SEC v. Mark Megalli, No. 1:13-cv-03783, Northern District of Georgia (Jan. 1, 2013) — Complaint

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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

____________________________________
       :
SECURITIES AND EXCHANGE  :
COMMISSION,     :
       :
  Plaintiff,    : Civil Action No.
       :
v.       : 1:13-CV-______-____
       :
Mark Megalli,     :
       :
  Defendant       :
       :
____________________________________:

COMPLAINT

 Plaintiff Securities and Exchange Commission (the “Commission”), hereby
files this Complaint alleging the following:
Overview
 1. On at least four occasions between September 2009 and July 2010,
Mark Megalli (“Megalli”), traded shares of Carter’s, Inc. (“Carter’s”) (NYSE:
CRI), an Atlanta-based public issuer and clothing marketer, based on material non-
public information.  Megalli executed these trades on behalf of Level Global

2

Investors, L.P. (“Level Global”), a now-defunct investment adviser, generating
profits and/or losses avoided of approximately $3 million.
 2. Megalli received the material non-public information from Eric
Martin, a former Carter’s employee.  Martin received the information from Richard
Posey, who was Carter’s Vice President of Operations (“Posey” or “Carter’s VP”).
3. In every instance of trading tipping described below, Megalli knew or
should have known that the material non-public information he received was
communicated in breach of a duty of trust or confidence that a   Carter’s insider
owed Carter’s.
 4. By the conduct described herein Megalli violated Section 17(a) of the
Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(a) and 10b-5(c)
thereunder.
Jurisdiction and Venue
 5. The Commission brings this action pursuant to Sections 20 and 22 of
the Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21(d), 21(e), and 21A
of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78u-1] to enjoin Defendant
from engaging in the transactions, acts, practices, and courses of business alleged

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in this Complaint, and transactions, acts, practices, and courses of business of
similar purport and object, for civil penalties, and for other equitable relief.
 6. This Court has jurisdiction over this action pursuant to Section 22 of
the Securities Act [15 U.S.C. § 77v] and Sections 21(d), 21(e), 21A and 27 of the
Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78u-1,   and 78aa].
 7. Defendant, directly and indirectly, made use of the mails, the means
and instruments of transportation and communication interstate commerce, and the
means and instrumentalities of interstate commerce in connection with the
transactions, acts, practices, and courses of business alleged in this Complaint.
 8. Venue is proper because certain of the transactions, acts, practices,
and courses of business constituting violations of the Securities Act and the
Exchange Act occurred in the Northern District of Georgia.   Carter’s principal
place of business lies within this district and the tipping of material, non-public
information to Megalli occurred within this district.
 9. Defendant, unless restrained and enjoined by this Court, will continue
to engage in the transactions, acts, practices, and courses of business alleged in this
Complaint, and in transactions, acts, practices, and courses of business of similar
purport and object.

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The Defendant
 10. Mark Megalli, 41, resides in New York City.  Between 2003 and July
2009, Megalli was a registered representative of several broker dealer firms.
Between August 2009 and approximately November 2011, he was associated with
Level Global.
Issuer
 11. Carter’s, Inc., an Atlanta-based public issuer, is the self-proclaimed
“largest branded marketer in the U.S. of apparel exclusively for babies and young
children.”  The company sells clothing under the Carter’s and OshKosh brand
names as well as private label apparel through its own stores and other retailers.
Since October 2003, Carter’s common stock has been registered with the
Commission under Section 12(b) of the Exchange Act and listed on the NYSE.
Related Persons and Entity
 12. Eric M. Martin (“Martin”), 42, resides in Roswell, Georgia.

