Axcan Pharma Shareholders Were Victimized By Arthur Cutillo: SEC Complaint

The SEC has -- as of last Friday -- added new counts and information in an amended complaint against Arthur Cutillo, a former Merck Vaccines researcher, patent attorney and Ropes and Gray litigator. To be clear, the people on the left side of the below chart (click it to enlarge) are -- according to the SEC -- not considered to be implicated in any way, in Cutillo's scheme. Cutillo is another matter, on the right; and James W. Self (lower right) has been implicated in a separate insider trading scheme, while still at work as a Merck executive:



They, and their company's shareholders, are likely victims here -- as the Cutillo tippees siphoned off chunks of other Axcan shareholders' would-be "merger premium" gains, in the days prior to the announcement. The executives on the right had every right to trust that Ropes and Gray, a fine firm, would keep the merger discussions to themselves. Again, to be clear, almost all Ropes and Gray lawyers did so -- save two (allegedly) bad apples. It is fascinating that one of those two bad apples was an ex-Merck Vaccines researcher -- and that another Merck Vaccines guy is now caught up in what appears at the moment to be an unrelated (alleged) insider trading scheme. [More on that one -- involving James W. Self -- on another day.]

In any event, here is some of the new SEC complaint (as an 8 page PDF file):

. . . .14. In 2007, Cutillo and Santarlas, together with Cutillo's friend Jason Goldfarb, a lawyer in private practice in New York, entered into a scheme with Zvi Goffer, a proprietary trader at Schottenfeld, to trade on material, nonpublic information concerning upcoming corporate acquisitions involving Ropes & Gray's clients. As part of this scheme, and in breach of their duties to Ropes & Gray and its clients, Cutillo and Santarlas misappropriated from their law firm material, nonpublic information concerning upcoming acquisitions involving the firm's clients, including the November 29, 2007 announced corporate acquisition of Axcan by TPG LLP. Cutillo and Santarlas, through Goldfarb, tipped this inside information to Zvi in exchange for kickbacks.

15. Zvi then tipped this information to others who traded, including Tudor. Based on the inside information, Tudor traded in the securities ofAxcan and made illicit profits of approximately $75,000.

16. In early 2007, Axcan's board of directors began to pursue the possibility of selling the company. After an August 9,2007 board meeting, Axcan established a data room and made senior management available for potential purchasers to conduct due diligence. Axcan's financial adviser, Merrill Lynch, requested that potential purchasers submit indications of interest, including purchase price ranges, by October 26, 2007. TPG Capital, a private equity firm, was one of the bidders for Axcan. Ropes & Gray represented TPG Capital in connection with the transaction.

17. By virtue of their employment at Ropes & Gray, Cutillo and Santarlas had access to, and learned of, material nonpublic information concerning the acquisition of Axcan. Cutillo and Santarlas tipped Goldfarb material, nonpublic information concerning the acquisition of Axcan, which they misappropriated from Ropes & Gray.

18. On October 25, 2007, Cutillo called Goldfarb four times between 7: 11 p.m. and 7:55 p.m. Cutillo tipped Goldfarb material, nonpublic information that Axcan was going to be acquired.

19. That same night at 8:51 p.m, Goldfarb called Zvi. Goldfarb tipped Zvi the material, nonpublic information concerning the upcoming acquisition ofAxcan that Cutillo and Santarlas misappropriated from their firm.

20. Zvi then tipped the material, nonpublic information concerning the Axcan acquisition to various tippees who traded, including Tudor.

21. From October through November 2007, based on the inside information misappropriated by Cutillo and Santarlas, and tipped to Tudor by Zvi, Tudor purchased shares ofAxcan in two separate personal trading accounts as well as in a proprietary account at Schottenfeld. Tudor knew, or should have known, that this material, nonpublic information was obtained in breach of a fiduciary or other duty of trust and confidence owed to the source of the information.

22. On November 29,2007, Axcan announced that TPG Capital would acquire Axcan at a price of $23.35 per share, which represented a premium of about 28% over the previous day's closing price. . . .

Again, there is no allegation that anyone at Axcan Pharma acted improperly, but one must wonder whether Cutillo was relying on "contacts to contacts of contacts" -- from his former life as a Merck Vaccines employee, to gather some of the inside information used to tip his tippees. I'll look in on this from time to time, and report back, as the matter progresses. [To be fair, here is Mr. Cutillo's recently-filed motion to dismiss the SEC's case -- as an 85 page PDF file.]

I should also mention that there has been a nearly 20 month SEC investigation -- into unusual trading in Schering-Plough and Merck securities immediately prior to the March 9, 2009 announcement of the bust-up. Will any of the gentlemen on the right, or their contacts be implicated there? I don't have any idea.