Ex-Friedman Fleischer CFO at centre of insider-trading claim

An SEC complaint today claimed Chen Tang, at the San Francisco buyout firm for just six months, tipped off a broad network of family members about impending deals. The CFO of ValueAct Capital has also been named in the complaint.

Chen Tang, formerly chief financial officer of San Francisco private equity firm Friedman Fleischer & Lowe, as well as Ronald Yee, former CFO of San Francisco private investment firm ValueAct Capital, have been accused of insider trading by the US Securities and Exchange Commission.

Tang was employed at Friedman Fleischer for a period of six months until April 2008, during which time he allegedly used non-public information to enrich himself and others, including family members, according to the complaint.

An alleged infraction at the centre of the complaint was Tang’s trading in the securities of Tempur-Pedic International in 2008. According to the Friedman Fleischer website, the firm originally acquired the bedding company in 2002, took it public in 2003 and then re-invested in the New York Stock Exchange-listed company again in 2008.

“Through their personal brokerage and retirement accounts, the accounts of their spouses, children and relatives, and the accounts of several privately offered investment funds that they managed, Chen Tang and his trading partners Ming Siu, Joseph Seto, and Zisen Yu illegally traded in Tempur securities in 2008,” according to the complaint.

In the case of Tempur, Tang and his network went long, short and then long again in the securities based on insider information, according to the complaint. In February and March of 2008, Tang learned that Freidman Fleischer planned to make a “market moving purchase” of Tempur securities, and that Freidman Fleischer planned to time the purchase to coincide with a pre-announcement that Tempur expected to miss its earnings forecast for the quarter. Two of Tang’s trading partners took long positions after Tang “tipped” them, the complaint said.

The complaint noted that before the deal Friedman Fleischer employees were told to avoid trading Tempur stock and “to confer with Chen Tang if they had any questions about the trading blackout”.

When Friedman Fleischer decided to postpone the final investment decision, the Tang group closed their long positions, and all the partners executed short sales and put option purchases in advance of the pre-announcement. After the pre-announcement, the partners bought Tempur stock and call options before Freidman Fleischer executed its investment.

In April 2007, Ronald Yee, who is Chen Tang’s brother-in-law, learned in the course of his employment with ValueAct that his firm planned to submit a bid to buy business services company Acxiom. In August 2007, after Acxiom and Yee’s firm had entered into a merger agreement, Yee learned that the deal was in jeopardy. The suit alleges that Yee conveyed all of this information to Tang, who “tipped his friends and relatives”. Before the April 2007 tip, Tang’s trading partners bought Acxiom securities. After the August 2007 tip that the deal was in jeopardy, the Tang trading partners short-sold Acxiom securities.

Both Tang and Yee went on administrative leave in April when their firms were informed of the investigation. Yee, who joined the firm in 2005, quit ValueAct in June. ValueAct declined to comment on the charges. Neither the firm nor its employees are under investigation.

A statement from Friedman Fleischer (FFL) reads: “FFL became aware of this investigation in April of 2008. Immediately after hearing of the SEC investigation FFL suspended Mr. Tang. Shortly thereafter, his employment was terminated. FFL has fully cooperated with the SEC in its investigation. FFL has been assured by the SEC that neither FFL or any other of its employees are implicated in any of the misconduct that is associated with the complaint.”

-additional reporting by David Snow