SEC charges three in alleged insider trading scheme tied to proposed Aphria takeover, other deals

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© Provided by Financial Post Green Growth Brands tried to buy Aphria in 2019.

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The U.S. Securities and Exchange Commission has charged three Florida men in a multi-million-dollar insider trading scheme related to three transactions — including a proposed takeover of Canadian cannabis business Aphria Inc.

In a complaint filed Thursday, the U.S. regulator alleged David Schottenstein, 38, of Surfside, Fla., traded on material, non-public information obtained from a cousin who served on the board of directors of Green Growth Brands, the company that tried to buy Aphria in 2019. That transaction did not come to fruition.

In a separate filing, the U.S. Department of Justice said Schottenstein has agreed to plead guilty to a single count of conspiracy to commit securities fraud in connection with the trading, from which the SEC alleges he made US$600,000 in “illicit gains.”

In its complaint, the SEC alleged Schottenstein, who founded a designer sunglasses business in 2016 and whose family has longstanding connections in the U.S. retail sector, also tipped two close friends, Kris Bortnovsky and Ryan Shapiro, about the insider information he obtained ahead of public announcements.

They are alleged to have made trades ahead of earnings reported by retailer DSW in the summer of 2017; an announced merger between Rite Aid and Albertsons Companies Inc. in 2018, which was later called off; and the hostile bid for Aphria.

The U.S. regulator alleged Bortnovsky, who managed investment vehicles in which Schottenstein had invested, placed illicit trades for his investment management firm Sakal Capital Management, LLC and one of its hedge funds, Sakal U.S. Fund, LLC, in addition to trading in individual brokerage accounts owned by himself and another person.

According to the SEC complaint, Bortnovsky used these various accounts to trade ahead of all three announcements for total profits of more than US$4 million. Shapiro allegedly traded Rite Aid and Aphria and reaped total profits of approximately US$121,000.

None of the allegations have been proven.

David Schottenstein’s cousin, who is referred to only as Insider 1 in the SEC complaint, served on the board of directors of both Green Growth Brands and DSW, according to the document. The Schottenstein family owned a private business that was involved in the Rite Aid transaction, according to the filing, which refers to the cousin’s father as Insider 2.

Though neither relative is named, their descriptions match Joey and Jay Schottenstein. A spokesperson for the two men told Reuters they were “shocked and saddened” to learn of the alleged illegal conduct.

Authorities did not allege any wrongdoing by the companies whose shares were traded.

Green Growth Brands made a hostile bid for Leamington, Ont.-based Aphria in early 2019 on the heels of a short-seller’s report in December that alleged Aphria had overpaid for international assets as part of a “scheme” to benefit company insiders. Aphria’s shares fell 30 per cent following the short report, and Aphria rejected the takeover offer, suggesting it “significantly” undervalued the company.

Aphria ultimately merged with Tilray, another Canadian cannabis firm, in the spring of 2021, and now operates under the latter’s name.

Financial Post

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