Friday afternoon, the Securities and Exchange Commission (“SEC”) announced that it filed charges against Steven Cohen, manager of SAC Capital Advisors (“SAC Capital”), for failing to adequately supervise his employees and ignoring signs of suspicious trading activity. Cohen is alleged to have missed warning signs that “any reasonable hedge fund manager” should have seen, though the charges fall short of alleging Cohen was directly involved in insider trading. The SEC alleges SAC Capital realized $275 million in profits or avoided losses, and is asking for Cohen to be banned from overseeing investor funds.…
Following the short holiday week, below are notable developments in SEC enforcement activity for the week of Dec. 24-28.
Insider Trading: One More Charged for IBM-SPSS Merger Scheme
The SEC has charged another broker for taking part in an insider trading scheme connected to IBM’s acquisition of SPSS. Trent Martin learned of the impending merger from an attorney friend working on the deal, who confided in Martin for “moral support, reassurance, and advice,” according to the SEC complaint. Martin allegedly purchased SPSS shares the first day he learned of the deal, then tipped his roommate, Thomas Conradt, who was charged earlier this month.
Read the SEC complaint here.…
Below are notable developments in SEC enforcement activity for the week of December 3-7, 2012.
Big Lots CEO Resigns Amidst SEC Inquiry
The CEO of Central Ohio-based Big Lots (NYSE: BIG) is under scrutiny by the SEC surrounding his sale of over $10 million in company stock prior to a negative quarterly earnings report. Big Lots stock fell 24 percent as a result of the April 2012 earnings report. Steven Fishman will retire as soon as a replacement is found, after serving as CEO since 2005.
Chinese Affiliates of Big Four Accounting Firms Charged For Refusing To Produce Documents
The SEC announced charges this week against the Chinese affiliates of the Big Four accounting firms for refusing to produce audit records for Chinese companies under investigation for violations of accounting fraud. According to the SEC’s administrative order, the four firms (as well as BDO) have refused to cooperate with the SEC investigations for months. For the Shanghai office of Deloitte & Touche, these recent charges are similar to those brought by the SEC in May and September.
See the order here.…
Below are updates on notable SEC enforcement activity from the week of November 26-30, 2012:
“White-Out” Firm Found Guilty
Jeffrey Liskov and his firm, EagleEye Asset Management, LLC were found guilty of securities fraud by a jury in Boston. The Plymouth, MA firm was found guilty of misleading investors by misrepresenting the risks associated with investments in the foreign currency exchange (“forex”) market.
The Commission alleged that Liskov and EagleEye persuaded “older” clients to shift investments from low-risk securities into high-risk forex positions based on misleading information. Despite racking up huge losses for the clients, Liskov earned over $300,000 in performance fees. Among the allegations were that Liskov used “white-out” to change names and dates on forms in order to, among other things, fraudulently transfer client assets into forex trading accounts.
After four hours of deliberation, the jury found Liskov and EagleEye liable for violations of Section 10(b) of the Exchange Act, Rule 10b-5, and the Advisers Act.
For more, read the SEC Release.
Insider Trading: Oil Company CEO Charged
Former CEO of Denver-based oil company Delta Petroleum Corporation was charged with insider trading. In the run-up to California-based investment firm Tracinda taking a 35% stake in Delta, former CEO Roger Parker tipped a close friend, who in turn tipped friends and family, according to the SEC complaint. Delta’s stock rose 20% in value once the Tracinda investment was announced. The complaint also alleges Parker provided early insights into a positive earnings report. The SEC obtained emails and phone records in connection with the alleged tipping.…
Earlier this week, Columbus retailer Big Lots Inc. filed suit in Florida against a stock research company that Big Lots claims obtained nonpublic information about inventory, payroll, and margins. Big Lots claims that research firm Retail Intelligence Group stole trade secrets and aided employees’ breach of fiduciary duties by inducing 72 Big Lots managers to disclose the confidential information. Retail Intelligence Group allegedly sold the information to investors in the form of a research report, which correctly predicted decreased performance for the third quarter.
