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News August 8, 2011 Issue

Insider Trading – It’s All In The Family

Itís called black and white for a reason.

As in, no middle ground, no gray areas.

You canít be a director of a public company or a supervisor at a registered investment adviser and not know that passing and trading on material non-public information is a no-no.

Clearly, some folks didnít get the memo.

One of the SECís latest insider trading stings nabbed a father and son Ė both of whom held high, if not the highest, fiduciary positions within their organizations. Both of whom utterly disregarded those positions without hesitation in an effort to reap millions in ill-gotten gains.

So alleges the SEC in its August 5 complaint that charges father H. Clayton Peterson, a Marine Energy board member, and son Drew Peterson, a managing director at a registered investment adviser, with insider trading related to Marine Energyís acquisition.

Almost a year and a half ago, in March 2010, Apache Corporation entered into discussions with Mariner Energy regarding a possible business combination. Both companies entered into a confidentiality agreement to keep the discussions private. On April 7, Apache sent Mariner a term sheet including an acquisition proposal that expired on April 14. That same day, April 7, Marinerís board met by phone to discuss the proposal.

Marinerís board decided to hire an adviser to evaluate the transaction, and directed Marinerís CEO "to tell Apache that Mariner was Ďseriously consideringí the Apache proposal and would respond promptly."

After the call ended, Clayton Peterson made another call of his own. He dialed up his son Drew and started giving buy orders for Mariner stock. He was explicit in telling Drew heíd just participated in a board meeting that concerned positive developments for the company.

The buying began in Drewís sisterís account maintained at Drewís firm. Then Drew let himself and several favored accounts in on the potential windfall. Over the following days in the run-up to the April 14 deadline, the SECís complaint alleges that Drew Peterson purchased Mariner stock for himself, his relatives, a close friend, and other clients, including an investment club he managed for himself and a few pals.

Drew Peterson didnít stop there.

Almost immediately after learning of Marinerís likely acquisition, Drew Peterson told "Hedge Fund A Portfolio Manager" that he should buy Mariner stock because Clayton Peterson had recently attended Mariner board meetings and something good was going to happen for Mariner.

Between April 8 and April 14, Drew and the hedge fund portfolio manager kept talking, and the portfolio manager kept buying. The portfolio manager bought 200,000 shares, approximately $3.3 million worth, of Mariner stock for the hedge fund. Then he bought options. Then he bought more stock and more options for his own accounts and the accounts of relatives. After another conversation with Drew during the evening of April 13, the portfolio manager bought more options for the hedge fund and for himself the following day.

On the April 14 deadline, Clayton Peterson again called his son and told him Mariner would be acquired for $25 per share, and the deal would be covered on CNBC early the next day. Just as Clayton Peterson had predicted, Marinerís acquisition was announced on the morning of April 15 and covered by CNBC. Marinerís stock price jumped over 40 percent, from $18.09 at the close on April 14, to $25.68 at the close on April 15.

In the days following the announcement, all of the positions in Mariner securities that had been recently acquired by Drew Peterson and the portfolio manager for themselves and others were liquidated.

For all of his efforts, Drew Peterson personally made a profit of $9,000.

The accounts of his friends and relatives however, profited altogether to the tune of almost $100,000. Hedge Fund A scored big, making approximately $4.6 million. The portfolio manager also made a hefty $130,000 profit for himself, and $305,000 for his relatives.

But you know the SEC canít just let that stand.

Someone Ė or more than one someone Ė has to pay.

An order has not been entered yet, but the complaint asks for all that money back, and then some. If the order matches the request, Clayton and Drew Peterson will both be jointly and severally liable for repayment of all their "ill-gotten" profits, including the "illicit trading profits, other ill-gotten gains, and/or losses avoided of their direct and downstream tippees" (thatís over $5 million). The two will also pay undisclosed civil money penalties.

Clayton Peterson will be barred from acting as an officer or director of any public company as well.

The request for relief is curiously silent about any bar from the industry or other sanction against Drew Peterson, although the press release notes that the SECís investigation in this matter is "continuing."