Obtaining 501(c)(3) Tax-Exempt Status

Federal tax law provides tax benefits to nonprofit organizations recognized as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code (IRC). It requires that most organizations apply to the Internal Revenue Service (IRS) for that status.

This IRS Publication 4220 presents general guidelines for organizations that seek tax-exempt status under section 501(c)(3) of the IRC. Content includes references to the statute, Treasury regulations, other IRS publications that explain the requirements for tax-exempt status, and IRS forms with instructions. Publication 4220 is neither comprehensive nor intended to address every situation. As an alternative to applying for exemption, an organization may obtain many of the benefits of 501(c)(3) status by affiliating with an existing charity that acts as its agent.

It is important to note that the existing charity must be given full control and authority over
the program.

To learn more about the rules and procedures that pertain to organizations applying for exemption from federal income tax under section 501(c)(3) of the IRC, see Publication 557, Tax-Exempt Status for Your Organization. For assistance with 501(c)(3) status and other tax matters, please contact Selig & Associates.

Why Apply for 501(c)(3) Status?

The benefits of having 501(c)(3) status include exemption from federal income tax and eligibility to receive tax-deductible charitable contributions. To qualify for these benefits, most organizations must file an application with, and be recognized by, the IRS as described in this publication. Another benefit is that some organizations may be exempt from certain employment taxes.

Individual and corporate donors are more likely to support organizations with 501(c)(3) status because their donations can be tax deductible. Recognition of exemption under section 501(c)(3) of the IRC assures foundations and other grant-making institutions that they are issuing grants or sponsorships to permitted beneficiaries.

An IRS determination of 501(c)(3) status is recognized and accepted for other purposes. For example, state and local officials may grant exemption from income, sales or property taxes. In addition, the U.S. Postal Service offers reduced postal rates to certain organizations.

Who is Eligible for 501(c)(3) Status?

There are three key components for an organization to be exempt from federal income tax under section 501(c)(3) of the IRC. A not-for-profit (i.e., nonprofit) organization must be organized and operated exclusively for one or more exempt purposes.

Organized – A 501(c)(3) organization must be organized as a corporation, trust, or unincorporated association. An organization’s organizing documents (articles of incorporation, trust documents, articles of association) must:
n limit its purposes to those described in section 501(c)(3) of the IRC;
n not expressly permit activities that do not further its exempt purpose(s), i.e.,
unrelated activities; and,
n permanently dedicate its assets to exempt purposes.

Operated – Because a substantial portion of an organization’s activities must further its exempt purpose(s), certain other activities are prohibited or restricted including, but not limited to, the following activities. A 501(c)(3) organization:
n must absolutely refrain from participating in the political campaigns of candidates for local, state, or federal office;
n must restrict its lobbying activities to an insubstantial part of its total activities

n must ensure that its earnings do not inure to the benefit of any private shareholder or individual; n must not operate for the benefit of private interests such as those of its founder, the founder’s family, its shareholders or persons controlled by such interests; n must not operate for the primary purpose of conducting a trade or business that is not related to its exempt purpose, such as a school’s operation of a factory; and, n must not have purposes or activities that are illegal or violate fundamental public policy. Exempt Purpose – To be tax exempt, an organization must have one or more exempt purposes, stated in its organizing document. Section 501(c)(3) of the IRC lists the following exempt purposes: charitable, educational, religious, scientific, literary, fostering national or international sports competition, preventing cruelty to children or animals, and testing for public safety. 501(c)(3) Organizations, The most common types of 501(c)(3) organizations are charitable, educational, and religious.

CHARITABLE, Charitable organizations conduct activities that promote: - relief of the poor, the distressed, or the underprivileged, - advancement of religion, - advancement of education or science, - erection or maintenance of public buildings monuments, or works, - lessening the burdens of government, - lessening neighborhood tensions, - eliminating prejudice and discrimination, - defending human and civil rights secured by law, - combating community deterioration and juvenile delinquency, EDUCATIONAL, Educational organizations include: -  schools such as a primary or secondary school, a college, or a professional or trade school, -  organizations that conduct public discussion groups, forums, panels, lectures, or similar programs, -  organizations that present a course of instruction by means of correspondence or through the use of television or radio, -  museums, zoos, planetariums, symphony orchestras, or similar organizations, -  nonprofit day-care centers, -  youth sports organizations,

RELIGIOUS, The term church includes synagogues, temples, mosques, and similar types of organizations. Although the IRC excludes these organizations from the requirement to file an application for exemption, many churches voluntarily file applications for exemption. Such recognition by the IRS assures church leaders, members, and contributors that the church is tax exempt under section 501(c)(3) of the IRC and qualifies for related tax benefits. Other religious organizations that do not carry out the functions of a church, such as mission organizations, speakers’ organizations, nondenominational ministries, ecumenical organizations, or faith-based social agencies, may qualify for exemption. These organizations must apply for exemption from the IRS. See Publication 1828, Tax Guide for Churches and Religious Organizations, for more details.

