Friends With Ties to Boards of Designer Brands, Albertsons Charged in Insider Trading Ring
Illicit tips garnered at least $4 million in trading profits
WASHINGTON—Three friends tapped family ties to the boards of public companies including Designer Brands Inc. and Albertsons Cos. to get tips that gained them at least $4 million in illicit trading profits, according to law-enforcement officials.
Two of the men—hedge-fund manager Kris Bortnovsky and fintech entrepreneur Ryan Shapiro —were indicted Thursday in Boston and charged with securities fraud and conspiracy. The third trader, David Schottenstein, agreed to plead guilty to conspiracy to commit securities fraud, according to court records.
Mr. Schottenstein, the founder of a sunglasses retailer, passed illicit tips to his friends that he got from a cousin who is a board member of Designer Brands, the parent company of the Designer Shoe Warehouse chain, according to prosecutors and regulators.
The cousin also knew about grocery retailer Albertsons’ 2018 plan to merge with Rite Aid Corp. because his father served on Albertsons’ board of directors, according to court filings. The cousin shared the undisclosed merger plan with Mr. Schottenstein, who prosecutors say traded on the information and shared the tip with his friends.
The traders purchased shares of Rite Aid, whose stock price rose after the deal became public in February 2018, and other securities that would pay off if the merger became public, according to the Securities and Exchange Commission, which filed a separate civil fraud lawsuit against the three men.
Court documents don’t name Mr. Schottenstein’s cousin, who wasn’t charged.
“Traders who seek to profit from inside information are no match for the SEC’s sophisticated data analysis methods like the ones used to uncover this alleged insider trading ring,” said Joseph Sansone, chief of the SEC’s market-abuse unit.
Messrs. Bortnovsky and Shapiro were arrested last month in Miami, but the criminal complaint against them was sealed until Thursday, when a federal grand jury in Boston returned an indictment against them.
Mr. Schottenstein will plead guilty to conspiracy to commit securities fraud, according to an agreement made Wednesday with the Boston U.S. attorney’s office. He faces a maximum prison sentence of 20 years as well as a financial penalty of at least $250,000 and forfeiture of $634,000 in trading gains.
“I take full and sole responsibility for my conduct and deeply regret my actions,” Mr. Schottenstein said in a statement provided by his lawyers. “I apologize to my family, friends and colleagues,”
Spokesmen for Designer Brands and Albertsons didn’t return messages seeking comment. James Froccaro, an attorney for Mr. Bortnovsky, said his client is innocent and plans to plead not guilty. An attorney for Mr. Shapiro didn’t immediately respond to requests for comment.
Mr. Bortnovsky, 40 years old, managed a small hedge fund in which Mr. Schottenstein was an investor, according to court records. He netted about $260,000 by trading ahead of the Designer Brands and Albertsons announcements, according to the SEC. His hedge fund and a related account earned about $3.4 million, according to the SEC.
The two men communicated frequently about their trades, according to the SEC. In one text message cited by the SEC in its federal court complaint, Mr. Schottenstein told Mr. Bortnovsky: “u never LOST due to my tips…EVER…not once.”
Mr. Schottenstein also frequently spoke with his cousin before buying Designer Brands shares in August 2017. The bets paid off when Designer Brands later reported quarterly results that beat expectations, sending the shares up 17%, according to the SEC.