LOS ANGELES/NEW YORK A Walt Disney Co employee and her boyfriend have been charged with a "brazen" insider trading scheme in which they said the media conglomerate was in advanced talks to sell its ABC TV network.
Disney quickly said that claim was false. But the incident, which came to light on Wednesday after a months-long FBI undercover sting operation, is an irritant for a company known for a carefully spun image.
Shares in Disney leapt as much as 4.7 percent before backtracking after the denial to end the day up 2.3 percent.
U.S. prosecutors accuse Bonnie Hoxie, an assistant to Disney's corporate communications chief, and Yonni Sebbag of trying to sell insider information to over 30 hedge funds.
"It's a total embarrassment for Disney, but it can happen to any company," said Alan Gould, an analyst with Soleil Research. "What's far more interesting from the share value perspective is if they are selling ABC."
U.S. prosecutors have been cracking down on insider trading but this investigation is not part of the closely watched probe that ensnared Galleon hedge fund founder Raj Rajaratnam and 20 others last year from Wall Street to Silicon Valley.
Court documents said Hoxie and Sebbag conspired from March through May 25 of this year to try to profit off confidential information available to her as assistant to a top executive.
Hoxie is accused of giving information about Disney's earnings to Sebbag, who in turn tried to sell it to U.S. and European hedge funds, according to criminal and civil charges filed in New York on Wednesday.
The assistant and Sebbag -- also known as Jonathan Cyrus -- were arrested by FBI agents in Los Angeles and arraigned in Los Angeles federal court on Wednesday. Hoxie was released on $50,000 bail and ordered to a hearing in New York on June 3. Sebbag was deemed a flight risk and was detained. He will be transported to New York.
Prosecutors said Hoxie and Sebbag kicked off their effort by sending cold emails to hedge funds, many of whom then went straight to federal authorities.
In an undercover dragnet, agents contacted Sebbag, who in one email said he learned Disney was in talks to sell ABC, a long-standing subject of speculation on Wall Street.
"Bob Iger is in serious and advanced negotiations with two private equity firms to sell them the ABC network but no price has been determined yet," Sebbag wrote in the email, according to the criminal complaint.
Disney responded: "The reference in the complaint to conversations regarding the ABC Network were and are false."
It was unclear from the complaints what motivated the pair. According to the Securities and Exchange Commission complaint, Hoxie -- on the day she sent confidential earnings information -- told her boyfriend she had her eye on a $700 Stella McCartney designer handbag.
"Here is the bag you are going to get for me - thank," Hoxie was quoted as writing in an email with an attached photo of the item.
According to the complaint, Sebbag replied: "I may be able to (buy) u 2 of them, lol."
"In that case, I also love love these shoes," she is said to have responded.
The U.S. Securities and Exchange Commission filed civil charges, saying the pair sent anonymous letters to U.S. and European hedge funds, offering a pre-release of Disney second-quarter 2010 results in exchange for a fee.
The criminal complaint filed in Manhattan federal court in New York charged Hoxie, 33, and Sebbag, 29, with conspiracy and wire fraud in allegations of illegal insider trading. The charges carry a maximum possible sentence of 20 years' imprisonment should they be found guilty.
The case is being prosecuted in New York rather than in Los Angeles because the pair contacted several hedge funds in New York. Sebbag stayed at a Manhattan hotel during a trip to collect payment for the sale of the confidential information about Disney, the complaints said.
At that meeting on May 14 with two putative traders, in reality FBI agents, Sebbag was paid $15,000 in cash.
Sebbag, with an envelope containing $15,000 in his grasp, revealed his true identity to the supposed traders and discussed building their relationship by providing more confidential Disney information in future, the complaints said.
According to a recording of the meeting, Sebbag told the undercover FBI agents his source at Disney was an assistant to one of the top five executives at the company. He said she had access to emails about sensitive business information.
"It's not (a one-time deal)," Sebbag said, according to the criminal complaint. "For as long as (the Tipper) is in place, we're continuing. And I'll make sure that that person stays in place, in her position ... because some chunk of my money, I'm going to give it to her."
The case is USA v Bonnie Hoxie et al, U.S. District Court for the Southern District of New York No. 10-mag-1113.