, schemes, or artifices to defraud; 2) made untrue statements of material facts and failed to state material facts necessary to make those statements not misleading; and 3) engaged in acts which would operate as a fraud upon other persons, including buyers and sellers of securities

The SEC alleged Chang acted with scienter by opening a nominee brokerage account which controlled significant amounts of AFOP shares in both his wife’s name and brother’s name, failing to disclose ownership of the nominee accounts, trading AFOP shares on the basis of material nonpublic information, and informing his brother to do the same.

Chang allegedly opened a nominee brokerage account in his brother’s name in 2002 and one in his wife’s name in 2011, both funded from foreign bank accounts he held or controlled. Chang properly filed the correct forms to disclose his stock ownership held on behalf of himself, an LLC, a foundation, and his two sons, but failed to disclose ownership in the two nominee accounts.

Chang allegedly knew that AFOP had suffered a decline in purchase orders and its revenue would likely miss the provided earnings’ guidance for Q3 and Q4 in 2015. The SEC argued that Chang began selling off AFOP shares, and informed his brother to do the same in advance of the scheduled earnings announcements, despite AFOP’s trading blackout for all officers and directors during that time.

During the entire duration Chang’s brother’s trading account was open, AFOP comprised the entire trading activity in his account, with minor exceptions. Chang’s brother’s AFOP trades closely tracked Chang’s AFOP trades in the nominee accounts in timing, size, and direction.

The SEC represented that in May 2015, Chang contacted the brokerage firm for one of his nominee accounts and failed to correct the representative who understood that the account owner was unrelated to Peter Chang.

Later, in 2016, Chang identified his brother but failed to identify his wife when FINRA requested a review of persons whose accounts traded in AFOP around the time of Corning’s acquisition, and to identify any past or present relationships.   

The SEC further alleged Chang and his brother avoided losses totaling more than $950,000 due to violations of the AFOP trading policies and federal securities laws.

Based on these allegations, the SEC initiated this action against Chang and requested the court to: 1) permanently restrain and enjoin Chang “from directly or indirectly violating Sections 10(b), 14(e), and 16(a) of the Exchange Act . . . and Rules 10b-5, 14e-3, and 16a-3 thereunder; 2) order Chang “to disgorge, with prejudgment interest, all illicit trading profits, losses avoided, or other ill-gotten gains as a result of the conduct alleged herein”; 3) prohibit Chang “from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act”; and 4) order Chang to pay civil penalties pursuant to Section 21A and 21(d)(3) of the Exchange Act.

The primary materials for this post can be found on the DU Corporate Governance website.