On January 6, 2022, the US Securities and Exchange Commission announced that insider trading charges were filed in the US District Court for the District of Massachusetts against three Florida residents, David Schottenstein and his close friends Kris Bortnovsky and Ryan Shapiro, for placing trades based on material nonpublic information obtained from Schottenstein’s cousin in advance of three major announcements involving DSW Inc., Rite Aid Corporation, and Aphria Inc., an international cannabis-related company based in Canada.
According to the SEC complaint, Schottenstein was involved in a scheme that enabled him to place illegal trades in August 2017 ahead of DSW’s earnings announcement; in February 2018 ahead of a merger agreement between Rite Aid and Albertsons; and in December 2018 in advance of a corporate announcement regarding the acquisition of Aphria by Green Growth Brands Inc.(GGB), another cannabis-related company based in Canada. Schottenstein allegedly placed the trades based on tips he received from his “insider” cousin who served on the boards of directors of DSW Inc. and GGB, and whose family owned a private business involved with the Rite Aid merger. According to the complaint, Schottenstein shared the tips with his friends Bortnovsky and Shapiro, who also traded based on tips they received.
As a result of the scheme, Schottenstein realized more than $600,000 in illegal profits, and Shapiro made approximately $121,000, according to the complaint. Bortnovsky allegedly used the tips to engage in illegal trades not only in his personal brokerage accounts but also in the accounts of his investment firm Sakal Capital, and one of its hedge funds, Sakal Fund. According to the complaint, Bortnovsky generated approximately $260,000 in illicit gains in his personal account and approximately $293,000 for another individual whose account he managed. Bortnovsky also allegedly made more than $3.4 million in illegal profits in the Sakal accounts that he controlled.
The SEC charged Schottenstein, Shapiro, Bortnovsky, and the two investment vehicles with violating Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 thereunder; the three friends and the Sakal Fund were also charged with violating Section 14(e) of the Exchange Act and Rule 14e-3 thereunder. In addition, the SEC sought civil monetary penalties and permanent injunctions for all defendants.
The US Attorney’s Office for the District of Massachusetts also announced that parallel criminal charges were filed against the three friends for their participation in the scheme. Federal prosecutors reported that two of the friends, Bortnovsky and Shapiro, were indicted for securities fraud and conspiracy, while Schottenstein agreed to plead guilty to the charge of conspiracy to commit securities fraud.