Public Charities and Private Foundations, Every organization that qualifies for tax-exempt status under section 501(c)(3) of the IRC is further classified as either a public charity or a private foundation. Under section 508(b) of the IRC, every organization is automatically classified as a private foundation unless it meets one of the exceptions listed in sections 508(c) or 509(a). For some organizations, the primary distinction between a classification as a public charity or a private foundation is the organization’s source of financial support. Generally, a public charity has a broad base of support while a private foundation has very limited sources of support. This classification is important because different tax rules apply to the operations of each. Deductibility of contributions to a private foundation is more limited than deductibility of contribu- tions to a public charity. See Publication 526, Charitable Contributions, for more information on deductibility of contributions. In addition, private foundations are subject to excise taxes that are not imposed on public charities. For more informa- tion about the special tax rules that apply to private foundations, see Publication 4221-PF, Compliance Guide for 501(c)(3) Private Foundations, and the Life Cycle of a Private Foundation website on www.irs.gov/eo. Organizations statutorily classified as public charities under section 509(a) of the IRC are: n churches; n schools; n organizations that provide medical or hospital care (including the provision of medical education and in certain cases, medical research); n organizations that receive a substantial part of their support in the form of contributions from publicly supported organizations, governmental units, and/or from the general public;

n organizations that normally receive not more than one-third of their support from gross investment income and more than one-third of their support from contribu- tions, membership fees, and gross receipts from activities related to their exempt functions; and,
n organizations that support other public charities.

If the organization requests public charity classification based on receiving support from the public, it must continue to seek significant and diversified public support in later years. Beginning with the organization’s sixth year of existence and for all succeeding years, the organization must demonstrate in its annual return that it receives the required amount of public support. If the organization does not meet the public support requirement, it could be reclassified as a private foundation.
In addition, to avoid unexpectedly losing its public charity classification, the organization should keep careful track of its public support information throughout the year, so that it will have the information it needs to complete Schedule A, Form 990 or 990-EZ. Unless the organization is committed to raising funds from the public, it may be more appropriate to consider an alternate statutorily based public charity classification. See Publication 557, Tax-Exempt Status for Your Organization, for assistance with determining how your organization would be classified.

What Responsibilities Accompany 501(c)(3) Status?

While conferring benefits on 501(c)(3) organizations, federal tax law also imposes responsibilities on organizations receiving that status.

Recordkeeping,

Section 501(c)(3) organizations are required to keep books and records detailing all activities, both financial and nonfinancial. Financial information, particularly information on its sources of support (contributions, grants, sponsorships, and other sources of revenue) is crucial to determining an organization’s private foundation status. See Publications 4221-PC and 4221-PF, Publication 557, and the instructions to Forms 990, 990-EZ, and 990-PF for more information with 501(c)(3) status and other tax matters, please contact Selig & Associates.

Filing Requirements,

Annual Information Returns – Organizations recognized as tax exempt under section 501(c)(3) of the IRC may be required to file an annual information return: Form 990, Form 990-EZ, 990-N (see below) or Form 990-PF along with certain schedules that may be required for your organization. Certain categories of organ- izations are excepted from filing Form 990 or Form 990-EZ, including churches.

See the instructions with each of these forms for more information. See the listed publications and instructions in the “Recordkeeping” section above for more infor- mation and guidance.

Annual Electronic Notice – To meet their annual filing requirement, organizations with gross receipts normally $50,000 or less may choose to submit an annual electronic notice using Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt Organizations Not Required To File Form 990 or 990-EZ. The e-Postcard can only be filed electronically; there is no paper version. For more information about the e-Postcard, go to www.irs.gov/Charities-&-Non-Profits.

Any organization that fails to file a required annual return or notice for three consecutive years will automatically lose its tax-exempt status, by act of law, as of the due date of the return for the third consecutive year.

Unrelated Business Income Tax – In addition to filing Form 990, 990-EZ, or 990-PF, an exempt organization must file Form 990-T if it has $1,000 or more of gross income from an unrelated trade or business during the year. The organization must make quarterly payments of estimated tax on unrelated business income if it expects its tax liability for the year to be $500 or more. The organization may use Form 990-W to help calculate the amount of estimated payments required. In general, the tax is imposed on income from a regularly carried-on trade or business that does not further the organization’s exempt purposes (other than by providing funds). See Publication 598, Tax on Unrelated Business Income of Exempt Organizations, and the Form 990-T instructions for more information.

