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Insider Trading Charges Against Private Prison Consultant Rejected

by David M. Reutter

A Florida federal district court has rejected insider trading charges brought against a consultant for Correctional Services Corporation (CSC). The civil complaint, filed in September 2008 by the Securities and Exchange Commission (SEC), charged Dr. Zachariah P. Zachariah, his brother Dr. Mamen P. Zachariah, and his friend and colleague Dr. Sheldon Nassberg with using inside information to trade CSC stock.

On July 14, 2005 it was announced that GEO Group Inc., the nation’s second-largest private prison company, was acquiring CSC. The SEC alleged that the three defendants traded CSC stock from May to July 2005 based on non-public information concerning the acquisition. The evidence at trial showed the defendants periodically discussed securities transactions and traded in private prison company stock.

The evidence established that Dr. Zachariah had researched CSC, printed out information about the company on his computer on May 18, 2005, purchased his largest block of CSC stock the following day, and recommended it to others. The stock experienced a spike in trading volume the same day of his purchase. Zachariah was subsequently charged with insider trading. [See: PLN, Dec. 2008, p.36].

To prove its case, the SEC pursued a “multiple choice” theory at trial. The first involved Dr. Zachariah’s relationship with GEO Group’s CEO, George Zoley. The district court noted that Zoley had not been charged and there was no credible evidence that he tipped off Zachariah about the acquisition of CSC by GEO.

The second theory involved Zachariah’s son, Reggie, who worked for GEO at the time and who in fact had information about the pending acquisition. Reggie, who now works as a clerk for a federal judge, was found by the district court to be credible in his denials of wrongdoing. The court determined that he was very candid under a lengthy cross-examination. Although it was shown he spoke to his father daily by phone, there was no proof he had disclosed information concerning the acquisition deal.

Finally, that Dr. Zachariah served as a consultant for CSC was insufficient to prove he had obtained insider information. The district court found his consulting work “had nothing to do with GEO’s planned acquisition of CSC...,” and Dr. Zachariah was therefore cleared of all charges on December 20, 2010. The other defendants reportedly settled with the SEC. See: SEC v. Zachariah, U.S.D.C. (S.D. Fla.), Case No. 0:08-cv-60698-LRJ.

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Related legal case

SEC v. Zachariah