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SEC Drops Insider Trading Case Over J&J Deal

By Leigh Kamping-Carder

Law360, New York (November 03, 2009, 3:34 PM ET) — Following a mistrial, the U.S.Securities and Exchange Commission has dropped a suit against the head of a medical device company accused of trading on inside knowledge of Johnson & Johnson’s acquisition of diabetes products manufacturer Animas Corp. 
The SEC dismissed with prejudice its allegations against Joseph A. Fontanetta, CEO of Diopsys Inc., in a stipulation of dismissal that Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York approved Monday. 

Following seven days of trial that took place between Sept. 15 and Sept. 24, the jury was unable to reach a verdict on the SEC’s allegations, prompting Judge Rakoff to declare a mistrial, according to court records. 

Fontanetta stood accused of violating federal securities laws by tipping off a business partner on the Animas transaction before the companies publicly announced the deal.

But after deliberating for roughly three days, the seven jurors remained deadlocked as to Fontanetta’s liability. A new trial was scheduled for Nov. 16. 

“Shortly before the trial, as we were in the midst of preparing, the SEC decided to walk away from the case once and for all,” said Randy Zelin, co-counsel for Fontanetta. 

“I would call it an enormous victory,” he added. 

The SEC decided not to proceed with a new trial because of the amount of resources it would require and not on the merits of its case, according to a source familiar with the agency’s investigation. 

Zelin said he suspected that the jury was unable to determine whether Fontanetta had misappropriated nonpublic information and whether he had breached a duty to whomever was the source of the knowledge. 

“The information [Fontanetta] had gotten was publicly available and based upon things that he knew that were not nonpublic,” Zelin said. 

A representative for the SEC declined to comment. 

The SEC filed a complaint against Fontanetta and his business partner, Burr B. McKeehan, in June 2008, claiming Fontanetta had disclosed material information about the Animas-J&J merger to McKeehan, who subsequently purchased Animas stock in the days leading up to the public announcement of the deal. 

In connection with the filing, McKeehan agreed to pay more than $384,000 to put to rest the regulator’s claims against him. McKeehan, a retired podiatrist living in California, neither admitted nor denied the SEC’s claims. 

According to the SEC, Fontanetta had learned about the confidential Animas-J&J deal through one of the founders of Diopsys, a private company that manufactures vision-related medical devices. 

The Diopsys founder, who remained nameless in the SEC’s complaint, is married to an Animas executive, the SEC said. The anonymous founder and Fontanetta have known each for more than 20 years, according to the agency. 

In early December 2005, Animas’ board approved a definitive merger agreement with J&J, and the deal was announced Dec. 16. 

Prior to the public announcement, the Animas executive allegedly told her husband about the merger, who passed the information to Fontanetta, who allegedly then tipped McKeehan, the SEC said. 

After learning of the impending deal, McKeehan went on to buy 30,000 shares of Animas stock on Dec. 14 and 15, according to the SEC. When the merger was announced, the price of Animas stock increased by 32 percent, earning McKeehan $183,000 in profits. 

McKeehan agreed to disgorge his allegedly ill-gotten profits, plus $18,000 in prejudgment interest, and pay $183,000 in civil penalties. 

Fontanetta is represented by Randy Scott Zelin PC and the Law Office of Douglas T. Burns. 

The case is U.S. Securities and Exchange Commission v. Fontanetta et al., case number 08-5110, in the U.S. District Court for the Southern District of New York.