Disclosure Requirements

,

Public Inspection of Exemption Applications and Returns – Section 501(c)(3) organizations must make their applications (Form 1023 or 1023-EZ) and the annual returns (Form 990, Form 990-EZ or Form 990-PF) available to the public for inspection, upon request and without charge (except for a reasonable charge for copying). Each annual return must be made available for a three-year period starting with the filing date of the return. The IRS is also required to make these documents available for public inspection and copying. These documents must be made available at the organization’s principal office during regular business hours. The requests may be made in person or in writing. See Publication 557 for more information.
For tax years beginning after August 17, 2006, section 501(c)(3) organizations that file unrelated business income tax returns (Forms 990-T) must make them available for public inspection, and the IRS must make those returns publicly available. Organizations should not include private information of donors or other individuals, such as a social security number, in any information return.

Charitable Contributions—Substantiation and Disclosure – Organizations that are tax exempt under section 501(c)(3)of the IRC must meet certain requirements for documenting charitable contributions. The federal tax law imposes two general disclosure rules: 1) a donor must obtain a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable contribution on his/her federal income tax return; 2) a charitable organization must provide a written disclosure to a donor who makes a payment in excess of $75 partly as a contribution and partly for goods and services provided by the organization. See Publication 1771, Charitable Contributions – Substantiation and Disclosure Requirements, for more information. For assistance with this and other tax matters, please contact Selig & Associates. Recordkeeping Requirements, A donor cannot claim a tax deduction for any contribution of cash, a check or other monetary gift made on or after January 1, 2007, unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or a written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution. "How Do You Apply for 501(c)(3) Status?" (To be Continued)

IRS Publishes “The Commoners Guide to Common EITC Errors”

COMMON EITC ERRORS
Claiming a child who does not meet all the qualifying child tests: relationship, residency age and joint return	We find most of the errors are because the child is not related in one of the listed relationships or the child didn't live with the person or persons on the tax return (residency test). Read more about qualifying child rules here.
More than one person claiming the same child	This is often caused because the child lived with more than one person for more than half the tax year. But, sometimes, a person claims a child who didn't live with them for more than half the tax year.  Find more information on our “Qualifying Child of More Than One Person” page.
Social Security number or last name mismatches	Look at the Social Security card of everyone listed on your return to make sure the number matches and that you use the name the same way the Social Security Administration lists the name.  Read more about Social Security Numbers and EITC here.
Filing as single or head of household when married	Unsure about your tax filing status? Use the EITC Assistant to find out! Or, use the Spanish version of the EITC Assistant.
Over- or under-reporting of income or expenses	Be sure you have all your Forms W-2, W-2G, 1099 MISC, and all other income records, even if not reported on a form, before your file your return. And, you need to report allincome you earn from running or owning a  business or  farm and deduct allallowable expenses.

Consequences of Errors on Your EITC Returns

Avoid an audit, additional tax, penalties or interest by making sure all the information on your tax return is complete and correct. There are consequences for filing your returns with errors whether you made a mistake or knowingly did it. Find out more about the consequences of errors on your EITC returns here.

If you pay someone to prepare your return, that person and the firm the person works for has the responsibility to make sure your return is correct. Expect your preparer, whether you pay or it’s free, to ask you a great deal of questions to make sure your return is correct. For more information on choosing a preparer, see our page “IRS Advice on How to Choose a Tax Preparer.” For more information on the preparer’s responsibilities, see our article, “Consequences of Not Meeting Your Due Diligence Requirements."

Can You Support Your Claim of a Child?

If we pick your EITC claim for an audit based on the child you claim, we ask for proof that the child is your qualifying child. Or, if you and another person claim the same child, we may ask you to send proof. The following are some of the documents you can use to support your claim:

Warning: Don't send any of the items listed unless we ask for them and then only send copies not the originals.

Relationship Test:  You need to send proof the child is related to you:

• Birth certificates or other official documents of birth that show you are related to the child, you may have to send copies of more than one certificate. For example, if you are the grandparent, you would send a copy of your child's birth certificate showing your name and a copy of your grandchild's birth certificate showing your child's name. 
• If the father of the child is not named on any of the birth certificates you have, you may have to send paternity test results.
• If you are related by marriage, you may have to send a copy of the marriage certificate showing how you are related to the child
• If the child is adopted, you may have to send the legal adoption papers such as a court order or a letter from the authorized child placement center showing the child was placed with you before the adoption is final
• Proof for full-time student:
• Copies of official school records showing:
  • Child’s address of record (that must match your address)
  • The child was a full-time student for at least five months of the tax year (the months don’t have to be consecutive) and you may need more than one school record
  • The dates the child attended the school

