Hedge Fund CEO Pleads Guilty in Manhattan Federal Court to Insider Trading Scheme That Netted Nearly $2.5 Million in Profits
PREET BHARARA, the United States Attorney for the Southern District of New York, and JANICE K FEDARCYK, the Assistant Director in Charge of the New York Office of the Federal Bureau of Investigation (“FBI”), announced today that DREW K BROWNSTEIN, a/k/a “Bo Brownstein,” CEO of a Denver-based hedge fund (the “Hedge Fund”), pled guilty in Manhattan federal court to securities fraud arising from an insider trading scheme in which he received material, non-public information (“Inside Information”) about a pending acquisition of Mariner Energy, Inc. (“Mariner”) by Apache Corporation (“Apache”). BROWNSTEIN traded on the Inside Information he received from his friend DREW CLAYTON PETERSON (“DREW PETERSON”), who got it from his father, Mariner board member H CLAYTON PETERSON (“CLAYTON PETERSON”). When the acquisition was publicly announced, BROWNSTEIN realized nearly $2.5 million in profits for himself, the Hedge Fund, and others.
BROWNSTEIN pled guilty today before United States District Judge ROBERT P PATTERSON, JR.
Manhattan United States ATTORNEY PREET BHARARA said: “Bo Brownstein is the latest example of a privileged professional who thought he could make a quick and easy profit by trading on his access to confidential information—here, from the Boardroom of a public company. He is also the latest example of a privileged professional to find out he was woefully mistaken.”
FBI Assistant Director in Charge JANICE K FEDARCYK said: “Acting on material, non-public information, Brownstein purchased stock and options in a company about to be acquired, and then, immediately after the announcement of the acquisition—and the sharp increase in the value of those securities—sold the securities at a hefty profit. This is a textbook example of the kind of conduct for which the law imposes a heavy price.”
According to the Information and statements made during today’s guilty plea proceeding:
On March 25, 2010, representatives of Apache began confidential discussions with representatives of Mariner to acquire the company. On April 7, 2010, Mariner’s board of directors convened a conference call to consider Apache’s proposal to buy Mariner for cash and stock totaling $25 per share.
At the time, Mariner stock was trading at approximately $17 per share.
The next day, Mariner board member CLAYTON PETERSON told his son, DREW PETERSON, who worked as an investment adviser in Denver, Colorado, that he had recently participated in several Mariner board meetings and that DREW PETERSON should purchase Mariner stock on behalf of his sister.
Over the next several days DREW PETERSON had two discussions with BROWNSTEIN, during which he advised him that his father had been participating in several Mariner board meetings and that it appeared Mariner was about to be acquired.
On Monday, April 12, 2010, after participating in another conference call with the board of directors, CLAYTON PETERSON telephoned his son and told him that Mariner would be acquired by another company within a week. At the time he made this disclosure, he knew that Mariner had not yet publicly announced the acquisition. DREW PETERSON immediately telephoned BROWNSTEIN and left a short, coded voice-mail message confirming the Mariner acquisition. Early in the morning on Tuesday, April 13, 2010, BROWNSTEIN had a telephone conversation with DREW PETERSON during which he conveyed to BROWNSTEIN that Mariner would soon be acquired and that the source of the information was his father.
That same day, BROWNSTEIN, using the Inside Information, purchased Mariner options for the Hedge Fund as well as Mariner stock and options for other individuals who had previously given BROWNSTEIN trading authority.
The following day, after having had further discussions with DREW PETERSON, BROWNSTEIN purchased additional Mariner options for the Hedge Fund and also purchased Mariner options for his personal account.
On April 15, 2010, before the market opened, Apache and Mariner announced that Apache would acquire Mariner. Mariner’s stock, which opened at approximately $18 per share, rose dramatically, and closed at approximately $26 per share. During the trading day, BROWNSTEIN caused the Hedge Fund, his personal account, and the accounts of the other individuals to sell all of their Mariner stock and options, reaping illegal profits of nearly $2.5 million.
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BROWNSTEIN, 35, of Denver, Colorado, pled guilty to one count of securities fraud. He faces a statutory maximum of 20 years in prison, a maximum fine of $5 million, or twice the gross gain or loss from the offense, and a maximum period of three years of supervised release.
BROWNSTEIN is scheduled to be sentenced by Judge PATTERSON on December 20, 2011.
CLAYTON PETERSON and DREW PETERSON were previously charged on August 5, 2011, and pled guilty before Judge PATTERSON the same day. CLAYTON PETERSON was sentenced on October 11, 2011, to two years’ probation, with a condition of three months’ home confinement, and a $400,000 fine. DREW PETERSON is scheduled to be sentenced on January 11, 2012.
Mr BHARARA praised the investigative work of the FBI. He also thanked the United States Securities and Exchange Commission for its assistance.
This case was brought in coordination with President BARACK OBAMA’s Financial Fraud Enforcement Task Force, on which Mr BHARARA serves as a Co-Chair of the Securities and Commodities Fraud Working Group.
President OBAMA established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant United States Attorneys MICHAEL A LEVY and ANTONIA M APPS are in charge of the prosecution.
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