No Knowledge, No Jail: Second Circuit Clarifies Scope of Tippee Insider Trading Liability

On December 10, 2014, the Second Circuit issued an important decision (U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014)) that will make it more difficult in that Circuit for prosecutors, and most likely the SEC, to prevail on a “tippee” theory of insider trading liability. Characterizing the government’s recent tippee insider trading prosecutions as “novel” in targeting “remote tippees many levels removed from corporate insiders,” the court reversed the convictions of two investment fund managers upon concluding that the lower court gave erroneous jury instructions and finding insufficient evidence to sustain the convictions. The court held, contrary to the government’s position, that tippee liability requires that the tippee trade on information he or she knows to have been disclosed by the tipper: (i) in violation of a fiduciary duty, and (ii) in exchange for a meaningful personal benefit. Absent such knowledge, the tippee is not liable for trading on the information.

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Out of Control: SEC Says Lack of Internal Controls Led to HP Paying More Than $108 Million to Settle FCPA Actions

On April 9, 2014, the Securities and Exchange Commission announced that Hewlett-Packard had agreed to pay more than $108 million to settle Foreign Corrupt Practices Act actions brought by the SEC and the Department of Justice.  These actions were based on HP’s subsidiaries’ alleged payments of more than $3.6 million to Russian, Polish, and Mexican government officials to obtain or maintain lucrative public contracts.  The settlement is important because it highlights the SEC’s and DOJ’s continued focus on companies’ internal controls, particularly in the FCPA arena.  It also shows that the SEC may be able to use lesser, non-fraud offenses in which the underlying conduct involves a fairly de minimis amount of money to police behavior and subject companies to significant financial consequences. 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

The Cop is on the Beat: SEC Chair White Says the Agency Aims to be “Everywhere”

In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.”  She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.

Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani.  According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.”  On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.”  Chair White postulated that the same theory applies to the US securities markets:  minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.”  Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims. Read More

Here’s Looking At You, Money Market Funds

While money market funds did not exist when Humphrey Bogart spoke his famous line in Casablanca, since the 2008 financial crisis, reforming money market funds have been the subject of high drama and intense scrutiny on Capitol Hill. Advocates for reform finally got their long awaited breakthrough last Wednesday, June 5, 2013, when the Securities and Exchange Commission voted unanimously to propose legislation that would reform money market funds. The SEC’s goal with the reform is to make money market funds less susceptible to “runs” that could harm investors.

The SEC’s goal of reform has been in the works for a long time, was championed by former Chair of the SEC, Mary Schapiro, and has been continued by current Chair Mary Jo White. A money market fund is a type of fixed-income mutual fund that invests in debt securities with short maturities and minimal credit risk. They first developed in the early 1970s as an option for investors to purchase a pool of securities that generally provided higher returns than interest-bearing bank accounts. Money market funds have grown considerably since then and currently hold more than $2.9 trillion in assets.

Money market funds seek stability and security with the goal of never losing money and keeping their net asset value (“NAV”) at $1.00. However, many felt reform was necessary after a money market fund “broke the buck” at the height of the financial crisis in September 2008 and re-priced its shares below its $1.00 stable share price to $0.97. Investors panicked and within a few days, investors had pulled approximately $300 billion from similar money market funds. Intervention from the United States Treasury Department prevented further runs on the funds. Read More

The Revolving Door Spins Again

On January 24, President Obama announced his nominee for Chairman of the Securities Exchange Commission – Mary Jo White, a former United States Attorney for the Southern District of New York.

By selecting White, the President is signaling an interest in seeing a more forceful approach at the Commission. Indeed, if confirmed, White will be the first former criminal prosecutor to head the SEC. Previous SEC chairs, by contrast, had established careers in private legal practice, in academia, in business, and in government, either as legislators or, in the case of Harvey Pitt, as general counsel to the SEC (before his long career in private legal practice) — but not as criminal prosecutors. Although White has little regulatory or policymaking experience, she brings to the table a wealth of experience in enforcement, which has been a top priority for the SEC in recent years.

As the United States Attorney for the Southern District of New York from 1993 to 2002, White is best known for winning convictions for the 1993 World Trade Center bombing and for the 1998 bombings of two U.S. embassies in Africa as well as for winning the conviction of mobster John Gotti. The President emphasized, “Today . . . there are rules to end taxpayer-funded Wall Street bailouts once and for all. But it’s not enough to change the law. We also need cops on the beat to enforce the law.” Read More