Proof of Residency (you may have to send more than one of the following to show your child lived with you for more than half the year):

• Copies of school (no report cards) medical or social services records
• Letter on official letterhead from school, a healthcare or medical provider, social service agency, placement agency official, employer, Indian tribal official, landlord or property manager or a place of worship that shows:
  • The name of your child’s parent or guardian
  • Your child’s address matching your own
  • Dates the writer knows the child lived with you
• Daycare records or a letter from your day care provider (if the daycare provider is related to you, you must have at least one other record or letter that shows proof)

When the stakes are high, you can rely on Our experience, energy and ability. Selig & Associates provides the most aggressive tax representation allowed by law. Payroll Taxes, Trust Fund Recovery Cases, Income and Sales Tax Controversies. We negotiate excellent payment plans, compromise tax debts, and resolve all Civil and Criminal tax issues, including innocent spouse relief and separation of liability. Call us today for a FREE face-to-face Consultation (212) 974-3435. 

Case of the Day: SEC Insider Trading Complaint

Selig & Associates We provide the most aggressive Tax Representation allowed by law. Payroll Taxes and Trust Fund Recovery Penalty and all Income and Sales Tax Controversies. We settle contested tax audits; negotiate excellent payment plans, compromise tax debts, and resolve all civil and criminal tax issues, including innocent spouse relief and separation of liability. Call us today for a FREE face-to-face Consultation (212) 974-3435. 

Case 1:16-cv-11955 Document 1 Filed 09/29/16 

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UNITED STATES DISTRICT COURT DISTRICT OF MASSACHUSETTS

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, 

                               v. 

ROBERT GADIMIAN a/k/a ROBERT GHADIMIAN, Defendant.

COMPLAINT

Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”) alleges the following against Defendant Robert Gadimian (a/k/a Robert Ghadimian) (“Gadimian”):

SUMMARY

1. This case concerns insider trading in the securities of Puma Biotechnology, Inc. (“Puma” or the “company”) by Gadimian, then a senior employee at Puma, in advance of two company announcements about positive drug trial results. Gadimian reaped more than $1.1 million in profits from his illegal trades.

2. Puma is a biotechnology company focused on developing a drug called “neratinib” for the treatment of cancer. From November 2011 through October 2014, Gadimian worked for Puma as the Senior Director of Regulatory Affairs. As a Puma employee, Gadimian was subject to the company’s insider trading policy, which required preclearance before buying or selling any Puma securities and prohibited trading in Puma securities during company- imposed blackout periods.

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3. During his employment at Puma, Gadimian learned material, nonpublic information about two drug trials involving neratinib: (1) the I-SPY 2 trial and (2) the 3004 trial (a/k/a the ExteNET trial). Both drug trials involved the treatment of breast cancer. The material, nonpublic information about the drug trials included indications that neratinib was performing positively in those trials, that the drug trials had reached key milestones that soon would be made public, and that, as a result, neratinib was more likely to be a lucrative drug for Puma.

4. After learning this information, despite being aware that he was violating Puma’s insider trading policy, Gadimian secretly purchased and sold Puma securities on the basis of such information without preclearance and during blackout periods.

5. In 2013, Gadimian purchased and sold Puma stock without preclearance and during blackout periods. In August and September 2013, Gadimian spent about $261,530 to buy 4,918 shares of Puma stock after learning that neratinib was performing well in the I-SPY 2 trial, but before the positive trial results were announced to the public. When Puma announced the I- SPY 2 trial results on December 4, 2013, its stock price jumped from $46.21/share to $77.70/share – an increase of 68%. On December 5, 2013, the day after the public announcement, Gadimian sold his Puma stock for approximately $95,000 in profits.

6. In 2014, Gadimian again purchased and sold Puma stock and options without preclearance and during blackout periods. In March 2014, Gadimian spent about $215,880 to buy 1,850 shares of Puma stock, soon after he learned the nonpublic schedule for locking the data from the 3004 trial for neratinib and analyzing the results. Locking the data, also called the “soft lock,” refers to capturing the data from the drug trial at a specific point in time – in other words, taking a “snapshot” of the data – to be analyzed to determine whether neratinib was effective.

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7. Later, in July 2014, shortly after learning that the 3004 trial data had been locked and that the results would be announced around late July, Gadimian spent another approximately $34,500 on 71 high-risk, short-term, out-of-the-money Puma call options, essentially betting that Puma’s stock price would rise in the near future. Gadimian did not seek preclearance for these trades, as required by Puma’s insider trading policy.

