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Editor's Notes: SANDRA J. HARRIS, Cal. Bar # 134153 Attorneys for Plaintiff UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission ("Commission") alleges: SUMMARY 1. This matter involves insider trading in the securities of Ancor Communications Inc. ("Ancor") by Defendants Brian E. Pridgeon ("Pridgeon"), Stephon A. Carradine ("Carradine") and Craig L. Smith ("Smith") (collectively, the "Defendants") prior to Ancor's December 7, 1999 public announcement that it had entered into two significant business agreements with Intel Corporation ("Intel"). Specifically, Ancor announced that Ancor and Intel had agreed to collaborate to develop Intel's Spider chip for use in Ancor's products and that Intel had agreed to purchase $14 million in Ancor stock (the "Intel-Ancor transaction"). [begin page 2] 2. During the period from July 1999 to the end of November 1999, Pridgeon obtained material nonpublic information regarding the Intel-Ancor transaction by virtue of his employment at Intel and his participation in the transaction. Pridgeon owed a fiduciary duty or similar duty of trust and confidence to Intel to maintain the confidentiality of information concerning the Intel-Ancor transaction. In breach of that duty, Pridgeon misappropriated and used material nonpublic information concerning the Intel-Ancor transaction by purchasing several thousand shares of Ancor stock before the public announcement of the transaction. Pridgeon sold those shares after Ancor's stock price rose following the public announcement of the Intel-Ancor transaction and realized illegal profits of over $137,000. 3. Pridgeon also improperly used the material nonpublic information concerning the Intel-Ancor transaction that he misappropriated from Intel by tipping his cousin, Carradine, who, in turn, tipped his business partner, Smith. On December 2, 1999, Carradine and Smith purchased approximately $15,000 in speculative call options through a Charles Schwab & Co. ("Schwab") account they opened on that day in Smith's name. Smith sold the options on December 7, 1999, realized an illegal profit of $94,875, and paid Carradine $53,583. JURISDICTION AND VENUE 4. This Court has jurisdiction over this action pursuant to Sections 21 (d), 21 (e), 21A(a)(1) and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d), 78u(e), 78u-1 (a)(1) and 78aa]. 5. Defendants Pridgeon, Carradine and Smith (collectively, the "Defendants"), directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, and/or the facilities of a national securities exchange, in connection with the transactions, acts, practices and courses of business alleged in this Complaint. [begin page 3] 6. This Court is an appropriate venue for this action, pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa], because certain of the transactions, acts, practices and courses of business constituting violations of the laws alleged herein occurred within the Central District of California. THE DEFENDANTS 7. Brian E. Pridgeon, age 36, resides in San Jose, California, and, at all relevant times, was a product-marketing engineer in Intel's Fabric Component Division. 8. Stephon A. Carradine, age 37, resides in Long Beach, California, and is Pridgeon's cousin. He is the vice-president and part owner of Century 21-Coastline Realty, a real estate brokerage firm in Long Beach, California. 9. Craig L. Smith, age 50, resides in Long Beach, California, and is the president and part owner of Century 21-Coastline Realty with Carradine. RELATED ENTITIES 10. Ancor is a Minnesota corporation, with its principal place of business in Eden Prairie, Minnesota. Ancor develops, manufactures, and markets switches used to store data in computer networks. Ancor's stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is traded on the Nasdaq National Market System. Ancor options trade on the Chicago Board Options Exchange. 11. Intel is a Delaware corporation, with its principal place of business in Santa Clara, California. Intel is one of the nation's largest manufacturers of computer products and systems. THE INTEL-ANCOR TRANSACTION 12. In June and July 1999, senior executives from Ancor and Intel began preliminary discussions about sharing technological information to develop Intel's "Spider" chip for use in Ancor's high-speed computer switches. The parties also discussed the possibility of Intel's investing directly in Ancor to finance further [begin page 4] research and development. As a result, on July 8, 1999, personnel from Ancor and Intel (including Pridgeon) attended a meeting at which Ancor formally proposed a collaboration between the two companies. Over the course of the next five months, Ancor and Intel officials held further discussions to negotiate the terms of: (i) a collaboration agreement to develop Intel's Spider chip for use in Ancor's products; and (ii) an investment agreement under which Intel purchased over $14 million in Ancor stock. These agreements were finalized and signed on November 24 and 29, 1999, respectively, but were not announced publicly until the morning of December 7, 1999. PRIDGEON OBTAINS INFORMATION ABOUT THE INTEL-ANCOR