The Securities and Exchange Commission has posted more details of how it built its investigation against an alleged insider-trading ring in China.
Included among those interesting details is Comcast Corp.'s account of how it learned from lawyers that DreamWorks Animation SKG was in talks with a would-be buyer. That eased the way for Comcast to squash that deal with its bigger bid.
In New York last week, U.S. District Judge J. Paul Oetken extended his freeze on $81 million in U.S. brokerage accounts for China-based investors in DreamWorks, the Hollywood studio that Philadelphia-based Comcast agreed to buy in April 2016 for $3.8 billion.
The SEC alleges that China-based investor Shaohua "Michael" Yin, who earned his Wharton MBA in 2005 and has worked for blue-chip investment houses in the United States and China, bought DreamWorks shares for five accounts using illegal insider information in the three weeks before Comcast paid a premium price for the studio that gave us Shrek and Kung Fu Panda.
But the commission has admitted in court filings that it doesn't know how Yin found out DreamWorks was nearing a deal. The SEC called its own evidence "circumstantial."
DreamWorks officials are not accused of wrongdoing; nor is anyone at Comcast, which told the SEC it didn't know DreamWorks was talking to anyone about a sale until a week after Yin started buying shares.
Comcast stepped in with its offer last April, just as PAG Asia Capital, a Hong Kong-based firm that calls itself one of Asia's largest private-investment managers, was preparing the last touches on its own formal DreamWorks bid after months of negotiations.
On April 4, according to the SEC, DreamWorks board members received an update on PAG's offer to buy their studio for $35 a share.
Corporate-merger proposals are typically kept secret to prevent unwelcome speculation by shareholders and uninvited offers from other would-be acquirers.
If management is already talking to a favored buyer, it's tough to justify telling a higher bidder no. And it's illegal for dealmakers and other insiders to share information that hasn't been given to the public, or to buy shares to exploit that inside information. You could go to prison that way.
But word that DreamWorks was in talks apparently leaked out anyway, and Yin took illegal advantage of the insider information, the SEC says. He and his lawyer have not returned calls seeking comment.
On April 4, the same day DreamWorks board members began mulling the details of PAG Asia's offer, Yin began buying DreamWorks shares for five accounts that had not previously owned the stock. Yin's group bought tens of thousands of shares every trading day, until Comcast and DreamWorks announced their sale agreement April 27, the morning after financial news outlets began reporting deal rumors.
Comcast told SEC investigators that it found out about that offer through a routine inquiry between two partners at the New York law firm Davis, Polk & Wardwell LLP, which has represented both Comcast and DreamWorks' investment bank, Centerbridge Partners.
Comcast's longtime general counsel, Arthur Block, explained in a letter to the SEC: On April 10, Davis Polk's William H. Aaronson learned that his colleague George R. Bason Jr. had gotten a call from Centerbridge, asking whether his firm could advise Centerbridge in its work as "financial adviser to a special committee of the DreamWorks Animation board of directors. Aaronson understood that the special committee was created in connection with a potential M&A transaction involving DreamWorks Animation."
Block continued: On April 11, Aaronson "sought to clear with Comcast any conflict which might arise out of Davis Polk's representation of Centerbridge." So Aaronson called Robert Eatroff, Comcast's executive vice president, global corporate development and strategy, and asked "whether Comcast would be comfortable with Davis Polk acting as counsel to a financial adviser to a special committee of a publicly traded film studio."
Which studio? "Aaronson recalls that Eatroff immediately concluded that the studio at issue must be DreamWorks," Block wrote.
You shouldn't work for them in that deal if you're also working for us, the Comcast executive told the lawyer. "Aaronson did not confirm or reject Eatroff's suspicion regarding the identity of the film studio," Block added.
Two days later, on April 13, "Brian Roberts, the chairman and chief executive officer of Comcast, contacted [DreamWorks boss Jeffrey] Katzenberg to express interest in a possible acquisition" of DreamWorks by Comcast, DreamWorks noted in an SEC filing after the deal was announced.
The DreamWorks people told Roberts that their company already had an offer on the table, and that he'd have to beat $35 a share. Comcast rushed to cut a better deal. PAG Asia was left behind. Comcast clinched DreamWorks at $41 a share.
And that, incidentally, made the Yin group its illegal $29 million, the SEC says.
Within a few weeks, the SEC was investigating those trades, collecting phone and trading records tying Yin to the five accounts that had bought so many DreamWorks shares in such a "suspiciously" timely way.
But the SEC still hasn't been able to show where Yin got any insider information.
Will circumstantial evidence be enough to keep the profits frozen? Oetken ordered the SEC and Yin's lawyers back to court to review that question at the end of March.