Insider Trading Gets Political: Trading on Political Intelligence

Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.

The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. Read More

Patience is a Virtue: District Court Suggests that the SEC “Wait and See” Before Seeking Certain No-Admit, No-Deny Settlements

On June 18, 2014, Judge Victor Marrero of the U.S. District Court for the Southern District of New York approved the SEC’s no-admit, no-deny consent decrees in its insider trading case against CR Intrinsic Investors, LLC and affiliated entities.  In approving the decrees, however, the court called on the SEC to take a “wait and see” approach in cases involving parallel criminal actions arising out of the same transactions alleged in its complaint.

The decision follows the much-anticipated opinion in SEC v. Citigroup Global Markets (“Citigroup IV”), in which the Second Circuit vacated Judge Rakoff’s order refusing to approve a no-admit, no-deny consent decree between the SEC and Citigroup.  The Second Circuit found that district courts are required to enter proposed SEC consent decrees if the decrees are “fair and reasonable,” and if the public interest is not disserved.  A court must focus on whether the consent decree is procedurally proper, and cannot find that a proposed decree disserves the public based on its disagreement with the SEC’s use of discretionary no-admit, no-deny settlements.

Read More

SEC Bats 0-for-2 on Insider Trading

A California federal jury sided against the U.S. Securities and Exchange Commission on Friday, June 6, finding the founder of storage device maker STEC Inc. not guilty on insider trading charges.  This is the second insider trading loss in a week for the SEC, following a May 30 defeat in which a New York federal jury rejected insider trading allegations against three defendants, including hedge fund manager Nelson Obus.

In STEC, the SEC alleged that founder Manouchehr Moshayedi made a secret deal with a customer to conceal a drop in demand in advance of a secondary offering.  According to the complaint, Moshayedi knew that one of STEC’s key customers, EMC Inc., would demand fewer of STEC’s most profitable products than analysts expected.  The SEC alleged that he then made a secret deal that allowed EMC to take a larger share of inventory in exchange for a steep, undisclosed discount.

Read More

Honey, You Did What? SEC Charges Yet Another Spouse with Insider Trading

On March 31, 2014, the Securities and Exchange Commission brought insider trading charges against Ching Hwa Chen, the husband of a corporate insider, alleging that he misappropriated financial information from his wife and then shorted her employer’s stock, netting $138,000 in ill gotten gains.  SEC v. Chen, No. 5:14-cv-01467 (N.D. Cal).  The SEC’s allegations (taken from its complaint) are as follows:  Chen’s wife was the Senior Tax Director of Informatica, a data integration company.  In late June 2012, Informatica learned it would miss its revenue guidance for the first time in 31 consecutive quarters.  That miss caused the defendant’s wife to work more than usual as the company scrambled to close its books and prepare for a potential pre-release of its quarterly revenues.  Over the next several days, the defendant overheard his wife’s phone calls addressing the revenue miss, including on a four-hour drive to Reno, Nevada where his wife fielded calls from the passenger seat as he drove.  Early the next week, convinced that Informatica’s stock would lose value, Chen bet heavily against the company, shorting its stock, buying put options, and selling call options.  In early July, after announcing the miss, Informatica’s stock price fell 27% from $43 to $31.  Chen closed out all of his positions that same day. Read More

I’m Ready for My Close-up: SEC Puts the Focus on Moviemaker Over Hostile Takeover Maneuvers

In a story right out of the movies, complete with “poison pills” and “white squires,” the SEC announced on March 13, 2014 that motion picture company Lions Gate Entertainment Corporation settled charges that it failed to disclose to investors a set of “extraordinary” corporate transactions designed to thwart takeover efforts by investor Carl Icahn.

The tale of intrigue and midnight board meetings can be traced to Icahn’s efforts, beginning in 2008, to acquire control of Lions Gate. Despite his eventually gaining beneficial ownership of nearly 40 percent of Lions Gate’s outstanding shares, the company rejected various demands from Icahn over the years, including a demand to appoint five of the twelve seats on the Board of Directors.  In March, 2010, Icahn made a tender offer with a premium over the market price to entice shareholders to sell.  To thwart Icahn’s tender offer, Lions Gate adopted a poison pill and began to look for ways to keep the company out of Icahn’s hands. Read More

Trading on Tips: SEC May Seek Disgorgement from Trader for Gains in Investment Fund

A trader who uses material nonpublic information to execute trades but does not personally benefit from the resulting gains may nonetheless face disgorgement of all profits, according to a recent Second Circuit opinion.  In Securities Exchange Commission v. Contorinis, No. 12-1723, the Second Circuit affirmed a judgment from the Southern District of New York requiring defendant Joseph Contorinis, a former hedge fund manager at Jeffries & Co., to disgorge nearly $7.3 million in profits realized through an investment fund he had managed.  The court rejected the argument a person can only disgorge profits that are personally enjoyed and instead found that disgorgement may also apply unlawful gains that flow to third parties.  Relying on a principle that the limit for disgorgement is the total amount of gain flowing from illegal action, the Second Circuit concluded that district courts may impose disgorgement liability for gains that flow to third parties. Read More

SEC Speaks, Cuban Tweets

The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C.  The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers.  In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference.  During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.