TRANSACTION 13. Pridgeon was aware of the Intel-Ancor transaction by virtue of his employment at Intel and the fact that Ancor was his key business account. Pridgeon attended the July 8, 1999 meeting with Ancor and Intel representatives at which Ancor proposed the collaboration between the companies. He also participated in regular status meetings at Intel at which the progress of the deal was discussed. Pridgeon also solicited progress reports concerning the Intel-Ancor transaction from several Intel employees who were directly involved in the negotiations with Ancor. Pridgeon reviewed technical information concerning the Intel-Ancor transaction and assisted Intel officials in evaluating Ancor's overall business and products. In addition, approximately two weeks before the Intel-Ancor transaction was publicly announced, Pridgeon's direct supervisor informed him that the completion of the transaction was imminent. 14. Pridgeon knew, or was reckless in not knowing, that the information regarding Intel's agreements with Ancor was nonpublic and that he owed a fiduciary duty or similar duty of trust and confidence to Intel not to use this information or convey it to any person without Intel's consent. [begin page 5] INTEL'S CONFIDENTIALITY POLICIES 15. Upon joining Intel in January 1999, Pridgeon was required to sign the company's "Information Security" agreement under which he agreed that he would "hold in confidence and not use (except for the benefit of Intel) any confidential information" to which he had access while employed at the company. Pridgeon further agreed to keep confidential "any proprietary or trade secret information (technical or otherwise) of Intel or any third party, until such information becomes generally and rightfully known outside Intel without nondisclosure restriction." Pridgeon signed an agreement acknowledging that Intel could fire him immediately for "inappropriately or without authorization using or disclosing information in violation" of company policy. 16. Pridgeon was also aware that Intel instituted procedures to maintain the confidentiality of the Intel-Ancor transaction. Intel referred internally to the proposed Ancor transaction by the code name "Project Audubon," and only a limited number of Intel employees knew of Intel's potential involvement with Ancor. THE PUBLIC ANNOUNCEMENT OF THE INTEL-ANCOR TRANSACTION 17. On Monday, December 6, 1999, Ancor stock closed at $62 7/8, on trading volume of 876,000 shares. Ancor issued its press release announcing the collaboration and investment agreements with Intel before trading began on Tuesday, December 7, 1999. The market's reaction to Ancor's announcement was extremely positive. Ancor stock closed at $85 7/8 per share after rising to an intraday high of $94 1/8 per share, on trading volume of 4.6 million shares. The closing price represented a gain of $23 1/8 per share, or a 36.7% increase from the previous day, and a trading volume increase of 529%. [begin page 6] PRIDGEON BUYS ANCOR STOCK BEFORE THE PUBLIC ANNOUNCEMENT 18. Between November 10 and December 2, 1999, in breach of his fiduciary duty or similar duty of trust and confidence to Intel not to use or otherwise misappropriate confidential information regarding the Intel-Ancor transaction, Pridgeon purchased 5,600 shares of Ancor shares as follows:
19. At the time Pridgeon purchased his Ancor shares, he knew, or was reckless in not knowing, that the information he possessed concerning the Intel-Ancor transaction was confidential and that trading for his own benefit while using that information and tipping others was a misappropriation of that information and a breach of fiduciary duty or similar duty of trust and confidence that he owed to Intel. Through his unlawful trades, Pridgeon realized illegal profits of $137,333. Pridgeon did not disclose these trades to Intel or obtain Intel's consent to use material nonpublic information concerning the Intel-Ancor transaction in effecting those trades. PRIDGEON TIPS CARRADINE WHO TIPS SMITH 20. Pridgeon and Carradine spoke by telephone throughout the period of November 24 though December 2, 1999. For instance, Pridgeon and Carradine spoke to each other by telephone five times on December I and twice on [begin page 7] December 2, 1999. During those conversations, which occurred prior to the public announcement of the transaction, Pridgeon conveyed information concerning the Intel-Ancor transaction to Carradine. 21. Pridgeon breached his fiduciary duty or similar duty of trust and confidence to Intel by improperly disclosing, directly or indirectly, material nonpublic information about the Intel-Ancor transaction to Carradine, even though Pridgeon knew, or acted in reckless disregard of the fact, that Carradine, upon receiving the information, was likely to effect or cause others to effect illegal transactions in Ancor's securities. 