 From
March 5, 2003, until his termination on March 24, 2009, Martin served Carter’s as
its Director and later, Vice President of Investor Relations.  On December 18,
2012, Martin pled guilty to Count One of an eleven-count indictment charging him

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with tipping others to material non-public information while employed at Carter’s.
He is awaiting sentencing.  On September 11, 2013, an Order of Permanent
Injunction and Officer and Director Bar was entered as to Martin in the U.S.
District Court for the Northern District of Georgia based upon his trading and
tipping of Carter’s inside information.
 13. Level Global was an unregistered investment adviser located in
Greenwich, Connecticut and New York, New York that managed hedge funds with
approximately $4 billion worth of assets in 2010.
Megalli Joins Level Global and
Engages Eric Martin as a Consultant

     14. On August 10, 2009, Megalli joined Level Global as head of its
consumer sector.  On September 14, 2009, Megalli, on behalf of Level Global,
entered into a consulting agreement with a firm owned by Martin, a former
Carter’s executive. The consulting agreement provided for an initial six month
term and a payment of $50,000.
15. Beginning on the same day the consulting agreement was executed,
Martin began providing Megalli with material non-public information regarding
Carter’s anticipated financial results and Megalli began directing and causing
Level Global to trade on that information.

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16. Martin was no longer employed by Carter’s when the consulting
agreement was executed, and received the material non-public information about
Carter’s from Posey.  Posey provided the information to Martin in exchange for
reputational benefit, i.e. to show that Posey was a source of valuable information,
to further their friendship, and in expectation of future business contacts and
benefits.
17. Based upon the nature, repeated instances, specificity and timing of
the information he received from Martin, Megalli knew or had reason to know that
Martin was receiving it improperly from a Carter’s insider and that the insider was
receiving some benefit from leaking the information to Martin.
18. Megalli’s trading in Carter’s stock on behalf of Adviser took place in
advance of at least four earnings related releases and/or announcements, including
Carter’s October 27, 2009 delayed earnings announcement related to an accounting
investigation, which later was the subject of a Commission enforcement action.
Trading before Carter’s October 27, 2009 Announcement
of a Delayed   Earnings Release Pending
Investigation into Its Accounting Practices

 19. Between September 14 and 17, 2009, Megalli directed the purchase of
350,000 shares of Carter’s stock on behalf of Adviser, at a cumulative cost of over

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$9 million,  based on explicit positive earnings information that he received from
Martin.
 20. In fact, Megalli’s first trade in Carter’s shares, on September 14,
occurred while on the phone with Martin.
 21. On October 23, 2009, Megalli again spoke to Martin in a telephone
conversation.  During that call, Martin advised Megalli about an unexpected
accounting issue that had been uncovered at Carter’s. Martin had been tipped about
the issue by Posey.
22. While still on the phone, after hearing this information, Megalli
ordered the sale of 100,000 shares and instructed Level Global’s trader to continue
selling the firm’s entire position in Carter’s.  The trader thus sold an additional
100,000 of Carter’s shares that day.  The trader finished liquidating Level Global’s
position on October 26, 2009.
23. On October 27, 2009, right at the market open, Carter’s announced a
“delaying earnings release to complete a review of its accounting for margin
support to its wholesale customers.”
24. That day, Carter’s closed at $21.66 per share, down $6.78 per share
from its previous day’s close at $28.44.  By selling 300,000 shares prior to the
negative announcement, the Level Global avoided losses of $2,110,910.

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Trading before Carter’s November 9, 2009 Announcement
of Restated Earnings due to Improper Accounting Practices

 25. After closing out of the stock in late October 2009, Megalli instructed
Level Global to purchase Carter’s shares at the newly depressed price.
Consequently, Level Global accumulated a position of 600,000 shares by the first
week of November 2009.
 26. On November 9, during the middle of the trading day, Megalli spoke
with Martin by telephone.  During that call, Martin told Megalli that Carter’s
would soon announce that it would be restating its earnings for the years 2007-
2009 because of the accounting issue it had identified. Martin was tipped as to that
information by Posey.
27. While on that call, Megalli instructed Level Global to “lighten up” in
Carter’s shares “without killing the stock.”  As a result, Level Global sold 150,000
shares of Carter’s stock at a price of $23.70 per share.
28. That same day, after the market closed, Carter’s announced that it
would be restating its earnings for the years 2007-2009 because of the accounting
issue it had announced on October 27.
 29. When the market opened the next day, Carter’s stock opened at
$24.04, a $2.13 decline from its price before the announcement at market close the

