Home > Law Enforcement > Investment Firm Owner Guilty of Insider Trading, Fraud Scheme

Investment Firm Owner Guilty of Insider Trading, Fraud Scheme

Donald Blakstad allegedly used material nonpublic information to rake in over $7 million
By Michael Katz

It took a jury only an hour to find the owner and principal of a California-based investment firm guilty of insider trading and committing a securities offering fraud in which he reaped more than $7 million in ill-gotten gains.

According to the unsealed indictment, Donald Blakstad, who ran an investment fund called Midcontinental Petroleum Inc., allegedly used insider information to trade shares in San Diego-based biotech firm Illumina. He allegedly received the information from Martha Bustos, a former accountant who worked in the finance department at Illumina and had access to material nonpublic information about the company’s financial condition, including its earnings. She pleaded guilty in 2019 for her participation in the insider trading and is cooperating with the government.

Bustos admitted she would tip Blakstad off about Illumina’s quarterly earnings results before they were made public, which allowed him to make profits as high as 2,400% on trades. For example, the indictment alleges that just before Illumina reported its earnings results for the third quarter of 2016, Bustos informed Blakstad that the company had missed its revenue targets. Using that information, Blakstad bought more than 1,500 Illumina put option contracts for approximately $110,000 just before the results were made public and then sold them the very next day for over $2.5 million when the stock dropped on the news.

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The indictment also alleges Blakstad committed a securities offering fraud to take in more than $1 million from several investors. He allegedly induced victim investors to make up-front, lump-sum investments for securities issued by Midcontinental Petroleum, which Blakstad then misappropriated. He is also accused of making false and misleading representations to investors regarding how their investment funds would be used.

The indictment said that at Blakstad’s direction, victims transmitted their funds, including by wire transfer, into bank accounts that he controlled and used the funds to pay for various personal expenses and for other reasons that were unrelated to his investment firm’s business.

“Donald Blakstad used his connections to a company insider to gather inside information that he and his associates then traded on, raking in more than $6 million in illegal profits,” Audrey Strauss, the US attorney for the Southern District of New York, said in a statement. “In addition, Blakstad defrauded investor clients out of more $1 million, funds he purported would be invested but he instead misappropriated, in some cases for personal expenses.”

Blakstad, 62, was convicted of one count of conspiracy to commit securities fraud, two counts of securities fraud, one count of conspiracy to commit wire fraud, and one count of wire fraud for his participation in the insider trading scheme. He was also convicted of one count of conspiracy to commit securities fraud and wire fraud and one count of wire fraud for his participation in the securities offering fraud. 

The securities fraud counts and the conspiracy to commit wire fraud count each carry a maximum sentence of 20 years in prison. The conspiracy to commit securities fraud and the conspiracy to commit securities fraud and wire fraud counts each carry a maximum term of five years in prison. Blakstad is scheduled to be sentenced Oct. 28.

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Home > News > Market Moves > Calm Corporate Bond Market Shows Everything Is OK, Says LPL
Market Moves

Calm Corporate Bond Market Shows Everything Is OK, Says LPL

Tight spreads to Treasurys plus low yields show investors aren’t worried about the economy, strategist Gillum finds.
By Larry Light


Sure, stock indexes are at record highs, and their lofty valuations evoke scary memories of other times when investors were beset by foolish optimism. And atop that is the threat of inflation. But there’s one place that is signaling all is well and that calm seas will prevail. That would be the corporate bond market.

“Corporate credit markets continue to tell an encouraging story about the economic recovery,” wrote Lawrence Gillum, LPL Financial’s fixed-income strategist. The strength of the $10.7 trillion US corporate bond market is a positive marker for both equity and debt markets, he contended in a research note.

Last year, both investment grade and junk-rated companies issued more than $2.3 trillion in debt, one of the biggest years ever to float bonds, he pointed out. The trend continues. This year through the first quarter, issuance is up 7.6% from the comparable period the year before, according to the Securities Industry and Financial Markets Association (SIFMA).

The option-adjusted spread between corporates and Treasurys is tight, indicating that bond buyers are feeling optimistic—because they don’t need much extra yield above risk-free government paper. The spread for high-yield corporates, for instance, is a tad over 3 percentage points. Last September, it was 5.6 percentage points. During the worst of the pandemic financial panic, the gap was around 10 percentage points.

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Bonds, Gillum observed, tend to “lead markets lower during market stresses.” Now, however, the lack of corporate fixed-income volatility “is a good sign for equity investors, as well.”

The “well-behaved” corporate spread data shows that borrowing costs are low for businesses, he said. The falling cost of borrowing “suggests the corporate sector is in good shape,” he added. An added reassurance comes from how robust corporate balance sheets are, he maintained.

And Gillum noted that all this comes amid higher volatility in the Treasury market. The yield on the benchmark 10-year Treasury hit 1.48% on Tuesday, down considerably from its peak this year of 1.74% in March. 

What could up-end the placid picture for corporates? Gillum said the volume of mergers and acquisitions (M&As), stock buybacks, and dividend increases—all of which sap company coffers—“could push spreads higher.”

Nonetheless, LPL is neutral on investment grades and less optimistic on junk. And he stated that stocks offer more upside for the rest of 2021, an unsurprising call due to fatter projected earnings, which always are a tonic for equities.

One factor he didn’t mention, yet could have: The market’s outlook for inflation remains tame, with the five-year breakeven rate at 2.46%. That measure, of course, is what Treasurys and Treasury inflation-protected securities (TIPS) imply. Inflation, as the archenemy of bond prices, would be an unwelcome intruder on the healthy status quo the financial world is enjoying now.

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