On October 21, 2011, the Securities and Exchange Commission filed an amended complaint in the case of SEC v. Clayton Peterson et al. (SDNY) adding charges against hedge fund manager Drew K. Brownstein and his hedge fund Big 5 Asset Management LLC for trading on confidential information in the securities of Mariner Energy Inc. ahead of the oil and gas company’s $3.9 billion takeover by Apache Corporation in April 2010.
In its initial complaint filed on Aug. 5, 2011, the SEC alleged that Mariner Energy board member H. Clayton Peterson tipped his son with confidential details about Mariner Energy’s upcoming acquisition. Drew Clayton Peterson, who was a managing director at a Denver-based investment adviser, then used the inside information to purchase Mariner Energy stock for himself and others.
The SEC now alleges that hedge fund manager Drew K. Brownstein who is a longtime friend of Drew Peterson, and the hedge fund advisory firm Brownstein controls, Big 5 Asset Management LLC traded Mariner Energy securities on the basis of inside information Brownstein received from Drew Peterson. Brownstein reaped illicit profits of more than $5 million combined in his own account, the accounts of his relatives, and the accounts of two hedge funds managed by Big 5.
According to the SEC’s amended complaint, Drew Peterson repeatedly tipped Brownstein about the impending acquisition of Mariner Energy as he learned the information from his father. Brownstein caused two Big 5 hedge funds – the Lion Global Fund LLLP and the Lion Global Master Fund Ltd. – to purchase large quantities of Mariner Energy stock and call option contracts on the basis of the inside information. This was the first time that the Big 5 hedge funds had ever traded Mariner Energy stock or options. Brownstein also purchased thousands of shares of Mariner Energy stock and call option contracts for the accounts of his relatives and for his personal brokerage account. In the days following the announcement of the deal, Brownstein liquidated the positions he had accumulated in Mariner Energy securities.
The SEC’s amended complaint charges each of the defendants with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks a final judgment permanently enjoining them from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay financial penalties. The SEC also seeks to permanently prohibit Clayton Peterson from acting as an officer or director of any publicly registered company.