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day earlier.  The loss avoidance for Level Global by selling ahead of the negative
news was $268,500.
 30. Megalli’s trader, noting the incredible timing of this trade and the
similar timing of the trade they had completed in late October in front of another
negative announcement emailed Megalli and asked, “haven’t we done this before?”
Trading Ahead of Carter’s December 23, 2009 Announcement
of a Restatement of its Earnings

 31. Megalli again spoke to Martin by telephone call on November 10,
2009, during which Martin advised that Carter’s upcoming quarterly earnings
would be favorable.  Martin had been tipped as to that information by Posey.
32. The next day, Megalli directed Level Global to buy 50,000 Carter’s
shares and commented, in an instant message to a colleague, that he was bullish on
the stock and had “100% conviction” and a “ton of recon on”   Carter’s.   The shares
were purchased at a price of $22.67 per share.
33. Throughout the rest of November and early December, Megalli
continued to receive positive information from Martin about Carter’s prospects.
34. On December 22, Megalli spoke to Martin and communicated by e-
mail regarding Carter’s prospects.  In one email, Martin hinted that Carter’s would
be updating investors regarding its already announced accounting issues
“tomorrow.”  Martin was tipped as to that information by Posey.

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35. The next day, December 23, before the market opened, Carter’s
announced the results of its restatement of earnings.  The market reacted positively
to the news.
36. That same trading day, shortly after Carter’s announcement, Megalli
ordered Level Global to sell    Carter’s shares, and Level Global sold a total of
100,000 shares at a price of $26.77 per share.
37. As a result of this trading, Level Global profited on the 50,000 shares
purchased on the basis of inside information by $205,000.
Trading Ahead of Carter’s July 29, 2010 Earnings Release
 38. Megalli and Martin had another telephone conversation on July 8,
2010.   During this call, Martin told Megalli that Carter’s earnings for the quarter
would be below expectations. Martin had been tipped as to this information by
Posey.
 39. Subsequently on that same day, Megalli told Level Global to begin
accumulating a short position in Carter’s, and Level Global initially sold 150,000
shares short.
40. At Megalli’s direction, Level Global continued to build up this short
position over the next few days, ending up with a short position of 300,000 shares
by July 19, at an approximate value of $7,800,000.

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 41. On July 29, before the market opened, Carter’s issued an earnings
release that contained negative future guidance.  The announcement caused
Carter’s stock to decline $2.47 per share, from $26.01 before the announcement to
$23.54.
42. Right at the market open, Level Global covered its   entire short
position of 300,000 shares at a price of $23.87, generating profits of $648,655.
43. After the trade, Megalli bragged to colleagues in instant messages of
being “max short” Carter’s before the negative announcement and, in return,
received hearty congratulations from his colleagues on the trading profits from his
short position.
COUNT I – FRAUD
Violations of Section 17(a)(1) of the Securities Act
[15 U.S.C. § 77q(a)(1)]

 44. Paragraphs 1 through 43 are hereby re-alleged and are incorporated
herein by reference.
 45. Between approximately September 2009 and July 2010, Defendant, in
the offer and sale of securities described herein, by the use of the means and
instruments of transportation and communication in interstate commerce and by
use of the mails, directly and indirectly, employed devices, schemes, and artifices
to defraud, all as more particularly described above.

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 46. Defendant knowingly, intentionally, and/or recklessly engaged in the
aforementioned devices, schemes and artifices to defraud, made untrue statements
of material facts and omitted to state material facts, and engaged in fraudulent acts,
practices and courses of business.  In engaging in such conduct, Defendant acted
with scienter, that is, with intent to deceive, manipulate or defraud or with a
severely reckless disregard for the truth.
 47. By reason of the foregoing, Defendant, directly and indirectly, has
violated and, unless enjoined, will continue to violate Section 17(a) of the
Securities Act [15 U.S.C. § 77a(q)].
COUNT II – FRAUD
Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act
[15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)]

