United States Securities and Exchange Commission Litigation Release No. 16036 / January 21, 1999 SECURITIES AND EXCHANGE COMMISSION v. WILLIAM B. LUM AND MICHAEL SALTZSTEIN, U. S. District Court for the District of Columbia, 199 CV 00170 (HHK) (D.D.C.) SEC SETTLES WITH TWO FOR INSIDER TRADING BEFORE SUN/REGENCY TENDER OFFER The Securities and Exchange Commission today filed a Complaint in the United States District Court for the District of Columbia charging William B. Lum ("Lum") and Michael Saltzstein ("Saltzstein") with insider trading in the securities of Regency Health Services, Inc. ("Regency") prior to the July 27, 1997 announcement that Sun Healthcare Group, Inc. ("Sun") would commence a tender offer for Regency’s common stock. Simultaneously with the filing of the Complaint, Lum consented to a permanent anti-fraud injunction and agreed to pay $214,043.75 in disgorgement, prejudgment interest thereon, and a $214,043.75 civil penalty, totaling $450,309.10. Saltzstein consented to a permanent anti-fraud injunction and agreed to pay $2,850 in disgorgement, prejudgment interest thereon, and a $2,850 civil penalty, totaling $5,924. Regency was a Tustin, California based healthcare provider whose common stock traded on the New York Stock Exchange. Sun is a healthcare provider based in Albuquerque, New Mexico whose common stock trades on the New York Stock Exchange. Both defendants settled without admitting or denying the Complaint’s allegations. Specifically, the Complaint alleges the following: Lum * Management of Regency and Sun began discussing an acquisition of Regency in May 1997 and by early July had taken substantial steps to commence a tender offer, including engaging investment bankers to advise them in negotiations, entering into exclusive negotiations and confidentiality agreements, and commencing due diligence examination of Regency. In a letter dated July 12, 1997, Sun informed Regency management that it proposed to acquire all of Regency’s outstanding common stock for $21 per share in cash. * Lum is a director of Hawaiian Airlines and serves on that board with John Adams, who is the chairman of both Regency and Hawaiian Airlines, and Richard Matros, who is a director of both companies and the chief executive officer of Regency. Hawaiian’s Board of Directors was scheduled to meet on July 14, and John Adams hosted a dinner for the directors and senior officers of Hawaiian Airlines the evening of July 13. During the dinner Matros, who had just learned of Sun’s proposal, described Regency’s negotiations with Sun in an animated way to another individual who was an outside director to both Regency and Hawaiian Airlines. Lum was present, and knew, or was reckless in not knowing, that the information Matros disclosed was material and nonpublic. * Lum had a long history of maintaining the confidentiality of information that Adams and Matros confided in him as part of his service on the Hawaiian Airlines board. Hawaiian Airlines also had an insider trading policy that prohibited directors from trading while in possession of material nonpublic information obtained as directors. At the start of the Hawaiian Airlines board meeting on July 14, Adams, the chairman of Hawaiian Airlines and Regency, admonished the attendees that they should not trade in Regency’s securities based on anything they had heard the prior evening concerning Regency. Adams’ warning not to trade was consistent with Hawaiian Airlines’ insider trading policy. Lum was present when that instruction was given and did not express any objection to assuming such an obligation. * Immediately after the board meeting, Lum began buying shares of Regency stock, in breach of his duty to Hawaiian Airlines. Between July 15 and 22, 1997, Lum purchased 30,000 Regency shares. After Sun’s tender offer for Regency was announced on July 27, Lum sold some of his illegally obtained shares in the open market, and later tendered the remaining shares, realizing profits of $214,043.75. Saltzstein * Saltzstein was employed by Regency as a risk manager. On July 14 Regency’s chief financial officer told Saltzstein of the tender offer negotiations and directed him to assist with Sun’s due diligence examination. During the rest of that week Saltzstein worked closely with Sun’s risk manager, providing her with nonpublic information about Regency, and the two discussed the contemplated acquisition of Regency by Sun. * On July 22 Saltzstein purchased 400 shares of Regency stock and, after the July 27 announcement of the tender offer, tendered those shares, realizing profits of $2,850. The Complaint alleges that the defendants’ trading violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 14e-3 thereunder. In its Complaint, the Commission seeks a permanent injunction against future violations of these provisions, disgorgement with prejudgment interest, and civil penalties. Simultaneously with the filing of the Complaint, the defendants, without admitting or denying the allegations of the Complaint, consented to the entry of Final Judgments enjoining them from future violations of Exchange Act Sections 10(b) and 14(e), and Rules 10b-5 and 14e-3 thereunder; and requiring Lum and Saltzstein to disgorge their illegal trading profits which, together with prejudgment interest, total $236,265.35 and $3,074, respectively, and to pay civil penalties of $214,043.75 and $2,850, respectively. The Commission acknowledges the assistance of the New York Stock Exchange and Chicago Board Options Exchange in this matter. The Commission’s investigation in this matter is continuing. 1