On Thursday, July 7, 2022, the U.S. Securities and Exchange Commission (“SEC”) sued 69-year-old George W. Haywood, a private investor from Washington, D.C., for selling stock based on “material non-public information” in violation of his express agreement not to do so, in order to avoid some $179,000 in losses. That same day, according to the SEC’s July 7 Press Release, the U.S. Attorney for the District of Columbia filed a criminal charge against Haywood “arising out of the same conduct.”

Who is George W. Haywood and what is his background? As reported in the publication “Black Economics,” he is the son of two teachers, and graduated from high school at age 16 with scores of 800 on each of the physics and chemistry College Board Achievement Tests, and a paltry 772 on the math exam. Enrolled as a pre-med student at Harvard University, he temporarily dropped out to work as a flight attendant “just for the fun of it.” Subsequently, although he earned a degree from Harvard Law School (also your author’s alma mater), he reputedly “spent most of his time counting blackjack cards in casinos from Atlantic City to Panama.” He mastered this activity, which he saw as “like a job,” and had winnings in the six figures, enough to support himself for two years following graduation. He decided that the law was not for him, and instead pursued a career in securities trading on Wall Street.

He was hired by Lehman Brothers in 1982 and worked as a corporate bond trader, becoming a Managing Director, Proprietary Trader, and Head of Corporate Bond Trading ten years later. In 1994 he moved to Moore Capital Management, a hedge fund management firm, to become its Director of Corporate and High Yield Bond Investments. In 1998 he left Moore to become a private investor. He served on the boards of directors of Denny’s Corporation (including on its Audit and Finance Committee) and XM Satellite Radio Holdings, Inc. (including its Finance Committee).  On Nov. 28, 2016, he was elected to the board of directors of Fannie Mae (the publicly held Federal National Mortgage Association). According to the publication “Blackfacts,” Haywood also served on the boards of non-profits including New Albans School, New School University, Mannes School of Music, Public Theater/ New York Shakespeare Festival, and Poly Prep School. He also was a member for a term of the Visiting Committee of Harvard College.

What did Haywood do that caused him to run afoul of the law? Clearly, with his training and experience, he was something of an expert on finance, and he knew the rules that govern participation in the capital markets, including trading securities. As one might also suspect, Haywood invested significant amounts in numerous companies, one of which was a publicly-traded Nevada corporation, then named Neurotrope, Inc. (“NTRP”). NTRP, according to the SEC’s Complaint filed July 7 in the U.S. District Court for the District of Columbia (the “Complaint”), was a clinical-stage biopharmaceutical company engaged in trying to develop a treatment for Alzheimer’s.  In fact, at 9:00 a.m. on Jan. 22, 2020, NTRP announced it had been awarded a $2.7 million grant from the National Institute of Health following “positive clinical trial results for its Alzheimer’s treatment.” The Complaint stated that “[o]n this news, NTRP’s stock price rose to a high of $3.85 per share.”  Haywood “owned or controlled approximately 2.4 million shares of NTRP,” then worth some $9,240,000. His holdings of NTRP accounted “for about 19% of NTRP’s approximately 13 million shares outstanding.”

On that news, NTRP’s management immediately decided to do a registered direct offering of some 11 million shares to raise an additional $18 million to fund continuing work developing the company’s Alzheimer’s treatment. Such an offering would necessarily dilute the holdings of existing shareholders like Haywood, and cause the stock price to decline significantly. NTRP took steps to ensure the confidentiality of its plans, including limiting the number of individuals who were informed of the pending offering, where those persons would be informed only after they agreed: i) to keep that information confidential; and ii) not to trade on it.  At 12:50 pm on Jan. 22, 2020, the Chairman of the Board of NTRP called Haywood, notionally one of NTRP’s largest shareholders, and said he had material non-public information about the company “that he would share if Haywood agreed that he would keep the information confidential and not trade on it.”  After getting Haywood’s agreement, the Chairman informed him of the offering and invited him to participate in it.  At “approximately 1:01 pm, the …chairman sent Haywood a confirming email” that said:

Pursuant to our discussion and as an inducement to obtain confidential investment information, this will confirm that you have agreed to keep the information to be disclosed/discussed as confidential and have agreed to not disclose the content of this information to any party not bound by our agreement. Furthermore, you agree not to use the information presented in connection with any investment outside the nature and scope of the proposed investment opportunity. This agreement shall terminate at the earliest of the public release of the information discussed or the completion/termination of the proposed offering.

