On April 4, 2022, the US Securities and Exchange Commission entered a cease and desist order against Lloyd D. Reed, a Kansas resident and business owner, for violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
According to the SEC’s order, Reed’s cousin and business partner was engaged in 2015 by Torotel, Inc., a Missouri corporation specializing in parts for the aerospace industry, to assess the company’s operations, customers, markets and financial performance. The cousin produced a report with the requested analysis and recommendations, and submitted it to Torotel’s management; he also shared the report with Reed. In 2018, Reed’s cousin was appointed to Torotel’s Board of Directors, and throughout 2019 he served on Torotel’s ad hoc and special committees formed to discuss strategic sales of the company. The compensation paid to Reed’s cousin by Torotel during this period was payable to an aerospace consulting business co-owned by Reed and his cousin.
In the context of their relationship as business partners and family members, Reed and his cousin had a pattern and practice of sharing confidences, including material non-public information, and — as stated in the SEC’s order — Reed knew or reasonably should have known that his cousin expected him to maintain the confidentiality of the information he shared about Torotel’s business and potential sale; and furthermore, Reed knew or was reckless in not knowing that the information he had about Torotel’s pursuit of a strategic transaction was both material and nonpublic.
Nevertheless, between July and August of 2019, Reed used his knowledge of material, nonpublic information to purchase 17,950 Torotel shares on twelve separate occasions. Following Torotel’s announcement on December 2, 2019 that it would be acquired by another company, the share price rose and Reed sold all of his Torotel stock, realizing a profit of over $116,000.
The SEC’s order requires that Reed cease and desist from future violations of Section 10 of the Exchange Act and its implementing rules, and pay a civil money penalty in the amount of $232,591.