 48. Paragraphs 1 through 43 are hereby re-alleged and are incorporated
herein by reference.
 49. Between approximately September 2009 and July 2010, Defendant, in
the offer and sale of securities described herein, by the use of the means and
instruments of transportation and communication in interstate commerce and by
use of the mails, directly and indirectly

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  a.   obtained money and property by means of untrue statements of
material fact and omissions to state material facts necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading; and
  b. engaged in transactions, practices and courses of business
which would and did operate as a fraud and deceit upon the purchasers of such
securities,
all as more   particularly described above.
 50. By reason of the foregoing, the Defendant, directly and indirectly, has
violated and, unless enjoined, will continue to violate Sections 17(a)(2) and
17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)].
COUNT III – FRAUD
Violations of Section 10(b) of the Exchange Act
[15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]

 51. Paragraphs 1 through 43 are hereby re-alleged and are incorporated
herein by reference.
 52. Between approximately September 2009 and July 2010, Defendant, in
connection with the purchase and sale of securities described herein, by the use of

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the means and instrumentalities of interstate commerce and by use of the mails,
directly and indirectly:
 a.   employed devices, schemes, and artifices to defraud; and
 b. engaged in acts, practices, and courses of business which would and
did operate as a fraud and deceit upon the purchasers of such securities, all as more
particularly described above.
 53. Defendant knowingly, intentionally, and/or recklessly engaged in the
aforementioned devices, schemes and artifices to defraud, and engaged in
fraudulent acts, practices and courses of business.  In engaging in such conduct,
Defendant acted with scienter, that is, with intent to deceive, manipulate or defraud
or with a severely reckless disregard for the truth.
 54. By reason of the foregoing, Defendant, directly and indirectly, has
violated and, unless enjoined, will continue to violate Section 10(b) of the
Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. §
240.10b-5].

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PRAYER FOR RELIEF
 WHEREFORE, Plaintiff SEC respectfully prays for:
I.
 Findings of fact and conclusions of law pursuant to Rule 52 of the Federal
Rules of Civil Procedure, finding that Defendant committed the violations alleged
herein and that the relief defendant was unjustly enriched.
II.
 A permanent injunction enjoining Defendant, his agents, servants,
employees, and attorneys from violating, directly or indirectly, Section 17(a) of the
Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c)
thereunder.
III.
 An order requiring the disgorgement by Defendant of all ill-gotten gains or
unjust enrichment (including amounts received by Level Global as a result of
Megalli’s actions) with prejudgment interest, to affect the remedial purposes of the
federal securities laws.

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IV.
 An order pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1]
imposing civil penalties against Defendant.
V.

 Such other and further relief as this Court may deem just, equitable, and
appropriate in connection with the enforcement of the federal securities laws and
for the protection of investors.

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DEMAND FOR JURY TRIAL
 Pursuant to Rule 38 of the Federal Rules of Civil Procedure, the
Commission demands trial by jury in this action of all issues so triable.
Dated:  November 14, 2013.
Respectfully submitted,

 /s/M. Graham Loomis
 Regional Trial Counsel
 Georgia Bar Number 457868

Pat Huddleston
      Senior Trial Counsel
      Georgia Bar Number 373984

Counsel for Plaintiff
U.S. Securities and Exchange Commission
950 East Paces Ferry Road, N.E., Suite 900
Atlanta, Georgia 30326-1234
(404) 842-7616
[email protected]
[email protected]

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IN THE UNITED STATES DISTRICT COURT 
FOR THE NORTHERN DISTRICT OF GEORGIA 

ATLANTA DIVISION 
 

____________________________________  
       : 
SECURITIES AND EXCHANGE  : 
COMMISSION,     : 
       : 
  Plaintiff,    : Civil Action No. 
       : 
v.       : 1:13-CV-______-____ 
       : 
Mark Megalli,     : 
       : 
  Defendant    : 
       : 
____________________________________: 
 
 

COMPLAINT 
 

 Plaintiff Securities and Exchange Commission (the “Commission”), hereby 

files this Complaint alleging the following: 

Overview 

 1. On at least four occasions between September 2009 and July 2010, 

Mark Megalli (“Megalli”), traded shares of Carter’s, Inc. (“Carter’s”) (NYSE: 

CRI), an Atlanta-based public issuer and clothing marketer, based on material non-

public information.  Megalli executed these trades on behalf of Level Global 

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Investors, L.P. (“Level Global”), a now-defunct investment adviser, generating 

profits and/or losses avoided of approximately $3 million.  

