U.S. SEC loses insider trading case against ex-sTec CEO

(Reuters) - A federal jury on Friday found the former chief executive of sTec Inc not liable for trading on inside information, a major loss for the U.S. Securities and Exchange Commission.

The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst

Manouchehr Moshayedi, 55, a co-founder of the computer storage device company, was cleared of insider trading on non-public information about a major customer’s reduced demand for a key product, enabling him and his brother to reap roughly $260 million.

The case in Santa Ana, California, was one of the largest U.S. insider trading enforcement actions to go to trial, and is another setback for the SEC on the heels of an insider trading trial loss a week earlier in New York.

“We are extremely grateful to the jury for their hard work and their focus on the evidence,” Patrick Gibbs, Moshayedi’s lawyer, said in an email.

SEC spokesman John Nester said the agency respected the verdict “but will continue to aggressively enforce the law when we believe the evidence supports the allegations.” Filed in 2012, the lawsuit alleged Moshayedi and his bother, Mark, had planned in 2009 to sell a large chunk of their sTec stock during a secondary offering coinciding with the release of sTec’s second-quarter results.

According to the SEC, Moshayedi then learned sTec’s largest customer, EMC Corp, would have less demand than expected for its flagship flash memory drive product and would not renew a $120 million supply contract.

Rather than call off the stock offering, Moshayedi sought to hide the facts via a secret side deal with EMC, while continuing with the sale, the SEC said. Moshayedi, who resigned as sTec’s CEO following the lawsuit, denied any wrongdoing.

Gibbs contended that Manouchehr Moshayedi did not know EMC would have excess inventory, reducing its demand, and that those risks were “clearly disclosed.” The SEC also investigated sTec and Mark Moshayedi, a co-founder of the company, but told both in 2012 it would not bring charges.

Western Digital Corp acquired sTec last year for $340 million.

The SEC previously said that it would seek to recoup $167.6 million plus interest from Manouchehr Moshayedi if he was found liable.

There has been a surge in SEC trials. So far this fiscal year, the commission finished 24, compared with 16 in all of last year.

Results have been mixed. Last month, jurors in New York cleared Nelson Obus, a fund manager at Wynnefield Capital Inc, and two others of insider trading. Earlier in May, a jury in New York found Texas businessman Samuel Wyly and the estate of his brother, Charles, liable for fraud in connection with undisclosed stock trading in offshore trusts.

The case is Securities and Exchange Commission v. Moshayedi, U.S. District Court, Central District of California, No. 12-01179.

Reporting by Nate Raymond in New York; Editing by Marguerita Choy and Andre Grenon