Christie Hefner, daughter of Hugh Hefner, was CEO of Playboy Enterprises for two decades, from the late 1980s to the dawn of the Obama era. And for several of those years, her husband was secretly trading Playboy stock based on inside information he gleaned from their relationship. A new report by Bloomberg, based on official transcripts obtained through a Freedom of Information Act request, reveals the details of the case for the first time.
Hefner and William Marovitz had been married for 15 years when he told her, in March 2010, that he was under investigation by the Securities and Exchange Commission for insider trading. According to Hefner's account, given in interviews with the SEC, she had no idea that Marovitz had ever purchased any Playboy shares -- something she says she had warned him against doing. In 1998, she had even had Playboy's general counsel, Howard Shapiro, draft a memo explaining to Marovitz why buying Playboy stock would be such a bad idea: "all SEC rules regarding Christie's sale or purchase of stock are equally applicable to you, particularly the rules governing insider trading ... your purchase is imputed to Christie."
"Give me a call and I'll walk you through the legal minefield," Shaprio advised. The SEC says Marovitz did not comply.
What enabled Marovitz to put his money into Playboy, despite Hefner's opposition, was the fact that the couple kept separate brokerage accounts. On April 15, 2004, Marovitz bought 5,000 shares of Playboy ahead of an announcement that the company would issue new stock to pay down debt, which was likely to lift the share price. On April 21, the day of the offering, Playboy spiked by 8 percent, netting Marovitz $2,806.
It was a small beginning, but Marovitz repeated the offense, taking advantage of non-public knowledge about such things as an at-that-point-unannounced large quarterly loss, that his wife naturally expected him to keep confidential. After a pair of particularly egregious trades in late 2009, exploiting the possibility of an acquisition of Playboy by Iconix Brand Group, (ICON), an SEC attorney told Marovitz that he was under investigation; a routine examination of his brokerage firm, Mesirow Financial, reportedly alerted the SEC.
Hefner initially supported her husband, a former Illinois state senator and real estate developer who had collaborated with the Playboy CEO on a Greek casino project before they were married. The couple retained a joint attorney to represent them in the matter. But when Hefner was herself subpoenaed, she hired a lawyer of her own, and denied any knowledge of her husband's actions.
"Over five years of alleged financial infidelity," Bloomberg sums up, "the SEC calculated that Marovitz gained, or avoided losses, of $100,952." The SEC officially sued Marovitz on Aug. 3, 2011, and he agreed to pay $168,352 "in disgorgement, prejudgement interest and civil penalties," according to an SEC spokesperson, without admitting wrongdoing.
Hefner and Marovitz, once described by The New York Times as "a Chicago power couple," are currently separated.
One puzzling question is why such a well-to-do person would engage in such reckless behavior for relatively minor rewards that he manifestly did not need. But the gratuitousness of the criminal behavior has long been a hallmark of insider trading cases, from Michael Milken in the 1980s to Raj Rajaratnam and Rajat Gupta in the past few years. (And the hugely wealthy Martha Stewart, who went to prison over approximately $230,000.) The answer might be that this crime has historically been pretty easy to get away with, leading some on Wall Street to view it as just another way of making money. According to the Bloomberg report, the case against Marovitz is part of a recent government crackdown, "A spike in criminal convictions and SEC enforcement actions in the last five years [which] shows the U.S. government does not share that blasé attitude toward a crime that cheats other investors."
Some observers are skeptical. "Realistically," a recent consideration by TIME concludes, "10 years from now, we'll still be talking about the deterrent value of insider-trading investigations, as unscrupulous Wall Street actors continue to seek advantage over others by just about any means necessary." One securities lawyer has even suggested that the government give up the fight: Writing in Forbes, Bill Singer has argued that insider trading should simply be legalized, "so that the public gets the message, once and for all, that Wall Street is not a level playing field and that you must enter the casino knowing that some or all of the games of chance are fixed."
For the full details of the Hefner-Marovitz case, as well as other examples of so-called pillow-talk insider trading (which collectively might persuade you of Singer's wisdom), head over to Bloomberg.
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