 2. Megalli received the material non-public information from Eric 

Martin, a former Carter’s employee.  Martin received the information from Richard 

Posey, who was Carter’s Vice President of Operations (“Posey” or “Carter’s VP”).   

3. In every instance of trading tipping described below, Megalli knew or 

should have known that the material non-public information he received was 

communicated in breach of a duty of trust or confidence that a Carter’s insider 

owed Carter’s. 

 4. By the conduct described herein Megalli violated Section 17(a) of the 

Securities Act of 1933 (the “Securities Act”), Section 10(b) of the Securities 

Exchange Act of 1934 (the “Exchange Act”) and Rules 10b-5(a) and 10b-5(c) 

thereunder. 

Jurisdiction and Venue 

 5. The Commission brings this action pursuant to Sections 20 and 22 of 

the Securities Act [15 U.S.C. §§ 77t and 77v] and Sections 21(d), 21(e), and 21A 

of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78u-1] to enjoin Defendant 

from engaging in the transactions, acts, practices, and courses of business alleged 

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in this Complaint, and transactions, acts, practices, and courses of business of 

similar purport and object, for civil penalties, and for other equitable relief. 

 6. This Court has jurisdiction over this action pursuant to Section 22 of 

the Securities Act [15 U.S.C. § 77v] and Sections 21(d), 21(e), 21A and 27 of the 

Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), 78u-1, and 78aa]. 

 7. Defendant, directly and indirectly, made use of the mails, the means 

and instruments of transportation and communication interstate commerce, and the 

means and instrumentalities of interstate commerce in connection with the 

transactions, acts, practices, and courses of business alleged in this Complaint. 

 8. Venue is proper because certain of the transactions, acts, practices, 

and courses of business constituting violations of the Securities Act and the 

Exchange Act occurred in the Northern District of Georgia.   Carter’s principal 

place of business lies within this district and the tipping of material, non-public 

information to Megalli occurred within this district.   

 9. Defendant, unless restrained and enjoined by this Court, will continue 

to engage in the transactions, acts, practices, and courses of business alleged in this 

Complaint, and in transactions, acts, practices, and courses of business of similar 

purport and object.  

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The Defendant 

 10. Mark Megalli, 41, resides in New York City.  Between 2003 and July 

2009, Megalli was a registered representative of several broker dealer firms.  

Between August 2009 and approximately November 2011, he was associated with 

Level Global.     

Issuer 

 11. Carter’s, Inc., an Atlanta-based public issuer, is the self-proclaimed 

“largest branded marketer in the U.S. of apparel exclusively for babies and young 

children.”  The company sells clothing under the Carter’s and OshKosh brand 

names as well as private label apparel through its own stores and other retailers.  

Since October 2003, Carter’s common stock has been registered with the 

Commission under Section 12(b) of the Exchange Act and listed on the NYSE. 

Related Persons and Entity 

 12. Eric M. Martin (“Martin”), 42, resides in Roswell, Georgia.  From 

March 5, 2003, until his termination on March 24, 2009, Martin served Carter’s as 

its Director and later, Vice President of Investor Relations.  On December 18, 

2012, Martin pled guilty to Count One of an eleven-count indictment charging him 

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with tipping others to material non-public information while employed at Carter’s.  

He is awaiting sentencing.  On September 11, 2013, an Order of Permanent 

Injunction and Officer and Director Bar was entered as to Martin in the U.S. 

District Court for the Northern District of Georgia based upon his trading and 

tipping of Carter’s inside information.   

