Disney said it was fully cooperating with an investigation into allegations by U.S. prosecutors that Bonnie Hoxie, an assistant to the head of corporate communications, and boyfriend Yonni Sebbag tried to sell insider information to more than 30 hedge funds.
The reference in the complaint to conversations regarding the ABC Network were and are false, Disney added.
Hoxie is accused of giving confidential information about Disney's earnings to Sebbag, who in turn tried to sell it to U.S. and European hedge funds, according to criminal and civil charges filed in New York on Wednesday.
Hoxie and Sebbag -- otherwise known as Jonathan Cyrus -- were arrested by FBI agents in Los Angeles, law enforcement officials said.
U.S. prosecutors in New York have been cracking down on insider trading, but this investigation is not part of the closely watched probe that ensnared Galleon hedge fund founder Raj Rajaratnam and 20 others in October and November last year from Wall Street to Silicon Valley.
In an FBI sting operation, undercover agents contacted Sebbag, who in one email said he had learned Disney was in talks to sell ABC, a subject of speculation on Wall Street the company has never confirmed.
Shares of Disney ended 2.3 percent higher at $33.07 on the New York Stock Exchange on Wednesday after rising as much as 4.7 percent earlier. Analysts said the shares had risen earlier on the claims regarding ABC rather than the insider trading charges.
It's a total embarrassment for Disney, but it can happen to any company. But what's far more interesting from the share value perspective is if they are selling ABC, said Alan Gould, an analyst with Soleil Research.
Court documents said Hoxie and Sebbag conspired from March through May 25 of this year to try to profit from confidential information available to Hoxie as the assistant to an executive.
An undercover FBI agent who identified himself as a hedge fund trader began communicating with Sebbag on March 11, court documents said. On March 15, Sebbag wrote that Disney's chief executive was in advanced talks to sell ABC.
Bob Iger is in serious and advanced negotiations with two private equity firms to sell them the ABC network but no price has been determined yet, Sebbag wrote in the email, according to the criminal complaint.
The U.S. Securities and Exchange Commission filed related civil charges. Its complaint said Sebbag was Hoxie's boyfriend. It said they sent anonymous letters to U.S. and European hedge funds, offering a pre-release of Disney second-quarter 2010 results in exchange for a fee.
The criminal complaint filed in Manhattan federal court in New York charged Hoxie, 33, and Sebbag, 29, with conspiracy and wire fraud in allegations of illegal insider trading. The charges carry a maximum possible sentence of 20 years' imprisonment should they be found guilty.
They are scheduled to make an initial appearance before a judge in Los Angeles later on Wednesday.
The case is being prosecuted in New York rather than in Los Angeles because the pair contacted several hedge funds in New York. Sebbag stayed at a Manhattan hotel during a trip to collect payment for the sale of the confidential information about Disney, the complaints said.
At that meeting on May 14 with two putative traders, in reality FBI agents, Sebbag was paid $15,000 in cash.
Sebbag, with an envelope containing $15,000 in his grasp, revealed his true identity to the supposed traders and discussed building their relationship by providing more confidential Disney information in future, the complaints said.
According to a recording of the meeting, Sebbag told the undercover FBI agents his source at Disney was an assistant to one of the top five executives at the company. He said she had access to emails about sensitive business information.
It's not (a one-time deal), Sebbag said, according to the criminal complaint. For as long as (the Tipper) is in place, we're continuing. And I'll make sure that that person stays in place, in her position ... because some chunk of my money, I'm going to give it to her.
The SEC complaint said that on the same day Hoxie sent confidential earnings information, she told her boyfriend she had her eye on a $700 Stella McCartney designer handbag and shoes in a luxury department store.
The case is USA v Bonnie Hoxie et al, U.S. District Court for the Southern District of New York No. 10-mag-1113.
(Reporting by Sue Zeidler and Lisa Baertlein in Los Angeles and Grant McCool in New York; Editing by Edwin Chan, Tim Dobbyn and Matthew Lewis)