Insider Trading

Pick Your Poison: Regulators Find Overvalued Assets, Securities Fraud, and Insider Trading at Failed Thrift

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In a case involving all of the hallmarks of the housing and economic crisis, on September 25, 2012 the SEC announced that it had charged three Nebraska bank executives and the CEO’s son with violations of securities fraud and insider trading laws stemming from subprime lending, undercapitalization, and the ultimate demise of TierOne Bank.

TierOne Bank was a century-old thrift that had traditionally focused on loans to the agricultural and residential sectors in Midwestern states, but like many banks caught up in the housing boom, in 2004 TierOne expanded into riskier loans in then-exploding markets such as Nevada, Florida, and Arizona. All of these markets would collapse just a few years later, leaving banks like TierOne with significant losses on their books. As a result, in June 2008, the Office of Thrift Supervision gave TierOne a choice: maintain elevated core and risk-based capital ratios or face enforcement action—the top leaders at TierOne allegedly chose neither.

Rather than increase capital ratios or accept an OTS enforcement action, CEO Gilbert Lundstrom, COO James Laphen, and Chief Credit Officer Don Langford allegedly materially understated TierOne’s loan and OREO losses. Not to be confused with the cookie, “OREO” in the banking context refers to “other real estate owned”—in this case real estate that TierOne had repossessed. Though TierOne was left holding real estate from failed markets around the country, its executives allegedly ignored the fact that the value of these assets was based on stale and inadequately discounted appraisals, and consequently made misstatements in its 2008 10-K and a number of other filings. READ MORE →

New SEC Rule Requires Securities Exchanges and FINRA to Work Together to Improve Monitoring of Trading Activity in the U.S.

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On July 11, 2012, the Securities and Exchange Commission (SEC) approved a new rule, which will require the national securities exchanges and self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail. The new consolidated audit trail will improve regulators’ ability to monitor and analyze trading activity. With the approval of Rule 613, the exchanges and FINRA must jointly submit to the SEC a comprehensive plan of how they plan to develop, implement, and maintain the consolidated audit trail. Rule 613 also requires that the consolidated audit trail collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options in all U.S. markets. READ MORE →

Supreme Court Sets Two Year Limit for Section 16(a) Insider Trading Claims

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The United States Supreme Court held on March 26th that the two-year statute limitation for Section 16 insider trading begins to run as the fraudulent trade is or should have been discovered by a shareholder plaintiff.  See Credit Suisse Securities LLC et al v. Simmonds.  This decision was yet another rebuke to the Ninth Circuit, which had previously held that the limitations period for a Section 16(b) claim could be tolled until the insider actually discloses his or her improper trade to the SEC and shareholders.

Defendant underwriters challenged the Ninth Circuit’s holding, calling it contrary to language of Section 16(b) that indicates the limitation period should begin to run as soon as an insider makes a profit from an illegal short-swing trade.  In an unanimous decision penned by Justice Scalia, the Court agreed, noting that if the filing of a Section 16(a) disclosure statement were necessary for Section 16(b) liability to attach, company insiders and underwriters who failed to file a 16(a) disclosure would forever face the possibility of claims under 16(b).  The Court held that “the potential for such endless tolling in cases in which a reasonably diligent plaintiff would know of the facts underlying the action is out of step with the purpose of limitations periods in general.”  The Court did not reach the larger question of whether Section 16(a) are subject to any equitable tolling and thus remanded the case to the Ninth Circuit for further consideration.

The Credit Suisse case is notable because it was one of 55 nearly identical actions filed over ten days in October 2007 by Vanessa Simmonds, then a 22-year old college student.  The cases all alleged Section 16(b) claims against the underwriters and other financial institutions who had participated in IPO’s during the late 1990’s and 2000.