The Securities and Exchange Commission has charged STEC Inc. Chairman and Chief Executive Manouchehr Moshayedi with insider trading, which carries a potential lifetime ban from serving as an officer or director of any publicly traded company.
The civil charges, filed today in U.S. District Court in the Central District of California, allege Moshayedi withheld “critical nonpublic information” that was likely to negatively affect the Santa Ana-based company’s stock price and a secondary offering that was set to coincide with its second quarter financial results and its third-quarter revenue guidance in 2009.
The SEC alleges Moshayedi did not call off the offering or abstain from selling his shares once he had the information. He instead engaged in a fraudulent scheme to hide the “truth” through a secret side deal, the SEC said, selling 9 million shares.
“I’m not in a position to respond,” a company spokesperson told the Business Journal minutes after the SEC disclosed the charges Thursday afternoon.
Moshayedi and his brother, Mehrdad Mark Moshayedi, a company cofounder, each made $134 million from the sale, according to the SEC.
“Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.
STEC makes flash memory drives for corporate data networks. The products, known as solid state drives, use chips to store data.
The SEC complaint contends that STEC’s stock price increased more than 800% from January to August 2009 as the company reported higher revenue and margins for its products, particularly its flagship flash memory product called “ZeusIOPS.”
The increase came on the heels of STEC’s July 2009 announcement of a deal with its largest customer, Hopkinton, Mass.-based EMC Corp., which agreed to buy $120 million of solid state drives in the third and fourth quarter of 2009.
Moshayedi touted the sales increases, according to the SEC, and said the agreement with EMC was “part of the expected growth” for STEC going forward.
Analysts increased STEC’s revenue targets for the third quarter after the company announced the agreement with EMC, the suit contends.
The SEC alleges that Moshayedi learned EMC’s actual demand for the products was in the neighborhood of $34 million−not nearly enough to ensure that STEC’s third quarter revenue guidance could meet or beat Wall Street estimates—prior to the Aug. 3, 2009, date for the secondary offering.
The SEC also alleges that Moshayedi was told by EMC executives on Aug. 3 the company would not make commitments on any additional purchases, yet he withheld that information from investors prior to the secondary offering while touting in public documents the future growth of the ZeusIOPS product and a $120 million agreement with EMC.
The SEC contends that Moshayedi subsequently entered into a secret deal with EMC to meet third quarter revenue estimates.
The complaint claims Moshayedi convinced EMC on July 29 to buy $55 million of ZeusIOPS product in the third quarter in exchange for an undisclosed $2 million price discount on the product in the fourth quarter.
The SEC is charging Moshayedi with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him and his brother to relinquish any trading profits, pay prejudgment interest and financial penalties, and be permanently barred from serving as an officer and director of any registered public company.
The SEC’s investigation was conducted by Finola Manvelian and Douglas Kobayashi in the Los Angeles Regional Office.
John Berry will lead the litigation.
The Business Journal first reported the SEC was considering a civil injunction action against “the company, its CEO and president, charging them with violations of the antifraud and reporting provisions of the federal securities laws,” in August 2011.
Regulators began looking at the company in 2009 to determine if it violated federal securities laws by making false and misleading statements.
