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Traders, Don't Turn Your Telephone Interview With the SEC Into a Federal Crime

Bruce Carton | September 6, 2013

This week a federal jury convicted a California man for obstructing an SEC investigation into insider trading. The defendant, Karim Iskander Bayyouk, now awaits his sentencing hearing, which is scheduled for January 15, 2014.

Bayyouk's conviction is the latest reminder that although the SEC is a civil (not criminal) agency, it is still possible for someone being investigated to botch things so badly that, as in Bayyouk's case, federal criminal prosecutors also get involved. As I have noted here before,

SEC enforcement actions are civil matters, meaning no matter how badly a defendant may lose the case he or she isn't going to prison. However, there is a one easy way to parlay this situation into jail time, and that is by perjuring yourself in sworn testimony or, similarly, by obstructing justice by making false statements to the SEC during its investigation.

Bayyouk was convicted of the latter--making false statements when the SEC called him on the telephone to ask him some questions about his well-timed purchase of approximately $100,000 in Biosite call options just days before a merger announcement caused the price of Biosite stock to surge (and Bayyouk to profit by nearly $1 million). Although SEC telephone interviews of traders or other witnesses lack the formality of a court hearing or a deposition, the danger of making false statements in such interviews is still very real. 

In Bayyouk's case, the jury concluded that he falsely told the SEC over the telephone that "he did not speak to anyone before investing in Biosite, that no one suggested Biosite to him, and that he did not suggest Biosite to his brother, who also traded Biosite call options." To the contrary, prosecutors said, the evidence showed that Bayyouk did receive a tip from an individual who had come into possession of inside information about the imminent merger.

Bayyouk, who is now free on bond, was convicted of one count of obstructing proceedings before the SEC, in violation of 18 U.S.C. § 1505.