A former accountant at a New Jersey biotechnology company, now part of Jazz Pharmaceuticals Public Ltd Company, and his three co-conspirators failed in their attempt to use an encrypted smartphone application to outsmart the securities system in an insider trading case, prosecutors said Aug. 31.
Evan Kita, who worked as an accountant at Celator Pharmaceuticals Inc., and two of his friends, Chiang Yu and Richard Yu — father and son, respectively — pleaded guilty Aug. 31 at the U.S. District Court for the District of New Jersey to one count each of securities fraud. Kita also pleaded guilty to the charge of conspiracy to commit securities fraud.
All three were released on $150,000 unsecured bond, according to a statement from the U.S. Attorney's Office for the District of New Jersey.
A fourth man, Daniel Perez, was arrested and charged with one count of conspiracy to commit securities fraud. Perez pleaded not guilty.
The Securities and Exchange Commission also filed insider trading charges against all four men, who had conspired together to split their ill-gotten gains.
The scheme
Kita was accused of tipping off the younger Yu and Perez in March 2016 about the positive study results of Celator's acute myeloid leukemia drug Vyxeos — non-public information they used to trade in the company's shares.
Celator's stock rose more than 400% on the trial's results, the SEC noted in its complaint.
Kita became privy to the successful trial data on March 10, 2016, during a meeting with Celator's chief financial officer, who asked the accountant to calculate a financial scenario reflecting the positive study results.
Kita tipped off Perez, who agreed to purchase Celator stock and share the profits with him, according to prosecutors.
The next day, Perez purchased 5,520 shares of Celator, which generated $40,967 in profits after the stock jumped on the positive results.
Kita also leaked the information about the study to the younger Yu and asked him to purchase stock in the company on his behalf. Like Perez, Yu agreed to share any gains with Kita.
But Yu also told his father about the scheme, and both men separately bought shares of Celator.
The younger Yu bought 2,446 shares of Celator, while his father purchased 33,500 shares, using three separate brokerage accounts.
The younger Yu generated illicit profits of about $18,093, while his father nabbed $245,475.
The father's brokerage companies, however, became suspicious of his stock purchases, asking if he knew anyone at Celator — something he repeatedly denied, according to the SEC.
Heard it through the grapevine
Kita left Celator in April 2016, taking a job at another company. But through his friends at Celator, Kita learned about the pending Jazz acquisition — information he then shared with Perez through an encrypted smartphone message.
"Listen I have a little bird. And I am told today is a deadline for submitting bids to buy the company. Get your ducks in line on your end, idk [I don't know] when it's gonna be announced but it's gonna pop again," Kita wrote on May 20, 2016, the SEC document shows.
That same day, Perez bought 60 shares of Celator stock at $16.63 per share. On May 31, 2016, Jazz revealed it was acquiring Celator for $30.25 per share.
Kita also sent an encrypted message about the pending $1.5 billion Jazz-Celator deal to the younger Yu, who further tipped his father, who then purchased 2,000 shares of Celator stock at $16.70 per share. He bought additional shares a few hours later through three different brokerages, purchasing a total of 7,600 shares.
His profits from those purchases totaled about $101,852, the SEC said. The younger Yu took in about $3,841.
Kita admitted his insider trading activities had generated more than $250,000, but not more than $550,000, prosecutors said. The elder Yu confessed that the illegal gains from his offense were more than $95,000, but not more than $150,000. The younger Yu said that his illegal activities had garnered $200,070.29.
The men could be fined as much as $5 million each and be imprisoned for up to 20 years for the securities fraud charges.
The conspiracy to commit securities fraud charge, which Kita and Perez are both facing, carries a maximum potential penalty of five years in prison and a $250,000 fine, or twice the gross gain or loss from the offense.