The lawsuit touches on the difficulty of defining what types of behavior should be considered illegal insider trading. Federal securities laws (and case law) generally prohibit trading securities in breach of a duty to the issuer (or otherwise) while in the possession of material, nonpublic information. Research firms are known to estimate inventory, converse with suppliers and customers, and engage experts on specific companies or industries, among other things, in order to predict performance. There is a serious question as to when simply having detailed insight into the health of a corporation morphs into obtaining nonpublic information. Federal courts have historically interpreted the term “nonpublic” to mean information that companies have not widely disseminated.
Of further concern are the implications for Regulation FD raised by this lawsuit. Regulation FD prohibits selective disclosure to market professionals and securityholders of material, nonpublic information unless the information is simultaneously disclosed to the public. Employees certainly cannot tip others with confidential corporate information. But it is possible to conceive of …
On Friday the Cleveland Plain Dealer reported that members of the U.S. House Financial Services Committee bought and sold financial stocks last fall, at the same time that the Committee was approving the bailout, and in the same companies that the Committee would later criticize for incompetence and greed. The article points out two potential problems:
1. The potential for conflicts of interest; and
2. The potential for trading on material, non-public information.
Some of the trades resulted in avoiding significant losses; while perhaps more troubling, some trades resulted in increased losses, which may at least be proof there was no impropriety.
In any event, such trades do not appear to violate Congressional ethics rules (although, arguably they could violate broad rules against using one’s office for “improper advantage”); however, the securities rules are more troublesome. If a member of Congress trades in securities based on material, non-public information provided by a corporate insider, the representative faces possible liability under a tipper/tippee theory assuming other elements of the offense are met. But, if the representative trades based on material, non-public information that results from the representative knowing about a new regulation or government program that will affect a company, liability depends on whether the representative has breached a duty to the source of the information, presumably Congress or some other source to which no duty is owed.
Congressional staffers are not so lucky, as they potentially owe a duty to their representative, the source of the information.
This is not …
The SEC announced yesterday charges against a former Citigroup investment banker who allegedly tipped his friends and family about upcoming mergers involving Citigroup’s healthcare industry clients, resulting in more than $5,000,000 in illegal insider-trading profits.
The case highlights a common insider-trading scenario: an employees uses inside information not to trade stock in his or her employer, but rather to trade stock in the employer’s clients.
In particular, privately-owned companies tend to think of illegal insider trading as a public-company problem, but often private companies and their employees are privy to information about public-company clients that can lead to insider trading concerns.
For example, the healthcare industry has a strong support industry of researchers, policy analysts, consultants, lobbyists, etc., all of whom potentially have access to material non-public information from their public healthcare clients that can be used to engage in illegal insider trading.
This raises a host of issues for private companies that service public companies, including:
- Should we have a company policy regarding employees owning stock in our clients?
- Should we accept stock as payment for services?
- If an employee who knows a lot about the industry makes great stock picks in client stock, will it seem like illegal insider trading even if technically it is not?
- If an employee pieces together a series of seemingly inconsequential non-public information and trades stock based on that information, what are the chances he or she will be accused of illegal insider trading?
- Is there a difference between having a hunch something good will happen
The major U.S. securities exchanges and self-regulatory organizations have agreed to consolidate oversight of insider trading in the hands of two regulators: NYSE Regulation and FINRA. The following equity exchanges and FINRA have signed the agreement, which must now be approved by the SEC:
- American Stock Exchange LLC
- Boston Stock Exchange, Inc.
- CBOE Stock Exchange, LLC
- Chicago Stock Exchange, Inc.
- International Securities Exchange, LLC
- NASDAQ Stock Market, LLC
- National Stock Exchange, Inc.
- New York Stock Exchange, LLC
- NYSE Arca Inc.
- Philadelphia Stock Exchange, Inc.
- NYSE Regulation, Inc. (acting under authority delegated to it by NYSE)
Currently, each securities exchange is responsible for investigating insider trading by its market participants, which amounts to 11 separate programs. The consolidation of power into two regulators is expected to make insider trading investigations more efficient by preventing duplicative efforts and failed detection of illegal activity.
The consolidation may result in more convicted insider traders, or it may simply result in more efficient investigation of insider traders who would have been caught anyway. The Wall Street Journal’s MarketWatch reports FINRA has already referred 104 insider trading cases to the SEC in 2008, compared to 118 in all of 2007. NYSE Regulation has referred 90 cases as of the end of June, compared to 141 in all of 2007.