Unusual ally came to Jain's rescue: SEC

After a Seattle federal judge ruled that InfoSpace founder Naveen Jain broke insider-trading laws, attorneys at the Securities and Exchange Commission sprang into action.

Rather than investigate Jain, though, the SEC rallied to his defense.

The agency — charged with watching out for the interests of shareholders and the public on Wall Street — urged an appeals court to reverse the ruling, which had required Jain to pay $247 million to his former company.

It isn't often that the SEC weighs in on behalf of an executive accused of wrongdoing. Under that unusual pressure, attorneys representing InfoSpace shareholders agreed to settle the case, with the judgment against Jain slashed to $65 million.

Such is Naveen Jain's charmed history with federal regulators.

Since founding InfoSpace in 1996, Jain has been mired in controversy. He has been accused of wrongdoing in 21 lawsuits involving him or InfoSpace. Through it all, the SEC was notably silent. When the agency finally did surface in 2003, it was in Jain's defense.

The Seattle Times this week has documented how Jain and other executives deceived the public about InfoSpace's success while selling millions of dollars in stock. Investors lost billions as the value of InfoSpace stock collapsed from its peak five years ago this week.

Some securities experts wonder why the SEC never focused on Jain and InfoSpace. Richard Spoonemore, attorney in one shareholder lawsuit against Jain and InfoSpace, said he alerted SEC lawyers more than a year ago regarding insider-trading allegations against Jain.

The SEC lawyers hinted that they might look into it, Spoonemore said, but he never heard anything further.

Michael Lofing, a financial expert at the research firm Glass Lewis & Co. who reviewed The Times' series, recently said he was surprised that a whistle-blower hadn't surfaced and gone to the SEC.

"There had to be a high level of complicity from a large number of people and no one seems to blow the whistle," he said. "That's probably what's most astounding to me."

But John Coffee, a securities-law expert at Columbia Law School in New York, said he is not surprised that InfoSpace or Jain may have escaped the scrutiny of the SEC. The agency was understaffed and underfunded during the market boom in the 1990s and early 2000.

"They had hundreds of cases that deserved prosecution," Coffee said. "They didn't get to most of them."

The SEC will not comment on whether InfoSpace or Jain was ever under investigation. Though the agency sided with Jain in court, "there is no basis to conclude ... that the Commission either will or will not bring an enforcement action" against him, an SEC spokesman said last week.

The SEC investigates allegations of trading on insider information. Jain was accused of that in two shareholder lawsuits.

The case in which the SEC weighed in on Jain's behalf involved "short-swing" trading. A form of insider trading, "short swing" happens when key executives buy and sell company stock in less than six months.

The law against such trades is intended to keep insiders from making quick profits on private company information. Profits recovered from such trades go back to the company.

This case involved 2 million shares in a trust that Jain and his wife held for their children. When the stock split and the new certificates arrived, Jain put them into an account with his other personal shares. About the same time, the Jains sold more than $200 million of InfoSpace stock.

U.S. District Court Judge Marsha Pechman ruled that the Jains had in essence purchased the shares at no cost.

Jain said that he and his wife signed documents to have the new shares put into their personal account but that he didn't understand what he was signing. Also in his defense, he said that routine SEC filings with details about the trust shares had inaccuracies, but that he signed the filings without reading them.

After being hit with the $247 million judgment, Jain hired Peter Romeo, a former SEC lawyer and short-swing expert, to help with his appeal. Romeo lobbied the SEC to intervene for Jain with the appeals court.

Romeo persuaded the commission that Pechman's 2003 ruling was unfair and confusing.

In an e-mail, he told the SEC: "If the district court's rulings stand on appeal, they will create considerable uncertainty and concern among insiders."

Persuaded, the SEC filed a "friend of the court" brief on Jain's behalf. That intervention was cited by the parties in the lawsuit as a reason to settle the case — a settlement that saved Jain $182 million.

Romeo said that despite his 15-year tenure with the SEC, he has no undue influence there.

"They would never concur with my views if they don't agree with me," he said in an interview. "If anything, they'd go out of their way to appear not to be playing favorites."

Until he agreed to the $65 million settlement, Jain had avoided paying any claims out of his own pocket, according to interviews and court records. InfoSpace or insurance policies had covered the tab.

Jain is hoping he won't have to dip into his wallet for the $65 million judgment, either. He has hired new lawyers and is suing his old law firm, Perkins Coie, for legal malpractice. He says the insider-trading snafu was the firm's fault.

Sharon Pian Chan, 206-464-2958 or schan@seattletimes.com
David Heath, 206-464-2136 or dheath@seattletimes.com