From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More

SAC Pleads Guilty to Five Counts of Securities Fraud; Agrees to Pay Largest Fine in History for Insider Trading Offenses

SAC Capital Advisors pleaded guilty last Friday to securities fraud claims brought by the U.S. Attorney in Manhattan.  If approved, the deal would require SAC to pay a $1.2 billion penalty, including a $900 million criminal fine and $284 million civil forfeiture, and to cease operation of its outside investment business.  Appearing on behalf of SAC, Peter Nussbaum, general counsel for the hedge fund, offered the plea of five counts of securities and wire fraud charges based on the allegations that the company allowed rampant insider trading among its employees.  More than merely turning a blind eye, SAC allegedly went out of its way to hire portfolio managers and analysts who had contacts at corporations and failed to monitor and prevent trades based on their inside knowledge.

Mr. Nussbaum expressed “deep remorse” for each individual at SAC who broke the law, taking responsibility for the misconduct which occurred under SAC’s watch.  He also noted that “even one person crossing the line into illegal behavior is too many,” but emphasized that despite the six former employees that SAC admitted engaged in insider trading, “SAC is proud of the thousands of people who have worked at our firm for more than 20 years with integrity and excellence.”  The six former employees, Noah Freeman, Richard Lee, Donald Longueuil, Jon Horvath, Wesley Wang and Richard C.B. Lee, had already pled guilty to insider trading-related claims.  Critics have called for the judge to reject the plea, arguing that SAC has not taken enough responsibility.  Prosecutors have indicated that had the case gone to trial, evidence would have shown that far more than six people were involved in the insider trading there. Read More

NBA Team Owner Mark Cuban “Talks Trash” After Defense Verdict

Following a defense verdict in the insider trading case brought against him by the SEC, Dallas Mavericks owner Mark Cuban has not been sitting on the bench—but rather using his blog to stay on the offensive.  Since the October 16, 2013 verdict, Cuban continues to post about the case on his blog—including, just a few days ago, blogging about when his own blog became the focus of the trial.  According to his October 26 post, an SEC attorney asked him during trial if everything he posted on his blog was true information, to which he replied that it was meant more “to communicate a point” and stimulate discussion.  Following up, the SEC attorney  asked: “If you post on your blog that you think the Lakers are going to stink in 2013 . . . you’re not telling this jury that that’s an opinion you don’t honestly hold, right?”   Cuban posted that the courtroom “cracked up” when he replied “This year?”, before going on to answer: “Well, no.  In 2004, I wouldn’t say it.  They had Shaq, they had Kobe, they actually went to the finals . . . To answer your question, if I said in 2004 that they stink, I didn’t believe it.”  In an earlier blog entry, Cuban also poked fun at the former Head of Enforcement—posting about internal emails, disclosed earlier in the case, in which SEC attorneys commented on photos of Cuban. Read More

Securities Litigation Trends in Q2 2013: What’s Up (or Should We Say Down)?

The second quarter of 2013 saw the largest quarterly percentage decline in new securities actions since before the 2007/2008 financial crisis. New filings in the first quarter plummeted by 41 percent, from 352 in the first quarter to 234 in the second quarter. This drop represents a 55 percent decrease in the number of new securities actions filed as compared to same period last year (Q2 2012). It has been approximately five years since we have seen a lower number of quarterly filings.

The number of new securities fraud cases also plummeted, falling 59 percent from the prior quarter, with the number of new filings decreasing from 149 to 61. There were also quarterly declines in newly-filed shareholder derivative actions, which decreased from 43 filings in the first quarter to 37 in the second quarter, and breach of fiduciary duty cases, which fell from 99 new filings in the first quarter to 71 in the second quarter.

Not only did the number of securities actions filed drop significantly, but so too did the average settlement amounts. The average settlement for all types of securities cases in the second quarter was just over $37 million, a marked decrease from the average settlement amount of $69.3 million during the first quarter of 2013.

What’s going on? There are a number of factors that may be contributing to these downward filing trends. The stock market has been strong, so many investors have little to complain about. Moreover, the surge in suits against U.S.-listed Chinese companies appears to have run its course, and no new scandal or market development has yet become the next “big thing” that will drive increased filings. In addition, SEC enforcement activities have continued to shift into areas (such as insider trading and whistleblowing) that do not always spawn parallel private litigation. It remains to be seen whether the recent appointment of new SEC personnel or a renewed focus on accounting fraud cases by regulators, which is anticipated by some analysts, will cause a variation in these trends moving forward.

Source = Advisen D&O Claims Trends: 2013 Report (July 2013)