8. Locking the data for the 3004 trial was an important and nonpublic milestone – it was described in Puma internal e-mails as “great news” – and Gadimian expected the trial results to be positive. Gadimian’s purchases of Puma securities in 2014 were influenced by important, nonpublic information that he learned from Puma e-mails and meetings, and Gadimian knew what he was doing was wrong.

9. On July 22, 2014, when Puma announced the positive results from the 3004 trial, its stock price soared from $59.03/share to $233.43/share – an increase of 295%. Gadimian immediately sold all of his Puma options and most of his Puma stock, realizing about $1,006,000 in profits.

10. In total, from 2013 through 2014, Gadimian made approximately $1,161,000 in profits from his illegal trading in Puma securities. Gadimian’s trading was on the basis of material, nonpublic information about the company and in violation of Gadimian’s fiduciary duty to Puma and its shareholders.

11. After learning about some of Gadimian’s trading through an inquiry by the Financial Industry Regulatory Authority (“FINRA”), Puma conducted an internal investigation. When interviewed for the internal investigation on October 6, 2014, Gadimian admitted that he traded Puma securities without preclearance and during blackout periods, and that he traded because of “greed.” Additionally, before providing his trading records to Puma for the internal

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investigation, Gadimian altered those records by deleting certain Puma trades and then re- numbering the pages of the altered documents to hide his deletions. On October 17, 2014, Puma fired Gadimian.

12. By virtue of the conduct alleged herein, Gadimian violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Unless Gadimian is permanently restrained and enjoined, he will violate those provisions of the federal securities laws in the future.

JURISDICTION AND VENUE

13. The Court has jurisdiction over this action pursuant to Sections 21A and 27 of the Exchange Act, 15 U.S.C. §§ 78u-1 and 78aa.

14. Venue lies in this district pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa, because certain acts or transactions constituting the violations occurred in this district and Gadimian transacts business in this district. For example, the insider trading by Gadimian alleged herein was done through Fidelity brokerage accounts, and Fidelity is headquartered in Massachusetts; Gadimian’s illegal trades were based, at least in part, on material, nonpublic information received via e-mails through the Massachusetts-based servers of a Massachusetts- based consulting firm (the “consulting firm”) that worked for Puma on the 3004 trial; and, from December 2014 to the present, Gadimian has been employed by a company based in Massachusetts.

DEFENDANT

15. Gadimian, age 46, is a citizen of the United States, Sweden, and Iran. He lives in Burbank, California. From November 2011 through October 2014, Gadimian was employed by Puma as the Senior Director of Regulatory Affairs.

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RELEVANT ENTITY

16. Puma, a Delaware corporation with its headquarters in Los Angeles, California, works on licensing and developing drugs for the treatment of cancer. A primary focus of Puma’s work is developing a drug called neratinib. At all relevant times, Puma’s common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act. From April 2012 to October 2012, Puma’s common stock traded on the OTC Bulletin Board and OTC Link under the ticker symbol “PBYI.” From October 2012 to the present, Puma’s common stock has traded on the New York Stock Exchange under the ticker symbol “PBYI.”

TRADING TERMINOLOGY

17. An option contract gives the purchaser the right to buy or sell 100 shares of the underlying stock before a specified deadline, known as the expiration date, for a predetermined price per share, known as the strike price.

18. A call option gives an investor the right, but not the obligation, to buy stock. Therefore, a call option generally will increase in value as the price of the underlying stock increases. Unlike stock, which retains some value even if the price falls, a call option loses all value once it expires. A call option with a strike price that is greater than the stock’s market price is referred to as being “out-of-the-money” because there is little to no value in the right to buy a stock at a price greater than its current market price.

FACTS A. Gadimian’s Position at Puma.

19. Puma hired Gadimian in November 2011, as its Senior Director of Regulatory Affairs. In that position, Gadimian worked on, among other things, the drug production process and regulatory and clinical issues.

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20. As Puma’s Senior Director of Regulatory Affairs, Gadimian had a fiduciary duty to Puma and its shareholders not to misuse the company’s nonpublic information for personal gain, such as by trading on material, nonpublic information relating to the company’s drug trials.

21. On April 17, 2012, Gadimian attended a Puma meeting at which Puma’s insider trading policy was discussed. Puma’s insider trading policy, which applied to Gadimian, explained what conduct constitutes insider trading, emphasized that insider trading was prohibited, and highlighted the criminal and civil sanctions for insider trading. Additionally, under Puma’s insider trading policy, Gadimian was required to obtain preclearance from company management before buying or selling any Puma securities, and, during company- imposed blackout periods, preclearance could not be obtained and all trading in Puma securities was prohibited.