 13. Level Global was an unregistered investment adviser located in 

Greenwich, Connecticut and New York, New York that managed hedge funds with 

approximately $4 billion worth of assets in 2010.  

Megalli Joins Level Global and  
Engages Eric Martin as a Consultant 

 
     14. On August 10, 2009, Megalli joined Level Global as head of its 

consumer sector.  On September 14, 2009, Megalli, on behalf of Level Global, 

entered into a consulting agreement with a firm owned by Martin, a former 

Carter’s executive. The consulting agreement provided for an initial six month 

term and a payment of $50,000.   

15. Beginning on the same day the consulting agreement was executed, 

Martin began providing Megalli with material non-public information regarding 

Carter’s anticipated financial results and Megalli began directing and causing 

Level Global to trade on that information.  

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16. Martin was no longer employed by Carter’s when the consulting 

agreement was executed, and received the material non-public information about 

Carter’s from Posey.  Posey provided the information to Martin in exchange for 

reputational benefit, i.e. to show that Posey was a source of valuable information, 

to further their friendship, and in expectation of future business contacts and 

benefits.   

17. Based upon the nature, repeated instances, specificity and timing of 

the information he received from Martin, Megalli knew or had reason to know that 

Martin was receiving it improperly from a Carter’s insider and that the insider was 

receiving some benefit from leaking the information to Martin. 

18. Megalli’s trading in Carter’s stock on behalf of Adviser took place in 

advance of at least four earnings related releases and/or announcements, including 

Carter’s October 27, 2009 delayed earnings announcement related to an accounting 

investigation, which later was the subject of a Commission enforcement action. 

Trading before Carter’s October 27, 2009 Announcement 
of a Delayed Earnings Release Pending  

Investigation into Its Accounting Practices 
 

 19. Between September 14 and 17, 2009, Megalli directed the purchase of 

350,000 shares of Carter’s stock on behalf of Adviser, at a cumulative cost of over 

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$9 million,  based on explicit positive earnings information that he received from 

Martin. 

 20. In fact, Megalli’s first trade in Carter’s shares, on September 14, 

occurred while on the phone with Martin. 

 21. On October 23, 2009, Megalli again spoke to Martin in a telephone 

conversation.  During that call, Martin advised Megalli about an unexpected 

accounting issue that had been uncovered at Carter’s. Martin had been tipped about 

the issue by Posey. 

22. While still on the phone, after hearing this information, Megalli 

ordered the sale of 100,000 shares and instructed Level Global’s trader to continue 

selling the firm’s entire position in Carter’s.  The trader thus sold an additional 

100,000 of Carter’s shares that day.  The trader finished liquidating Level Global’s 

position on October 26, 2009. 

23. On October 27, 2009, right at the market open, Carter’s announced a 

“delaying earnings release to complete a review of its accounting for margin 

support to its wholesale customers.” 

24. That day, Carter’s closed at $21.66 per share, down $6.78 per share 

from its previous day’s close at $28.44.  By selling 300,000 shares prior to the 

negative announcement, the Level Global avoided losses of $2,110,910. 

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Trading before Carter’s November 9, 2009 Announcement  
of Restated Earnings due to Improper Accounting Practices 

 
 25. After closing out of the stock in late October 2009, Megalli instructed 

Level Global to purchase Carter’s shares at the newly depressed price.  

Consequently, Level Global accumulated a position of 600,000 shares by the first 

week of November 2009. 

 26. On November 9, during the middle of the trading day, Megalli spoke 

with Martin by telephone.  During that call, Martin told Megalli that Carter’s 

would soon announce that it would be restating its earnings for the years 2007-

2009 because of the accounting issue it had identified. Martin was tipped as to that 

information by Posey. 

27. While on that call, Megalli instructed Level Global to “lighten up” in 

Carter’s shares “without killing the stock.”  As a result, Level Global sold 150,000 

shares of Carter’s stock at a price of $23.70 per share.     

28. That same day, after the market closed, Carter’s announced that it 

would be restating its earnings for the years 2007-2009 because of the accounting 

issue it had announced on October 27.   