22. Following Carradine's receipt from Pridgeon of material nonpublic information about the Intel-Ancor transaction, Carradine informed his business partner Smith about the Intel-Ancor transaction, even though Carradine knew, or acted in recklessly disregard of the fact, that Smith, upon receiving the information, was likely to effect illegal transactions in Ancor's securities. CARRADINE AND SMITH BUY ANCOR OPTIONS 23. On December 1, 1999, while in possession of material nonpublic information from Pridgeon concerning the Intel-Ancor transaction, Carradine and Smith opened a margin account at a Schwab office in Long Beach, California. On December 2, 1999, Smith deposited a cashier's check for $15,000 that Carradine had purchased using funds withdrawn from a bank account of their business, Century 21-Coastline Realty. Then, using material nonpublic information about the Intel-Ancor transaction, on December 2, 1999 (after the two telephone calls that day between Pridgeon and Carradine), Smith placed an order via the Internet to buy 55 December Ancor call options with a strike price of $70. Ancor common stock closed that day at a price of $60 11/16 per share. Smith paid $2 3/4 per share, or a total of just over $15,000, as the premium for these options. 24. A call option is a contractual right to purchase stock at a predetermined price before a preset deadline. In this instance, the call options gave [begin page 8] Smith the right to purchase Ancor stock at any time before December 18, 1999, at a price of $70 per share. In other words, Carradine and Smith spent $15,000 from their business to purchase options that would have no value unless Ancor's stock price increased more than ten points in approximately two weeks. Such a transaction would have been highly speculative but for Smith's and Carradine's knowledge that Ancor's stock price would likely increase significantly on the news of the Intel-Ancor transaction. 25. After the market closed on December 6, 1999 -- and one day before the positive Ancor news announcement -- Smith placed via the Internet a good-til-cancelled sell order for the options at a price of $20. On December 7, 1999, as the price of Ancor's stock rose following the public announcement of its deals with Intel, Schwab was able to execute Smith's limit order and sell his call options at $20, for a total sale price of $110,000 and a net profit of $94,875. 26. On December 6, 1999, Carradine wrote a check payable to Century 21 in the amount of $8,000, which represented Carradine's share of the original $15,000 that Smith and Carradine took from the Century 21 account to purchase the options. Carradine, however, did not have sufficient funds in his account on December 6, 1999 to cover the $8,000 check. Instead, Pridgeon funded Carradine's repayment by wire transferring $8,000 that same day into Carradine's bank account. On December 13,1999, Smith paid Carradine $53,583, representing approximately one-half of the gross proceeds from the trades. Also on December 13, 1999, Smith wrote a check payable to Century 21 in the amount of $7,500, which represented his share of the original $15,000 taken from the Century 21 account to fund the options purchase. 27. Smith and Carradine used material nonpublic information concerning the Intel-Ancor transaction obtained from Pridgeon to trade illegally in Ancor's securities before the public announcement of the transaction. Smith and Carradine knew or were reckless in not knowing that Pridgeon owed a fiduciary duty [begin page 9] or a similar duty of trust and confidence to Intel and that Pridgeon has breached that duty by misappropriating material nonpublic information concerning the Intel-Ancor transaction and providing it to Smith and Carradine. FRAUD IN CONNECTION WITH THE PURCHASE OR SALE OF SECURITIES Section 10(b) of the Securities Exchange Act 28. Paragraphs 1 through 27 are realleged and incorporated herein by reference. 29. Defendants, by engaging in the conduct described in paragraphs 1 through 27 above, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, or of a facility of a national securities exchange, with scienter: a. employed devices, schemes or artifices to defraud; b. made untrue statements of material fact or omitted to state state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or c. engaged in acts, practices or courses of business which operated or would operate as a fraud or deceit upon other persons. 30. By reason of the foregoing, each of the Defendants violated, and unless enjoined will continue to violate, Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C. F. R. § 240.10b-5]. [begin page 10] PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that this Court: I. Issue findings of fact and conclusions of law that the Defendants committed the violations charged and alleged herein. II. Permanently enjoin each of the Defendants from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. III. Order each of the Defendants to disgorge all ill-gotten gains from their illegal conduct, gained directly or indirectly from the transactions complained of herein, together with prejudgment interest thereon. IV. Order each of the Defendants to pay a civil money penalty pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1]. V. Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court. VI. Grant such other and further relief as this Court may determine to be just
and necessary.
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