Thursday, July 19, 2007

SEC Plans Suit Against Dow Jones Director

The WSJ reports:

The Securities and Exchange Commission intends to file civil charges against a Dow Jones & Co. board member in connection with an unfolding insider-trading case, according to people familiar with the matter.

In recent days, the SEC has notified Dow Jones director David Li, chairman and chief executive of Bank of East Asia Ltd., through a Wells notice, that it plans to recommend filing civil charges against him, these people said.

A Wells notice is the final step before the SEC files a lawsuit. It allows the person or entity one last chance to persuade the agency to not bring the case. The SEC's five-member commission has to sign off on any lawsuit. It isn't clear exactly what the SEC case against Mr. Li is built on or what law they might charge him with violating.

The development comes the same week that Dow Jones's board of directors agreed in principle to sell the company -- owner of The Wall Street Journal, Dow Jones Newswires, Barron's and other entities -- to Rupert Murdoch's News Corp. A final deal needs approval from the Bancroft family, the controlling shareholder of Dow Jones, which is split on whether to sell to Mr. Murdoch.

Mr. Li remains a member of Dow Jones's board of directors. It is unclear how the SEC's case might affect his future role on the board. An SEC spokesman declined to comment.

In a press statement Thursday, Mr. Li acknowledged receipt of the Wells notice and denied the allegations against him.

"I have broken no laws and deny the apparent allegations being made by the staff of the Commission. If the Commission does commence proceedings against me, I will defend myself vigorously. In the meantime, I will continue to carry out all my business and public duties while defending my good name and reputation," Mr. Li said.

When news of his potential involvement first became public, Mr. Li told the Journal: "I did not disclose to anyone, not even my wife, any information about Dow Jones."

Mr. Li's connection to the case is through Hong Kong businessman Michael Leung Kai Hung. The two men have a series of social and business ties. In May, Mr. Leung's daughter and son-in-law were charged with insider trading by the SEC in federal court in Manhattan. The SEC complaint says Mr. Leung transferred money to his daughter and son-in-law. The couple bought 415,000 shares of Dow Jones -- some with the funds from Mr. Leung -- two weeks before Mr. Murdoch's initial overture was made public. They made about $8 million in profit when they sold the stock three days after news of the bid was reported. A federal judge has frozen those assets.

At the time, Mr. Li said Mr. Leung "is a friend, but I certainly did not talk to him about Dow Jones." Mr. Leung couldn't be reached to comment. The SEC didn't name Mr. Li in its initial complaint, and Mr. Leung wasn't named as a defendant.

A Dow Jones spokeswoman declined to comment.

It is unclear if the SEC intends to charge Mr. Li with insider trading or another securities-law violation. As a member of Dow Jones's board, Mr. Li has a duty to keep material, nonpublic information about the company private. If Mr. Li breached that duty by sharing it with somebody outside the company with the expectation that the person would trade on it, Mr. Li could be considered a "tipper" and charged with insider trading.

Insider-trading cases are often hard to make. Investigators have to connect the flow of information to trades and prove that people along the chain knew that the information was improperly disclosed.

The office of New York's attorney general, which has criminal-prosecution authority, is also investigating the trading and sent subpoenas to Dow Jones and News Corp. after news of the trading broke. It hasn't filed any charges to date.

Mr. Li comes from a family that has long been a central player in Hong Kong's close-knit society. The Bank of East Asia, one of the first Chinese-owned and -operated banks in the former British territory, was founded by the family. Mr. Li serves on several boards, including those of the company that owns the luxury Peninsula Hotel chain, the publisher of the South China Morning Post newspaper and PCCW Ltd., the city's dominant telecommunications company.

His influence in the banking sector is reflected in his position as an appointed lawmaker representing Hong Kong's financial community. Mr. Li joined the Dow Jones board in 1993, becoming in the process its first non-American member.