 29. When the market opened the next day, Carter’s stock opened at 

$24.04, a $2.13 decline from its price before the announcement at market close the 

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9 
 

day earlier.  The loss avoidance for Level Global by selling ahead of the negative 

news was $268,500. 

 30. Megalli’s trader, noting the incredible timing of this trade and the 

similar timing of the trade they had completed in late October in front of another 

negative announcement emailed Megalli and asked, “haven’t we done this before?” 

Trading Ahead of Carter’s December 23, 2009 Announcement  
of a Restatement of its Earnings 

 
 31. Megalli again spoke to Martin by telephone call on November 10, 

2009, during which Martin advised that Carter’s upcoming quarterly earnings 

would be favorable.  Martin had been tipped as to that information by Posey. 

32. The next day, Megalli directed Level Global to buy 50,000 Carter’s 

shares and commented, in an instant message to a colleague, that he was bullish on 

the stock and had “100% conviction” and a “ton of recon on” Carter’s.   The shares 

were purchased at a price of $22.67 per share. 

33. Throughout the rest of November and early December, Megalli 

continued to receive positive information from Martin about Carter’s prospects.    

34. On December 22, Megalli spoke to Martin and communicated by e-

mail regarding Carter’s prospects.  In one email, Martin hinted that Carter’s would 

be updating investors regarding its already announced accounting issues 

“tomorrow.”  Martin was tipped as to that information by Posey. 

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35. The next day, December 23, before the market opened, Carter’s 

announced the results of its restatement of earnings.  The market reacted positively 

to the news. 

36. That same trading day, shortly after Carter’s announcement, Megalli 

ordered Level Global to sell Carter’s shares, and Level Global sold a total of 

100,000 shares at a price of $26.77 per share.  

37. As a result of this trading, Level Global profited on the 50,000 shares 

purchased on the basis of inside information by $205,000. 

Trading Ahead of Carter’s July 29, 2010 Earnings Release 

 38. Megalli and Martin had another telephone conversation on July 8, 

2010.   During this call, Martin told Megalli that Carter’s earnings for the quarter 

would be below expectations. Martin had been tipped as to this information by 

Posey.   

 39. Subsequently on that same day, Megalli told Level Global to begin 

accumulating a short position in Carter’s, and Level Global initially sold 150,000 

shares short.   

40. At Megalli’s direction, Level Global continued to build up this short 

position over the next few days, ending up with a short position of 300,000 shares 

by July 19, at an approximate value of $7,800,000. 

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 41. On July 29, before the market opened, Carter’s issued an earnings 

release that contained negative future guidance.  The announcement caused 

Carter’s stock to decline $2.47 per share, from $26.01 before the announcement to 

$23.54. 

42. Right at the market open, Level Global covered its entire short 

position of 300,000 shares at a price of $23.87, generating profits of $648,655. 

43. After the trade, Megalli bragged to colleagues in instant messages of 

being “max short” Carter’s before the negative announcement and, in return, 

received hearty congratulations from his colleagues on the trading profits from his 

short position. 

COUNT I – FRAUD 
Violations of Section 17(a)(1) of the Securities Act 

[15 U.S.C. § 77q(a)(1)] 
 

 44. Paragraphs 1 through 43 are hereby re-alleged and are incorporated 

herein by reference. 

 45. Between approximately September 2009 and July 2010, Defendant, in 

the offer and sale of securities described herein, by the use of the means and 

instruments of transportation and communication in interstate commerce and by 

use of the mails, directly and indirectly, employed devices, schemes, and artifices 

to defraud, all as more particularly described above. 

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12 
 

 46. Defendant knowingly, intentionally, and/or recklessly engaged in the 

aforementioned devices, schemes and artifices to defraud, made untrue statements 

of material facts and omitted to state material facts, and engaged in fraudulent acts, 

practices and courses of business.  In engaging in such conduct, Defendant acted 

with scienter, that is, with intent to deceive, manipulate or defraud or with a 

severely reckless disregard for the truth. 

