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The Securities and Exchange Commission secured a solid victory last month when a federal judge found that a Chester County, Pa., businessman had engaged in insider trading, but has now suffered a significant setback as the same judge ordered the defendant to pay just a fraction of the amount the government had demanded in civil penalties and refused to issue any injunctive orders. In his seven-page opinion in Securities and Exchange Commission v. Pardue, U.S. District Judge Robert F. Kelly found that although William Pardue “blatantly” engaged in insider trading, he simply cannot afford to pay about $200,000 in disgorgement and $419,000 in fines because he is a father of six with a modest income and staggering debts. Instead, Kelly ordered that Pardue disgorge only $25,000 in profits and pay a civil penalty of just $25,000. In his April opinion, Kelly found that Pardue had improperly traded on insider information gained from members of his wife’s family who are executives of Central Sprinkler Corp. that the company was about to be acquired by Tyco International. “The timing of Pardue’s trades in Central Sprinkler stock was highly suspicious,” Kelly wrote. “Pardue sold half of his Central Sprinkler holding in March 1999. He then, within a week of Tyco’s $30 [per share] bid, ordered his stockbroker to buy as much Central Sprinkler as possible. He liquidated his other holdings to make the purchase; several of his liquidations appear to have been taken at losses.” Kelly found that “the suspicious timing and pattern of Pardue’s stock trades leads to the conclusion that the Tyco offer triggered his decision to purchase Central Sprinkler.” But Kelly’s April ruling, which announced his verdict from a non-jury trial, was limited to the issue of liability and included no monetary award or injunctive relief. Instead, the judge said he wanted to “further evaluate Pardue’s financial condition to determine the appropriateness of the various forms of requested relief.” Now, in a decision announcing his award, Kelly ruled that the SEC is not entitled to any injunctive relief because there is simply no need for it. Kelly found there was no reason to issue injunctions prohibiting William Pardue from future violations of securities laws or barring Pardue from serving as an officer or director of a publicly traded company. “All of the evidence points to an isolated incident that is unlikely to be repeated by Pardue in the future. As I conclude that there is no reasonable likelihood of a future violation, I will not grant the requested injunction,” Kelly wrote. Kelly also said he felt “compelled” to address Pardue’s current financial condition before deciding how much to award the SEC in disgorgement and civil penalties. “Issuing a decision in this case without doing so would amount to ignoring the elephant in the room, and, therefore, doing considerable misjustice both to Pardue and to the Commission,” Kelly wrote. Kelly noted that Pardue reported that he has a negative net worth of between $50,000 and $100,000, and that he owes about $325,000 in back taxes that accrued from his capital gains while day trading from 1998 to 2000. Pardue’s only asset is the family home in Devon, Pa., Kelly noted, which Pardue reported is subject to a series of mortgages totaling approximately $300,000. Kelly also noted that Pardue’s current salary is about $50,000, and that he is the head of a household with six children ranging in age from 9 to 26, with five children still living in the family home. “Although the Commission would dispute the accuracy of the numbers provided by Pardue, there is no dispute regarding their effect,” Kelly wrote. “It is beyond dispute that Pardue cannot pay any monetary relief ordered by the court. � As a result, even if monetary relief were to be set at a more moderate level, the punitive effect to Pardue would be high while the Commission’s interest in public deterrence would be compromised by the outward appearance of a sweetheart deal,” Kelly wrote. SEC lawyers argued that Pardue’s financial status should have no effect on the court’s calculation of the disgorgement order and civil penalties. But Kelly said “while I agree with the Commission’s assertion that Pardue should fairly and rightfully be expected to pay something in the event he is able, I see no reason to pointlessly impose an order for monetary relief with dubious chances of execution and for no other purpose than further solidifying the financial ruination of the defendant and his innocent family.” According to court papers, in 1976, Pardue married Mariah Meyer, the daughter of William Meyer, then president of Central Sprinkler, a Lansdale, Pa., manufacturer of fire protection systems. Soon after, Pardue began working for Central Sprinkler as quality control manager. After a series of promotions, he became the company’s executive vice president of operations. In the late 1990s, Pardue was transferred to the position of executive vice president for administration. Several other members of the Meyer family also worked at Central Sprinkler while Pardue was employed there, including George Meyer, Stephen Meyer, John Meyer and Marilyn Thomas, who are children of William Meyer, as well as Stephen Billow and Andrew Post, who were sons-in-law of William Meyer. In January 1999, Pardue resigned his post as executive vice president. In late 1998, Tyco International had approached E. Talbott Briddell, Central Sprinkler’s CEO, and expressed an interest in acquiring the company. In May 1999, Tyco presented an offer of $30 per share to Central Sprinkler’s senior management. In his April ruling, Kelly found that the negotiations between Central Sprinkler and Tyco were confidential, and access to information about the negotiations was limited to a small circle within the company. Kelly found that none of the Meyer family members who were company insiders and knew of the Tyco deal had ever “deliberately” told Pardue of the acquisition talks. But Kelly found that Pardue nonetheless had access to insider information as a result of overhearing conversations among the Meyers. According to the opinion, in May 1999, Pardue saw William, George and Stephen Meyer at family gatherings and at a hospital where William Meyer’s wife was a patient. In his deposition, Pardue admitted that he had been observing William, George and Stephen Meyer involved in discussions related to Central Sprinkler at the hospital. Pardue testified that the three were “rejoicing,” that “a great weight had been taken off of his [William Meyer] shoulders,” and that based on his observations, Pardue “knew things were going well.” Although Pardue denied being in possession of material, non-public information about Central Sprinkler when he started buying Central Sprinkler stock on May 1999, Kelly found that his explanations for his stock trades proved to be false. “Based upon Pardue’s contacts with members of the Meyer family in possession of material, non-public information regarding Central Sprinkler; the suspicious nature of his trading activities in Central Sprinkler stock; the failure of his explanations to the Commission to explain his trading activities; Pardue’s admission that he was observing George and Stephen Meyer; and his admission that he was attempting to beat an expected favorable earnings announcement, the court finds that Pardue traded in Central Sprinkler stock while in the possession of material, non-public information,” Kelly wrote. Kelly also found that Pardue “knew that Central Sprinkler’s insider trading policy applied to him.” Pardue, who represented himself at trial, argued that the SEC had no direct evidence that Pardue had actual knowledge of insider information. But Kelly found there was “strong circumstantial evidence that he did.” After outlining a “suspicious” series of stock trades, Kelly found that “when Pardue’s proximity to William, George and Stephen Meyer during the events in question is added, the court is left with no other explanation of Pardue’s conduct other than his possession of material, non-public information.”

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