B. Gadimian Traded Puma Securities in 2012.

22. From April 20 to 25, 2012, starting three days after attending the meeting at which Puma’s insider trading policy was discussed, Gadimian purchased 8,119 shares of Puma stock in his Fidelity IRA account. According to Gadimian, he did not obtain preclearance for these purchases, as required by Puma’s insider trading policy, because he thought company management would not approve the trades if he requested preclearance.

23. Between May 9 and 25, 2012, Gadimian sold the 8,119 shares of Puma stock, but did not make any profits on these trades. Gadimian did not obtain preclearance for these sales.

24. On September 25, 2012, Gadimian signed a certification of compliance with Puma’s insider trading policy. By signing the certification, Gadimian certified that he received, reviewed, and understood Puma’s insider trading policy.

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C. Based on Material, Nonpublic Information, Gadimian Bought Puma Securities in Advance of Puma’s December 4, 2013 Announcement About the I-SPY 2 Trial.

25. By early 2013, Gadimian had begun attending Puma’s steering committee meetings, which occurred approximately every two weeks. During those meetings, the attendees discussed various projects, trials, and issues related to the strategic direction of the company.

26. During steering committee meetings that Gadimian attended in or around February and March 2013, the committee discussed confidentially that: (1) neratinib was performing well in the I-SPY 2 trial; and (2) based on neratinib’s positive performance in the I- SPY 2 trial, Puma planned to extend the length of the 3004 trial (which also involved neratinib) and to increase its financial investment in the 3004 trial.

27. During a steering committee meeting in or around July 2013, in response to a question from Gadimian, Puma’s Chief Executive Officer (the “CEO”) informed Gadimian that the positive data from the I-SPY 2 trial was not yet public.

28. In a steering committee meeting on or around August 14 or 21, 2013, Gadimian was informed that the board overseeing the results of the I-SPY 2 trial would determine the official results of the trial in the next several weeks. Based on the material, nonpublic information known to him, including neratinib’s positive performance in the trial thus far, Gadimian understood the trial results likely would be positive.

29. Between August 26 and September 6, 2013, Gadimian purchased 4,918 shares of Puma stock in his Fidelity accounts at a cost of approximately $261,530. Gadimian also tried to buy Puma call options during this period, but the orders were not executed due to technical issues. Gadimian did not obtain preclearance for these purchases and attempted purchases, as required by Puma’s insider trading policy, because he believed the company would not grant him

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preclearance if requested. Gadimian also knew that Puma was in a blackout period during his August and September 2013 purchases of Puma stock.

30. According to Gadimian, he purchased Puma stock in August and September 2013 in the “expectation of future results,” including the results from the I-SPY 2 trial, and, based on information Gadimian learned in Puma steering committee meetings, he knew it was likely the I- SPY 2 trial results would be positive. With respect to these trades, Gadimian was willing to risk getting fired in order to trade because he could “make money;” he “was 99.99-percent sure [Puma] wouldn’t find out” because he “did it in 2012 and they didn’t find out;” and so he bought Puma securities again in 2013 because he “[a]bsolutely” wanted to make money.

D. After the I-SPY 2 Announcement, Gadimian Sold Puma Securities for Profits of $95,000.

31. On December 4, 2013, after the market closed, Puma announced positive top line results for neratinib in the I-SPY 2 trial. Top line results refer to a trial’s preliminary efficacy.

32. On December 4, before the announcement, Puma’s stock price closed at $46.21/share with a daily trading volume of 104,200 shares. The next day, December 5, Puma’s stock price closed at $77.70/share (an increase of 68% from the previous day’s close) with a daily trading volume of 3,588,600 shares (an increase of 3,344% from the previous day).

33. On December 5, 2013, Gadimian sold all 4,918 shares of Puma stock in his Fidelity accounts for profits of approximately $95,000. Gadimian did not obtain preclearance for these sales, and he knew that Puma was in a blackout period during these trades.

34. Puma lifted its blackout period on December 10, 2013. One week later, on December 17, Puma reinstated its blackout period, which prohibited employees from trading Puma securities. The blackout remained in effect for the rest of Gadimian’s tenure at Puma.

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E. Based on Material, Nonpublic Information, Gadimian Bought Puma Securities in Advance of Puma’s July 22, 2014 Announcement Regarding the 3004 Trial.

35. By early 2014, besides attending Puma steering committee meetings, Gadimian also was a member of Puma’s “3004 Project Team.” That team met regularly to discuss, among other things, updates and timelines related to the 3004 trial, which involved neratinib.

36. The Massachusetts-based consulting firm that helped manage the clinical data for Puma on the 3004 trial communicated periodically with members of the 3004 Project Team. Like employees of Puma, employees of the consulting firm were required to keep information about the 3004 trial confidential.