 47. By reason of the foregoing, Defendant, directly and indirectly, has 

violated and, unless enjoined, will continue to violate Section 17(a) of the 

Securities Act [15 U.S.C. § 77a(q)]. 

COUNT II – FRAUD 
Violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act 

[15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)] 
 

 48. Paragraphs 1 through 43 are hereby re-alleged and are incorporated 

herein by reference. 

 49. Between approximately September 2009 and July 2010, Defendant, in 

the offer and sale of securities described herein, by the use of the means and 

instruments of transportation and communication in interstate commerce and by 

use of the mails, directly and indirectly 

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13 
 

  a. obtained money and property by means of untrue statements of 

material fact and omissions to state material facts necessary in order to make the 

statements made, in light of the circumstances under which they were made, not 

misleading; and 

  b. engaged in transactions, practices and courses of business 

which would and did operate as a fraud and deceit upon the purchasers of such 

securities,  

all as more particularly described above. 

 50. By reason of the foregoing, the Defendant, directly and indirectly, has 

violated and, unless enjoined, will continue to violate Sections 17(a)(2) and 

17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and 77q(a)(3)]. 

COUNT III – FRAUD 
Violations of Section 10(b) of the Exchange Act 

[15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5] 
 

 51. Paragraphs 1 through 43 are hereby re-alleged and are incorporated 

herein by reference. 

 52. Between approximately September 2009 and July 2010, Defendant, in 

connection with the purchase and sale of securities described herein, by the use of 

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14 
 

the means and instrumentalities of interstate commerce and by use of the mails, 

directly and indirectly: 

 a. employed devices, schemes, and artifices to defraud; and 

 b. engaged in acts, practices, and courses of business which would and 

did operate as a fraud and deceit upon the purchasers of such securities, all as more 

particularly described above. 

 53. Defendant knowingly, intentionally, and/or recklessly engaged in the 

aforementioned devices, schemes and artifices to defraud, and engaged in 

fraudulent acts, practices and courses of business.  In engaging in such conduct, 

Defendant acted with scienter, that is, with intent to deceive, manipulate or defraud 

or with a severely reckless disregard for the truth. 

 54. By reason of the foregoing, Defendant, directly and indirectly, has 

violated and, unless enjoined, will continue to violate Section 10(b) of the 

Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 

240.10b-5]. 

  

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PRAYER FOR RELIEF 

 WHEREFORE, Plaintiff SEC respectfully prays for: 

I. 

 Findings of fact and conclusions of law pursuant to Rule 52 of the Federal 

Rules of Civil Procedure, finding that Defendant committed the violations alleged 

herein and that the relief defendant was unjustly enriched. 

II. 

 A permanent injunction enjoining Defendant, his agents, servants, 

employees, and attorneys from violating, directly or indirectly, Section 17(a) of the 

Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5(a) and (c) 

thereunder. 

III. 

 An order requiring the disgorgement by Defendant of all ill-gotten gains or 

unjust enrichment (including amounts received by Level Global as a result of 

Megalli’s actions) with prejudgment interest, to affect the remedial purposes of the 

federal securities laws. 

  

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IV. 

 An order pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1] 

imposing civil penalties against Defendant. 

V. 
 

 Such other and further relief as this Court may deem just, equitable, and 

appropriate in connection with the enforcement of the federal securities laws and 

for the protection of investors. 

  

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DEMAND FOR JURY TRIAL 

 Pursuant to Rule 38 of the Federal Rules of Civil Procedure, the 

Commission demands trial by jury in this action of all issues so triable. 

Dated:  November 14, 2013.  

Respectfully submitted, 

 
 /s/M. Graham Loomis 
 Regional Trial Counsel 
 Georgia Bar Number 457868  
 

Pat Huddleston 
      Senior Trial Counsel 
      Georgia Bar Number 373984 

 
Counsel for Plaintiff 
U.S. Securities and Exchange Commission 
950 East Paces Ferry Road, N.E., Suite 900 
Atlanta, Georgia 30326-1234 
(404) 842-7616 
[email protected] 
[email protected] 

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