Securities and Exchange Commission v. Manouchehr Moshayedi

The Securities and Exchange Commission in this case accused Manouchehr Moshayedi, a founder of storage device maker STEC Inc., of insider trading when he and his family sold $267 million worth of shares in a secondary offering in August 2009. A federal court jury last Friday ruled against the SEC, finding no liability and rendering a complete victory for the defendant.

In July 2009, STEC Inc. announced a $120 million volume agreement with its largest customer for the second half of the year. The SEC alleged that this announcement and later statements by Mr. Moshayedi misled the market into thinking such agreements would be "recurring" into 2010. The SEC also alleged that approximately three weeks later, Mr. Moshayedi knew that this customer would not need all of that inventory, and entered into a secret side deal to ensure that the customer took $55 million of the $120 million in the third quarter, in order to ensure that STEC's Q3 guidance would meet Analyst's expectations.

The SEC's expert analyzed the stock price reaction on the date of the volume agreement, and opined that Analysts' reactions showed that they expected such volume agreements to be recurring. He also analyzed a date several months later when the SEC says the market learned that STEC's customer might carry excess inventory at the end of 2009 and opined that the entire stock price drop on that date was attributable to this news.

Compass Lexecon and our affiliate Harvard Professor Allen Ferrell were retained by the defendant to analyze the SEC's allegations and rebut the SEC's expert. Prof. Ferrell opined that the SEC's expert failed to properly analyze the impact of the announcement, and performed a sensitivity analysis on the range of stock price reaction attributable to a belief that the volume agreement was "recurring." He also opined that the SEC's expert had ignored confounding information on the date of the alleged corrective disclosure, making his analysis of materiality unreliable. Finally, Prof. Ferrell calculated the probable reaction to "perfect information" about future demand, and showed that the maximum impact on STEC Inc.'s stock price would have been far less than the SEC was seeking in punishment. After Prof. Ferrell submitted an expert report and testified by deposition, the SEC did not even call its expert to the stand during trial.

Compass Lexecon worked with Patrick Gibbs, Matthew Rawlinson & Colleen Smith of Latham & Watkins and Thomas Zaccaro and Howard Privette II of Paul Hastings, who successfully represented defendant at trial. Professor Ferrell was supported by team in Compass Lexecon's Pasadena office led by Elisabeth A. Browne and John Haut.