37. On March 12, 2014, Gadimian received an e-mail from the consulting firm, sent through a server in Massachusetts, which included attachments stating that the “Primary DBL” for the 3004 trial was planned for May 23, 2014. The “Primary DBL,” or primary database lock, was a synonym for the soft lock – that is, when the clinical data from the drug trial would be captured for analysis to determine whether neratinib was effective. The soft lock for the 3004 trial was an important milestone in the drug trial because it would provide preliminary efficacy results as well as data for a possible New Drug Application to the U.S. Food and Drug Administration (“FDA”). The planned date for the soft lock (May 23, 2014) was not public information.

38. Two days later, on March 14, 2014, Gadimian received another e-mail from a Puma employee relating to the 3004 trial. One attachment to the e-mail stated that, “The Executive Team has agreed to the proposed date of 6 June 2014 for the Project Team to deliver the 3004 top-line results,” i.e., the preliminary results showing neratinib’s efficacy. Another attachment to the e-mail indicated (1) that the soft lock was scheduled to be completed by May 23, 2014, and (2) that the “Top line results” were scheduled to be completed by June 6, 2014. 

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The planned date for the 3004 trial top line results (June 6, 2014) was not public information. Additionally, that date was important because it would impact when Puma could submit a New Drug Application to the FDA. According to Gadimian, such information is “do or die” for a biotech company.

39. Beginning on March 14, 2014 – the same day Gadimian received the e-mail providing scheduled dates for the soft lock and top line results – and continuing through March 18, 2014, Gadimian purchased 1,850 shares of Puma stock in his Fidelity accounts at a cost of approximately $215,880. According to Gadimian, his purchases were influenced by the information he received in the March 14, 2014 e-mail. With respect to these purchases, Gadimian did not obtain preclearance because he “was expecting [Puma] to tell [him] no;” he knew Puma was in a blackout period; and he knew what he was doing was wrong.

40. The date for the 3004 trial soft lock was delayed for several weeks. But, on the evening of July 8, 2014, a Puma Vice President (the “VP”) sent an e-mail to certain Puma employees announcing that, “This afternoon we have completed our database soft lock” for the 3004 trial. The VP’s e-mail further stated that he had notified Puma’s CEO “of the great news and will update the Steering committee tomorrow.” As the VP put it, the soft lock for the 3004 trial was “a big deal” and the “main event” because it captured the data that would be used for the top line analysis and possible FDA approval. Puma’s completion of the soft lock was not public information.

41. Later on the night of July 8, 2014, Gadimian received a copy of the VP’s e-mail regarding completion of the soft lock.

42. The next morning, July 9, 2014, Gadimian received another forwarded copy of the VP’s July 8 e-mail regarding completion of the soft lock. Gadimian knew that completion of

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the soft lock was important and nonpublic information, but he nevertheless traded Puma securities based on that information.

43. Additionally, by then, Gadimian already knew – from attending steering committee meetings – that the 3004 trial results would be announced “around the end of July.” According to Gadimian, “All I need to know is the date. I know the date, and that’s good enough for me for my trades.”

44. On July 10 and 11, 2014 – starting two days after learning that the soft lock had been completed – Gadimian sold 300 shares of Puma stock in his Fidelity accounts, and used the proceeds to purchase high-risk, short-term, out-of-the-money Puma call options. Specifically, Gadimian purchased 14 Puma call options of 100 shares each with strike prices between $90 and $95, expiring on August 16, 2014. At that time, Puma stock was trading around $65/share, so the strike prices on the options were 38% and 46% above the trading price.

45. On Monday, July 14, 2014, Gadimian bought 57 more Puma call options of 100 shares each with strike prices between $90 and $95, expiring on August 16, 2014. According to Gadimian, regarding his July 10 through 14 purchases, it is difficult to trade options in a small company, “[s]o that’s why I spread out my purchase through three days – that’s Thursday, Friday, and Monday.”

46. With respect to his July 10 through 14 trades, Gadimian did not obtain preclearance; Gadimian knew Puma was in a blackout period; and Gadimian later admitted that his knowledge that the soft lock had been completed (nonpublic information from the above Puma e-mails) “[a]bsolutely” influenced his decision to make these trades. Similarly, Gadimian admitted that he bought the call options because he knew the 3004 trial “results would be announced end of July.”

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47. Based on the material, nonpublic information he learned at Puma, Gadimian expected the top line results from the 3004 trial to be favorable. Among other things, Gadimian attended Puma steering committee meetings at which the 3004 trial was discussed; he was a member of Puma’s 3004 Project Team, which discussed nonpublic information about the 3004 trial; he knew Puma invested substantial financial resources in the 3004 trial; and, according to Gadimian, he knew Puma’s CEO “wouldn’t spend 20-30 million dollars on a 50/50 bet.”

