SAN FRANCISCO—The U.S. Securities and Exchange Commission (SEC) Thursday (July 19) charged the chairman and CEO of solid-state drive (SSD) maker STEC Inc. with insider trading, alleging that he sold a significant portion of his shares in the company with the knowledge that demand from a major customer would be lower than expected.
The SEC complaint alleges Manouchehr Moshayedi sold shares owned by he and his brother, Mark Moshayedi, a STEC co-founder, in a secondary offering in 2009 despite knowing that demand from EMC Corp. for an SSD called ZeusIOPS would be significantly lower than previously stated. The complaint further alleges that Moshayedi engineered a secret deal with EMC to prevent knowledge of its reduced demand for the product from coming to light prior to the sale of the shares. Each of the Moshayedis netted about $134 million on the deal, according to the SEC complaint.
The SEC complaint, filed in U.S. District Court in Central California, charges Moshayedi with securities fraud. It asks the court to order him to forfeit the proceeds from the stock sale and pay interest and penalties. It also asks the court to bar him from serving as an officer or director of any public company.
"Moshayedi put his own self-interest ahead of his responsibility to lead a public company, and shareholders who placed their trust in him suffered as a result," said Michele Wein Layne, director of the SEC’s Los Angeles regional office, in a statement. "Company insiders are strictly prohibited under the securities laws from exploiting corporate dealings for private gain, particularly in the secretive and manipulative manner that Moshayedi did."
In a statement, STEC (Santa Ana, Calif.) said the SEC had notified the company it would not bring charges against the company or any of its other executives.
"With the conclusion of the investigation, we remain confident that an independent trier of fact will find that the commission's allegations against Manouch Moshayedi, our chief executive officer, are without merit," said Kevin Daly, STEC's lead independent director.
Gary Mobley, an analyst with Benchmark Capital, said in a report circulated Friday that the SEC has been investigating the 2009 deal for over a year. He said that if Moshayedi is forced to step down as a result of the complaint, it could increase the likliehood of an outright sale of STEC.
"While the company is between product cycles, STEC does have significant enterprise-class SSD IP," Mobley said. "Also, the company does have $206 million in cash."
Mobley maintains a "hold" rating on STEC's stock—largely because of the investigation, he said—and a price target of $8 per share. STEC's shares traded at $7.53 in afternoon trading Friday, down about 1 percent from Thursday's close.
The SEC complaint alleges that Moshayedi sought to take advantage of an upward trend in the stock price of STEC by selling shares owned by he and his brother, in a secondary stock offering set to coincide with the release of the company’s financial results for the second quarter of 2009. But in the days leading up to the offering, Moshayedi learned that demand from EMC for ZeusIOPS SSDs would be significantly lower than previously stated, according to the SEC.
The complaint also alleges that Moshayedi convinved EMC to buy $55 million worth of the ZeusIOPS SSDs in the third quarter of 2009—far more than EMC needed in the quarter—in exchange for a $2 million discount on the product in the fourth quarter. The SEC maintains that Moshayedi made the deal with EMC so that STEC could hit its third quarter sales target and analyst estimates, thus preventing the stock price from falling.