A stock analyst at Zacks Small Cap Research and two investment bankers have been charged with insider trading by the Securities and Exchange Commission (SEC).
Federal prosecutors and securities regulators said Tuesday that Jason Napodano, a former biotech stock analyst at Zacks Small Cap Research, and Bryce Stirton and Bilal Basrai, who previously worked as investment bankers at LBMZ, are accused of violating federal laws by using knowledge of nonpublic events related to certain securities to generate nearly $200,000 in illicit gains.
The SEC has chosen to file the action as an administrative proceeding, and is seeking injunctive relief, disgorgement of ill-gotten gains, and the imposition of civil monetary penalties.
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Specifically, the commission alleges that Napodano repeatedly tipped off Basrai and Stirton about impending upgrades and downgrades to various securities he covered in the health care industry. Napodano was widely followed in the biotech sector, and his ratings had the ability to influence the short-term price direction of various penny stocks.
The SEC alleges that Jason Napodano made profits of $143,000 by trading in advance of reports and articles he wrote at Zacks SCR. The complaint further states that he misled investors with a disclaimer that his company’s analysts are restricted from holding or trading securities in the issuers which they cover.
In addition, after Napodano’s tip of an impending upgrade or downgrade, Basrai and Stirton had then purchased or sold short the relevant company’s stock ahead of the announcement.
The commission alleged a pattern of insider trading in which Napodano, after authoring a report upgrading or downgrading a stock, would then communicate with the other defendants prior to the publication of the report. They were then able to place the relevant purchase or sell order in the underlying security, and the commission alleges that they were able to realize gains ranging from $2000 to over $140,000 as a result.
Commenting on the case, Steven Peikin, Co-Director of the SEC’s Enforcement Division, said: “Retail investors seek honest rather than conflicted research to help them make decisions about which stocks to buy and trade. It is unacceptable for analysts to represent they have no stake in the companies they’re writing about while secretly cashing in on trades in those stocks.”