On June 1, the Second Circuit in Tilton et al. v. SEC, No. 15-2103 (2d. Cir. Jun. 1, 2016), echoed recent Seventh and D.C. Circuit decisions (respectively, Bebo v. SEC, No. 15-1511 (7th Cir. Aug. 24, 2015), cert. denied, 136 S. Ct. 1500 (Mar. 28, 2016), and Jarkesy v. SEC, No. 14-5196 (D.C. Cir. Sept. 29, 2015)) in finding that constitutional or other challenges to SEC proceedings cannot go forward in court until the administrative proceeding ends; review can only be sought as an appeal from a final decision by the Commission. The Second Circuit’s decision in Tilton creates unanimity among the circuit courts that have addressed the issue to date, although, as we previously reported, the Eleventh Circuit is likely to rule on the issue sometime this year in Hill v. SEC, No. 15-12831. Unless the Eleventh Circuit bucks this trend and creates a circuit split, it now looks unlikely that the Supreme Court will weigh in on this issue (particularly because the Supreme Court previously denied a petition to review the Seventh Circuit’s decision in Bebo).
On March 4, 2016, the Second Circuit affirmed the dismissal of two related securities actions against Sanofi Pharmaceuticals, its predecessor Genzyme Corporation, and three company executives (collectively, “Sanofi”). In doing so, the Second Circuit offered its first substantial interpretation of the Supreme Court’s March 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), which addresses how plaintiffs can allege securities claims based on statements of opinion.
The ripple effects of the Second Circuit’s landmark insider trading decision, United States v. Newman, 773 F.3d 438 (2d Cir. 2014), were felt again last week. On Tuesday, February 23, 2016, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) ruled that Former Neuberger Berman Analyst Sandeep “Sandy” Goyal, whom the SEC previously barred from the securities industry after he pled guilty to insider trading, could participate in the industry again. The SEC’s rare decision to lift an administrative bar order resulted from Newman, (previously discussed at length here), which led to Goyal’s criminal conviction being vacated and the civil claims against him being dropped by the SEC. Newman raised the bar for what prosecutors in tipper/tippee insider trading cases have to show by holding that tipper/tippee liability requires the tipper to receive a “personal benefit” amounting to a quid pro quo or pecuniary benefit in exchange for the tip and the tippee to know of that benefit. Despite the SEC’s decision to drop the administrative bar against Goyal in light of Newman, as recently as SEC Speaks on February 19-20, 2016, SEC Deputy of Enforcement Stephanie Avakian affirmed that insider trading cases “continue to be a priority” for the Commission. Nonetheless, the ripple effects of Newman continue to call the government’s ability to successfully bring both criminal and civil cases into question.
On September 10, 2015, a divided panel of the Second Circuit issued an opinion in Berman v. Neo@Ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015), creating a split with the Fifth Circuit on an issue that has also divided lower federal courts: whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to tipsters who claim retaliation after reporting internally, or only to those retaliated against after reporting information to the SEC. The Second Circuit, granting Chevron deference to SEC interpretive guidance, held that Dodd-Frank protections apply to internal whistleblowers. This stands in contrast to the Fifth Circuit’s holding in Asadi v. G.E. Energy (USA), LLC, 720 F.3d 620 (5th Cir. 2013), where that court found that on their face, the Dodd-Frank anti-retaliation provisions unambiguously limited protection to whistleblowers reporting to the SEC, and that, therefore, the SEC’s contrary guidance was not entitled to deference. Given this Circuit split, Supreme Court review is possible.
On August 4, 2015 the Securities and Exchange Commission issued interpretive guidance elaborating its view that the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply equally to tipsters who claim retaliation after reporting internally, as well as those who are retaliated against after reporting information to the SEC. The guidance reflects that there is a split among federal courts over whether Dodd-Frank’s whistleblower retaliation provisions apply to internal as well as external reporting, and recognizes that the only circuit court to decide the issue to date, the Fifth Circuit, has taken a contrary position to that of the Commission in Rule 21F, the regulation the SEC adopted to implement the whistleblower legislation, holding that internal reports are not protected by Dodd-Frank. Whether internal reports qualify for Dodd-Frank coverage has important implications because, among other things, Dodd Frank provides enhanced recoveries (including two times back pay) and longer time frames (six years) for bringing a retaliation claim than would be available under the anti-retaliation provisions in the Sarbanes-Oxley Act of 2002.
Today, the Solicitor General filed a petition for a writ of certiorari in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), asking the United States Supreme Court to address the standard for insider trading in a tipper-tippee scenario. Specifically, the Solicitor General argues that the Second Circuit’s Newman decision is in conflict with the Supreme Court’s 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), and the Ninth Circuit’s recent decision in United States v. Salman, No. 14-10204 (9th Cir. July 6, 2015). Because the Supreme Court grants certiorari in nearly three out of four cases filed by the Solicitor General, the likelihood of a cert grant in Newman is particularly high.
In United States v. Salman, the Ninth Circuit recently held that a remote tippee could be liable for insider trading in the absence of any “personal benefit” to the insider/tipper where the insider had a close personal relationship with the tippee. This opinion is significant in that it appears at first glance to conflict with the Second Circuit’s decision last year in United States v. Newman, in which the court overturned the conviction of two remote tippees on the grounds that the government failed to establish first, that the insider who disclosed confidential information in that case did so in exchange for a personal benefit, and second, that the remote tippees were aware that the information had come from insiders. READ MORE
The fall-out from the Second Circuit’s decision in U.S. v. Newman continued last week in SEC v. Payton, when Southern District of New York Judge Jed S. Rakoff denied a motion to dismiss an SEC civil enforcement action against two former brokers, Daryl Payton and Benjamin Durant, one of whom (Payton) had just had his criminal plea for the same conduct reversed in light of Newman. Although the United States may be unable to make criminal charges stick against some alleged insider traders under a standard of “willfulness,” Judge Rakoff found that the SEC had sufficiently alleged that related conduct of the two brokers at the end of the tip line was “reckless,” satisfying the SEC’s lower civil standard.
Last week, a New York federal judge struck another blow to prosecutorial efforts to secure insider trading convictions in tipper-tippee cases. As discussed in detail here, the U.S. Attorney’s Office for the Southern District of New York suffered a high-profile defeat in an insider trading case last month, when the Second Circuit issued its decision in U.S. v. Newman, No. 13-1837, 2014 WL 6911278 (2d Cir. Dec. 10, 2014). In Newman, the Second Circuit found that prosecutors in tipper-tippee cases must prove both that the tipper (the individual disclosing inside information in breach of a duty) received a personal benefit in exchange for the disclosure, and that the tippee (the individual receiving and trading on the information) knew about the tipper’s receipt of that benefit. In the wake of Newman, U.S. Attorney Preet Bharara and others expressed concerns that the decision could limit future insider trading prosecutions.
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.