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When John Johnson bought 3,900 shares of one tech hardware firm and short sold 1,200 of another—three days before the first company announced its acquisition by the second—he pulled off something more rare than an inside trade. It took nearly five years to come out, but Johnson managed to blindside people whose job it is to pick up on potential financial deviancy. If anyone could have foreseen the civil and criminal insider trading charges levied against Johnson, it would have been the public pension investors with whom he worked every day.
“I was absolutely shocked to hear of the charges when John told us over the telephone,” says Thomas Williams, executive director of the $6.5 billion Wyoming Retirement System (WRS), speaking of his former chief investment officer. “I am deeply saddened by the situation. John has given absolutely no indication of any wrongdoing in his time here, or a single reason to doubt his integrity.”
The illicit trades—the only financial crimes of which Johnson has ever been accused—took place two years before he joined WRS as a senior investment officer. The Security and Exchange Commission’s (SEC) investigation continues, but there is no evidence to suggest Johnson’s tipster—or his tipster’s tipster—had any personal or professional contact with WRS.
What took five years to emerge took only days to dismantle Johnson’s career. Williams and the board placed him on leave immediately after he informed them of the charges. Johnson was formally dismissed from the WRS within a week. His behavior has been matter-of-fact throughout the ordeal, according to Williams and others who have been in contact with him. There was no pretense of denial: Johnson entered guilty pleas to the two criminal charges brought against him, did not express surprise or anger at being dismissed, and has been silent in the press. As Johnson’s former colleagues reel, he is, by all indications, working to dispatch the matter as quickly and cleanly as possible.
“We view the trades as an unfortunate mistake,” Williams says. “I hope he will work in this industry again. He is very talented, and it would be a substantial waste of his intellect and experience for him not to be employed.” The decision to dismiss Johnson from his responsibilities at WRS was Williams’ alone, he says. “It had very little to do with John, his capabilities, or what he did; the decision related to our role as a public trust and our responsibilities to members.” One of those responsibilities is determining how someone who engaged in serious securities fraud became the chief steward of $6.5 billion of public retirement assets in the first place. Williams says he and the board revisited the due diligence WRS carried out in hiring Johnson, and were satisfied. “It is possible we’ll add an additional line of questioning for potential employees. Still, we already require multiple strong references and do thorough background checks. I don’t know how something like this could have been caught.”
Discussions with friends and former colleagues of Johnson’s, along with the relatively small amount of money involved ($136,000, according to the SEC), support Williams’ position: There is risk inherent in any investment, including human resources. As Johnson’s downside plays out, he’s not described by those who know him as a fraud or well-packaged CDO circa 2007. Johnson’s downfall, as they characterize it, was more like a black swan event. At the time of the trades, he was unemployed—one of the thousands of finance professionals to lose his job in 2008—with a large family he felt duty-bound to support. Many describe his situation as “desperate.”
“A private tip ahead of an acquisition represents opportunity for fast profits, and people can succumb to it,” says attorney Robert Heim, who has argued on both sides of insider trading cases. Heim was formerly assistant regional director of the SEC and now practices securities law privately. “People don’t think they are going to get caught, especially if they are trading in amounts of 100 or 200 shares. They always think there are larger, more important players out there for the SEC to focus on.”
The SEC was focusing on a bigger fish than Johnson at the time—his alleged informer Matthew Teeple cleared more than $21 million for his fund on that one tip, the SEC claims. But Johnson dialed up a phone that regulators seem to have been monitoring very closely, and gave them everything they needed. He also didn’t know he would pay for this crime when he himself became a bigger fish, with much more to lose.
Heim has been following the case, and predicts prison time. Sentences range at a judge’s discretion, Heim says, but it’s likely Johnson will spend 12 to 24 months behind bars. “Judges, particularly here in Manhattan, see any instance of insider trading as egregious.”