At 1:08 pm the Chairman sent Haywood two emails enclosing first, a draft Securities Purchase Agreement and then, a Purchase Warrant for the offering, to allow Haywood to participate in the offering if he wished.  At 2:05 pm NTRP announced the 11 million share direct offering. The Complaint notes that “Haywood did not participate in the offering.” Immediately before the announcement, NTRP stock was trading at about $2.70 a share. “Following the announcement, it dropped to a low of $1.38 and closed the day at $1.42.”

Approximately one minute after the end of the telephone call from the Chairman, Haywood called his stockbroker in New York and directed him to sell 74,736 NTRP shares from an account Haywood owned with one of his daughters; these sold at $3.15 per share. At 1:11 pm, and after receiving the three emails from the Chairman, Haywood again called his broker and directed him to sell 49,150 shares from an account he owned with another daughter, as long as the price was not below $3.10 per share (a limit order). A total of 11,220 shares sold at that price.  Haywood then called his broker at 1:12 pm and 1:14 pm, entering orders to sell 477,216 shares (approximately 38% of Haywood’s NTRP holdings) from his own account at a limit of $3.10 per share.  At that price, 6,202 shares sold.  Haywood dropped the price limit to $3.02; another 13,309 shares sold at an average of $3.03 per share.  He made two additional calls to lower the limit order price: at 1:36 pm to $2.95, and then, to only 30,000 shares, at a limit of $2.78 per share. No further shares sold above either of the limits.  All this activity “saved” Haywood from $179,297 in losses. The Complaint notes that had “he been successful in selling all the NTRP shares that he sought to sell … [he] would have avoided losses of approximately $1 million.”

The Commission asserts that Haywood violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5 thereunder, and asks the Court to enter a Final Judgment of liability, including permanently barring him from serving as an officer or director of a public company (such as Denny’s Corporation, XM Satellite Holdings, Inc., and Fannie Mae); ordering him to “disgorge his ill-gotten gains and to pay prejudgment interest on that amount”; and to pay a civil penalty, which may be up to three times the amount of the loss avoided (i.e., here a maximum of $537, 891). Of course, Haywood also faces possible criminal conviction for insider trading, which carries a maximum sentence of up to a $5 million fine and up to 20 years in prison.

It is almost unfathomable that a person of Haywood’s reputation, intellect, career successes, service on the boards of educational and cultural institutions, and personal wealth, who was fully knowledgeable about both the workings of the capital markets AND the federal securities laws, could breach his word and cast away all that he had achieved by age 67, solely to avoid a relatively small (for him) loss. It is surely a stark tragedy that he chose to act as he did, so sharply contrasting with the picture painted of him in the encomium given by the President and Chief Executive Officer of Fannie Mae when Haywood was elected to the Fannie Mae Board of Directors, as quoted in a Press Release from 28 November 2016:

Throughout his career … [George Haywood] has demonstrated clear financial prowess, diverse entrepreneurial talents, and strong leadership qualities… We are excited to leverage George’s passion for helping companies to grow and succeed as we fulfill our commitment to be America’s most valued housing partner.  Fannie Mae will benefit from his counsel as we continue to focus on … addressing today’s most critical housing challenges.

One cannot help but ruminate on how a well-lived life can be destroyed by greed and one’s own hubris. It does call to mind some lines from Shelley’s poem “Ozymandias”:

                  Look on my Works, ye Mighty and despair!

                  Nothing beside remains. Round the decay

                  Of that colossal Wreck, boundless and bare

                  The lone and level sands stretch far away.