F. After the 3004 Trial Announcement, Gadimian Sold Puma Securities for Profits of $1,006,000.

48. On July 22, 2014, after the market closed, Puma announced positive top line results from the 3004 trial. On July 22, before the announcement, Puma’s stock price closed at $59.03/share, with a daily trading volume of 1,469,800 shares. The next day, after the announcement, Puma’s stock price closed at $233.43/share (an increase of 295% from the previous day’s close) with a daily trading volume of 8,185,100 shares (an increase of 457%).

49. On July 23, 2014, the day after Puma’s announcement, Gadimian sold all 71 Puma options in his Fidelity accounts for profits of approximately $910,000. The next day, July 24, Gadimian sold 1,000 shares of Puma stock in his Fidelity IRA account for additional profits of $96,000. Additionally, as of July 24, Gadimian still held another 550 shares of Puma stock, which represented potential profits of approximately $60,000 (based on Puma’s stock price on July 23 and 24, 2014).

50. Gadimian did not obtain preclearance for his July 2014 trades in Puma securities, and he knew that Puma was in a blackout period during those trades.

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G. Gadimian’s Post-Trading Conduct.

51. On or around July 30, 2014, FINRA notified Puma that FINRA was conducting a review of trading in Puma securities around the company’s July 22, 2014 announcement. Puma retained outside counsel to conduct its own internal investigation.

52. On October 6, 2014, during an interview in connection with Puma’s internal investigation, Gadimian admitted that he traded Puma securities without preclearance and during blackout periods, and that he did so because of “greed.” Gadimian also indicated that he would provide the records for his Puma trades. Gadimian understood that the information he provided might be shared with regulators.

53. On October 7, 2014, at Puma’s request, Gadimian sent an e-mail to Puma’s Chief Financial Officer purporting to “attach[] the July [Fidelity] statement where it has all my trades that FINRA is asking about.”

54. But Gadimian altered his July 2014 Fidelity Investment Report before sending it. Specifically, Gadimian deleted seven pages – which contained all the Puma trades in his IRA account and showed approximately $273,000 in illicit profits – and then re-numbered the pages to hide his alteration.

55. On October 17, 2014, Puma fired Gadimian.

FIRST CLAIM FOR RELIEF

Violations of Section 10(b) of the Exchange Act and Rule 10b-5 Thereunder

56. All of the foregoing paragraphs are incorporated by reference herein. 
57. Gadimian knew, or was reckless in not knowing, that the information he obtained
    

from Puma and Puma’s consulting firm about the I-SPY 2 and 3004 trials was material and nonpublic, and that he owed a fiduciary duty to Puma to keep the information confidential and refrain from trading on it.

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58. Gadimian breached his fiduciary duty to Puma by trading for his own benefit on the basis of material, nonpublic information obtained from Puma and Puma’s consulting firm.

59. At all relevant times, Gadimian acted with scienter.
    
60. By virtue of the foregoing, Gadimian directly or indirectly, in connection with the
    

purchase or sale of securities, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of a national securities exchange, (a) employed devices, schemes, or artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) engaged in acts, practices, or courses of business that operated or would operate as a fraud or deceit upon any person.

61. By his conduct alleged in this Complaint, Gadimian violated 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. Unless restrained and enjoined, Gadimian will continue to violate those provisions of the federal securities laws.

PRAYER FOR RELIEF

Accordingly, the Commission respectfully requests that the Court enter a final judgment:
A. Permanently restraining and enjoining Gadimian, and his agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of the injunction, from violating 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;

B. Ordering Gadimian to disgorge, with prejudgment interest, all ill-gotten gains from the conduct alleged in this Complaint pursuant to Section 21(d)(5) of the Exchange Act, 15 U.S.C. § 78u(d)(5);

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C. Ordering Gadimian to pay a civil monetary penalty pursuant to Section 21A of the Exchange Act, 15 U.S.C. § 78u-1; and

D. Granting such other and further relief as the Court deems just and proper.

JURY DEMAND

   The Commission hereby demands a trial by jury on all issues so triable. Dated: September 29, 2016

Of Counsel:	Respectfully submitted, /s/ Jonathan P. Hooks
Antonia Chion Robert A. Cohen Deborah A. Tarasevich Cheryl L. Crumpton Martin Zerwitz Michael Baker	Jonathan P. Hooks (DC Bar No. 468570) Tel: 202-551-8061 E-mail: hooksj@sec.gov Timothy K. Halloran (DC Bar No. 483245) Tel: 202-551-4414 E-mail: hallorant@sec.gov Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 Counsel for Plaintiff

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