The SEC moves against another alleged insider-trading ring

I like what the Securities & Exchange Commission is doing this days. It cracked down on insider trading at Galleon Holdings, the former $3.7 billion hedge fund whose boss, Raj Rajaratnam, is out on $100 million bail. But the SEC hasn't stopped there: Yesterday it announced an indictment against a former chief financial officer of ValueAct Capital.

You may recall that several years ago, ValueAct Capital cleverly bought a huge chunk of Martha Stewart Living Omnimedia (MSO) after Stewart was tossed in jail in 2004 for lying to investigators about her late 2001 sale of stock in biotech company ImClone Systems -- prosecutors suspected she sold based on insider information. ValueAct ended up owning 22 percent of MSO and sold most of its stake in 2005 after the stock rebounded, picking up a nice profit in the process.

Now, the tables have turned. The Dow Jones Newswires reported on Friday that the SEC indicted Ronald Yee, the former CFO of ValueAct, for allegedly tipping off his brother-in-law Chen Tang, who worked for an unidentified private equity firm, that ValueAct would acquire Acxiom in 2007. That led to a $6 million profit for Tang, three of his friends and his brother. Yee reportedly didn't trade on this information, and the SEC has told ValueAct that the firm isn't a target of the investigation.

Tang also made $1.2 million by getting inside information that Tempur-Pedic (TPX) would post disappointing earnings last year. He passed that info to three friends, and they shorted the stock before the earnings announcement. Tempur-Pedic's stock fell 37 percent after the earnings news became public.

Like the Galleon case, the one involving ValueAct former CFO Yee and Chen Tang suggests that insider trading has been rampant in the high-stakes hedge-fund world. I hope the SEC keeps turning up the heat on those who profit from inside info and that the result will be a more level playing field for investors who follow the rules.

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

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