The Securities and Exchange Commission has charged Alfred Teo, owner of leading plastic bag producer Sigma Plastics Group, with insider trading and other actions that allegedly netted him and several relatives and colleagues more than $23 million in illegal profit.
The civil suit contends that Teo illegally purchased securities in Minneapolis-based Musicland Stores Corp. in the summer and fall of 2000.
Teo had learned through confidential communications with Musicland executives that the mall retailer would be sold to Best Buy Co. Inc., the suit alleges. The Musicland deal was announced publicly in December 2000.
Teo had been Musicland's largest shareholder since January 1999, but boosted his holdings by buying 45,000 shares after hearing of the tender offer, according to the suit.
He sold the shares after the announcement, gaining about $185,275 in profit, according to the suit, filed April 22 in U.S. District Court in Newark, N.J.
Moreover, the suit contends that Teo bought additional shares illegally by concealing his ownership interest in Musicland. Teo and sister-in-law Teren Seto Handelman, who runs an investment trust for Teo's four sons, falsified reports and failed to share with the SEC Teo's true ownership interest in Musicland, according to the suit.
The retailer prohibited individual shareholders from owning more than 17.5 percent of Musicland, to prevent a hostile takeover.
From July 30, 1998, to Dec. 6, 2000, when the deal with Best Buy was announced, Teo bought 5.9 million shares, taking his ownership from below the 17.5 percent threshold to about 36 percent of Musicland, the suit claims.
Those shares included shares bought jointly with Teo's wife, those in the names of some Sigma units that Teo owns, and those for his sons' trusts, the suit contends.
He gained about $22 million in illicit profit by selling those shares when Best Buy bought Musicland, the suit said.
Teo was attempting to engineer a leveraged buyout of Musicland when he met with company executives in the summer and fall of 2000, the suit claims. After several meetings, he learned of Best Buy's interest, the suit said.
At one point after hearing of the SEC investigation, Teo told one Musicland executive that he had confused his meeting dates with Musicland officials and now was ``really in trouble,'' according to the complaint.
Further, the suit alleges that Teo misled his broker, who had purchased the shares, by telling him he had learned of Best Buy's offer only at the last minute and that he was not an insider at Musicland.
In March 2001, after hearing of the SEC investigation, Teo told his broker he had been misunderstood and had wanted to transfer shares from Teo's account to his sons' trusts, not to buy Musicland shares, the suit said. The broker disputed Teo's claim, the suit said.
The SEC also alleges that Teo learned of another potential sale while at confidential board meetings of publicly held Cirrus Logic Inc. Teo, then a Cirrus director, heard that the electronic chip maker was involved in talks to buy C-Cube Microsystems Inc., according to the suit.
Soon after that, Teo bought an additional 35,000 shares of C-Cube, according to the suit. Although Cirrus bid on C-Cube, another company, LSI Logic Corp., ended up buying the firm. Teo recorded a profit of about $180,012 when C-Cube's share price went up 40 percent, according to the suit.
The suit also named 10 other defendants and the Lyndhurst, N.J., trust administered by his sister-in-law Handelman. The suit claims Teo tipped off eight of those defendants about both deals, allowing them to realize almost $1.22 million in profit.
The SEC has settled with three defendants, including resin salesmen Charles Fortune and Jerrold Johnston, and with Lawrence Rosen, a neighbor of Teo's near his resort home in Fisher Island, Fla. The trio has not admitted wrongdoing but has returned the profit from the transactions, SEC said.
Another resin salesman, Mark Lauzon, also is charged in the case. The suit also names John Reier, chief financial officer of Sigma-owned bag producer Alpha Industries Corp., and Mitchell Sacks, a hedge-fund manager who worked in Teo's offices.
Two other neighbors of Teo's in Fisher Island - Philip Sacks and Richard Herron - also were named, as was David Ross, whose company made Teo's luxury yacht.
Teo, 57, started Lyndhurst-based Sigma, the largest bag producer in North America, in 1979 and continues to run the company as chairman and chief executive officer. The privately held extruder has grown aggressively in recent years, purchasing the assets of several troubled companies. Sigma generates annual sales of about $850 million.
But Teo also is involved in companies outside the plastics industry. He is a director of another publicly held company, Navarre Corp., a music and compact disc distributor based in New Hope, Minn.
Teo was accused in 2000 of pocketing $3.33 million in illegal profit by selling shares of Navarre after the company registered to take public a direct-marketing subsidiary, according to a lawsuit filed by several Navarre shareholders. That suit, filed in U.S. District Court in Minneapolis and involving five other defendants, was dismissed in 2002.
Teo was out of the office and unavailable for comment before deadline. Jay Strum, a lawyer for Teo who handles SEC litigation, said he had not read the complaint and could not comment on the case.
SEC litigator Kay Lackey, based in New York, said Teo's lawyers have 20 business days to respond to the complaint before the case can proceed. The civil case is asking Teo to return any profit he made on the transactions and to repay three times that amount as a penalty, Lackey said. The penalties alone could top $66 million.
The suit also is asking that Teo be barred from serving as an officer or director for a publicly held company, Lackey said. That injunction is a bit unusual, but seemed appropriate for this lawsuit, she said.