Newly public records suggest that securities investigators had far from an airtight insider-trading case against David Knall, the star Indianapolis investment broker who nonetheless agreed to settle the 3-year-old inquiry by agreeing to a one-year suspension.
The Securities and Exchange Commission announced the pact Dec. 4. In addition to consenting to the suspension, Knall, a managing partner of Stifel Nicolaus & Co., agreed to pay $123,865.
That sum includes $55,281 in losses the SEC says Knall avoided by making a trade in Galyan's Trading Co. stock in his personal account days before the company announced it would be acquired by Pittsburgh-based Dick's Sporting Goods for $305 million.
The punishment is unusually light for an SEC insider-trading enforcement action, and that seems warranted given that it isn't clear Knall meant to do anything improper, said Mark Maddox, an Indianapolis securities attorney with no involvement in the case.
Indeed, court papers filed by the SEC indicate that although Knall had received advance word of the Galyan's-Dick's deal, he might not have realized when he made the trade that it hadn't been announced.
Further, the morning after the announcement, Knall on his own reported his trade to the CEO and to the chief compliance officer of his employer at the time, Clevelandbased McDonald Investments.
"This case sounds more like negligence than a serious securities fraud," Maddox said. "At the end of the day, one has to ask himself, 'Would a guy like Dave Knall risk his securities license over a $50,000 matter intentionally?'"
Knall, 63, is one of the nation's topproducing investment brokers. His 30-person team oversees $6 billion in assets for some of the state's most prominent families, including the Simons.
Papers filed in federal court in Indianapolis show in April 2004, weeks before Knall got word of the Galyan's deal, he sold 10,000 shares of the company short-a tactic investors use when they think shares are going to decline in value. Short-sellers unload stock they've borrowed from a broker, in a bet they'll be able to cover-in other words, return the borrowed stock-at a lower price. They face stiff losses if a stock instead moves higher.
The SEC says that "just after midnight" on June 12, 2004, "an individual" told Knall that Dick's planned to buy Galyan's. The person telling Knall had learned of the deal from a real estate professional who'd been helping Dick's find Indianapolis-area store sites. The real estate professional, in turn, had been told of the plan by a Dick's vice president, according to court papers.
Neither the "individual" nor the real estate professional is identified in court records.
Four days later, Knall covered his short position by buying Galyan's shares. The next week, Dick's said it was buying Galyan's for $16.75 a share-an announcement that sparked a 50-percent runup in Galyan's shares.
After Knall bought the shares, "he realized that there had been no announcement," court papers say. The morning after the companies finally announced the deal on June 21, Knall reported the trade to McDonald higher-ups.
In the settlement, Knall did not admit or deny the SEC's allegations of insider trading. In an interview with IBJ, he said deciding to settle "was an agonizing decision. You have to understand this did not involve client monies. It was my own account. It involved a single trade. ... I just wanted to get it behind me."
Knall's suspension is expected to begin in a few weeks. During his absence, clients "will be taken care of as they are accustomed," said Ronald Kruszewski, CEO of St. Louisbased Stifel Nicolaus.
The SEC took no action against Knall's son Jamie, who also was part of the insider-trading investigation. Jamie worked with his father at McDonald and jumped with him to Stifel in April 2005.
At McDonald, the insider-trading probe had sidelined both men. David had been on a leave of absence since December 2004, and Jamie had been on indefinite suspension since a month earlier. Stifel allowed the pair to return to work immediately.
Court papers don't mention Jamie by name. An attorney for David Knall, Richard Morvillo, would not comment on the SEC's allegations. He wouldn't say whether the person who told David about the deal was Jamie.