Brian Jorgenson and Sean Stokke wanted to start a hedge fund, and according to a complaint filed against the two by the Securities and Exchange Commission, they raised seed money by trading on inside information.
The SEC charged Jorgenson, a 32 year old who worked in Microsoft's Treasury Group, and his friend Sean Stokke, a day trader who worked with Microsoft for two months, with trading on inside information in three separate instances: in advance of Microsoft's April 2012 announcement of a $300 million investment in Barnes & Noble's Nook e-reader business; ahead of Microsoft's below-expectations fourth quarter earnings announcements in July 2013; and before Microsoft's expectations-beating first quarter earnings announcement in October. All told, the SEC says they earned $393,125 on their trades.
Federal prosecutors in Washington's western district filed parallel criminal charges.
The SEC's complaint paints a picture of a friendship that turned into an alleged insider trading scheme. Jorgenson and Stoke first met three years before the SEC says they decided to start a hedge fund when they both worked at an investment firm, which Jorgenson's LinkedIn profile identifies as Parametric Portfolio Associates. The fund the partners planned to start was to be called BioHawks Investment Group.
When Microsoft decided to invest $300 million in Barnes & Noble to support its e-reader business, one of Jorgenson's roles was "evaluating and developing
potential investments for Microsoft." The SEC alleges he learned about the investment at least 12 days before it would be announced publicly on April 30, 2012. After learning of the deal, the complaint details what the SEC describes as "a period of intense communication" between the two, including "a series of text messages" and two telephone calls.
As part of the deal, Microsoft and Barnes & Noble agreed to settle existing patent disputes — which started when Microsoft charged Barnes & Noble with infringing on Microsoft patents with its Nook Tablet. At the time, it was seen as a lifeline for the Nook business, which continued to iterate and release newer tablets that were cheaper than the iPad. However, the Nook has an enormous amount of increased competition from Amazon, which has regularly updated its line of Kindle tablets that are also priced much lower than much of the competition, as well as tablets like the Nexus 7 from Google. The current-generation Kindle Fire HD costs $139 and includes a free month of Amazon Prime, while the entry-level Nook tablet starts at $129.
Two days after the SEC alleges Jorgenson first learned of the deal, Stokke began purchasing call options on Barnes & Noble, an investment that only makes money if the company exceeds a certain higher price. The SEC alleges that Stokke bought a total of 203 call options and immediately sold them after the announcement, resulting in an alleged $185,000 profit.
Microsoft would report its disappointing fourth quarter earnings of 66 cents a share, 11% below expectations, on July 18, 2013. The stock would decline 11 percent, from $35.44 to $31.40 following the earnings announcement. The SEC says Jorgenson got his first look at the upcoming earnings more than a week earlier. The complaint says that the next day Jorgenson called Stokke and talked to him for more than half an hour and later told Stokke that Microsoft would "miss badly." Stokke bought put options, contracts that only pay off if a stock declines past a certain price. All told, the SEC says Stokke bought more than 1,000 puts and the two earned $179,000.
The SEC says that Jorgenson and Stokke's final scheme was in advance of Microsoft's first quarter earnings, which were 14% above expectations, at 54 cents a share. The stock would rise 6% following the October 24 announcement. Once again, the SEC alleges that Jorgenson was informed of the upcoming earnings and tipped off Stokke.
This time, the complaint says, Stokke and Jorgenson bought call options on a fund that reflected a basket of technology stocks, 8% of which was Microsoft. The fund, the XLK ETF, would rise 0.51% percent on the Microsoft news. The SEC says that the two profited from the move by buying 600 call options on the fund, netting $13,000 when they sold them.
The SEC also says that Stokke made payments to Jorgenson from the trade in cash and admitted "that the payments were in cash because they knew that their trading in connection with the Microsoft announcements was illegal and they did not want to leave a "paper trail" to Jorgenson. Jorgenson told the Seattle Times that he had received $40,000 from Stokke.
Jorgenson also said that he was motivated by "greed" and that he justified his behavior by telling himself, "Members of Congress can do it."
"Abusing access to Microsoft's confidential information and generating unlawful trading profits is not a wise or legal business model for starting a hedge fund," said head of the SEC's Enforcement Division's Market Abuse Unit Daniel Hawke.
Although Microsoft cooperated with prosecutors, more bad news is not something the software giant particularly needs now, as it is seeing its aging PC-powered empire gradually decay — taking the company's stock price with it. The company recently completed a major re-organization and said longtime CEO Steve Ballmer would step down. Microsoft, as part of the big shift, seems increasingly struggling with its identity — whether it's an enterprise services company or a Windows 8 device provider that looks more like Apple — and internal snafus like this certainly aren't helping.