On May 5, 2022, the US District Court for the Southern District of New York entered a consent judgment against Sepehr Sarshar, the founder and former member of the board of directors of Auspex Pharmaceuticals, Inc., in an action brought by the US Securities and Exchange Commission on August 25, 2020. During the relevant period, Auspex’ common stock was registered with the SEC and traded on NASDAQ.
According to the complaint, Sarshar shared with friends and family members material nonpublic information about the imminent acquisition of Auspex by a large pharmaceutical company in March 2015. Negotiations with several companies had been ongoing from January 2015, and, as recited in the facts, Sarshar was personally involved in and apprised of these negotiations, which culminated with the joint announcement of the acquisition on March 30, 2015. Knowing that he was subject to the stock trading prohibition in Auspex’ code of business conduct and ethics, and that he was not allowed to communicate with friends and family about nonpublic discussions held by Auspex, Sarshar nevertheless texted and telephoned repeatedly with his girlfriend at a critical juncture in the acquisition negotiations, and the girlfriend then removed $50,000 from her retirement account and invested it in Auspex shares. According to the complaint, Sarshar also shared information about the negotiations with his brother, his brother-in-law, and several friends, who purchased Auspex shares on the basis of the material nonpublic information they received from Sarshar, and realized at least $300,000 in profit.
In August 2015, several months after the acquisition, the Financial Industry Regulatory Authority sent Auspix a standard identification letter asking Auspex personnel to identify their contacts with Sarshar’s friends and family members. Sarshar responded falsely that he had had no contact with any but his brother, when in fact he had spoken on the telephone and exchanged numerous text messages with several of the individuals listed, including Sarshar’s girlfriend.
The SEC found that Sarshar’s conduct violated Section 14(e) of the Securities Exchange Act of 1934 and Rule 14e-3 thereunder. The consent judgment permanently enjoins Sarshar from further violations, and imposes a civil penalty of $56,222.
The US Department of Justice filed parallel criminal charges, which were initially dismissed on duplicitousness grounds. After the SEC settlement, the Justice Department confirmed that it did not intend to re-indict Sarshar.