Archive for the ‘insider trading’ Category
Steven Cohen could be the Alex Rodriguez of Wall Street. Like the New York Yankees’ $275 million slugger, the boss of hedge fund SAC Capital faces sanctions for allegedly employing an illegal “edge.” Yet it’s unclear that either broke arguably fuzzy rules. And trying to level their respective playing fields is probably futile. Ultimately, baseball and Wall Street are bigger than both.
The comparison may be debatable, but their stardom isn’t. Cohen has earned legendary 25 percent annual returns even after charging investors fees of 3 percent of assets and 50 percent of gains. A-Rod is a 12-time all star, three-time most valuable player and 10-time recipient of the Silver Slugger Award for best-hitting third baseman in the American League.
And like most stars, both constantly seek an advantage. For Cohen and his minions, that takes the form of information and insights largely reaped from research and a network of contacts. For Rodriguez, it’s intense workouts and, perhaps, performance-enhancing substances.
Now their careers are in doubt. While SAC faces criminal securities fraud charges, Cohen stands accused of failing to supervise employees charged with insider tradingâ€”and could be barred from the financial industry. A-Rod, a steroid user in the past, faces a 211-game suspension for recent, alleged doping offenses that could finish him in baseball.
Yet the legal lines aren’t necessarily clear. Using tips from solid sources is often just savvy investing, not insider trading. And failing to ask employees about their sources rarely amounts to wrongdoing. Rodriguez’s name on a shady character’s doping records isn’t proof of illegal drug use â€”and the athlete seems to have never failed a drug test.
The two cases differ, of course, in important ways. But both watchdogs involvedâ€”the Securities and Exchange Commission in Cohen’s action and Major League Baseball in A-Rod’sâ€”have their work cut out for them. If their aim is to punish clearly culpable individuals, it may be worth the effort. Neither, however, should assume their actions can help put traders or ballplayers on an equal footing.
High-level competitors will always search for an edge, and some will cross a forbidden line. Despite what federal prosecutions may suggest, though, insider trading is rare on Wall Street, just as steroids probably are in baseball. Both institutions will survive the shortcomings of even their biggest stars.
In case you missed it this afternoonâ€”and let’s face it, you probably didâ€”I was on the radio with Michael Yorba talking about the JOBS Act and the insider trading scourge. You can listen to the brief segment below.
Here’s the clip:
The federal indictment charging “substantial” insider trading at SAC Capital Advisors details how information allegedly leaked by a Dell insider found its way to SAC Capital’s portfolio managers.
If anyone keeps SAC Capital founder Steven A. Cohen up at night, it’s likely to be Preet Bharara, the U.S. Attorney for the Southern District of New York. Bharara’s office charged SAC Capital and associated entities with securities fraud and wire fraud in connection with a long-running insider trading investigation.
Here’s a link to a copy of the indictment filed by the U.S. Attorney for the Southern District of New York’s office against SAC Capital Advisors LP, SAC Capital Advisors LLC, CR Intrinsic Investors LLC and Sigma Capital Management. It alleges insider trading that was “substantial, pervasive and on a scale without precedent in the hedge fund industry. Check back here throughout the day for updated information. Reuters also has a live blog about the SAC Capital investigation.
Here’s a link to a copy of U.S. Attorney’s Richard Lee indictment.
Lastly, here’s a link to a copy of the government’s civil forfeiture complaint against SAC Capital.
Insider trading continues to dominate the headlines in the financial press. Even after a number of recent “blockbuster” enforcement actions, convictions and settlements in the last three years, the SEC’s acting head of enforcement is reported to have said that there is a lot more to come in insider trading enforcement.
Given that insider trading has been, and by all indications will continue to be, a top enforcement priority for the SEC, it is more important than ever for financial professionals to understand the elements of insider trading liability.
This article will provide a brief summary of the key elements of prohibited insider trading.
Definition of Insider Trading
Insider trading is, in short, the purchase or sale of securities on the basis of material, non-public information in breach of a duty arising out of a fiduciary relationship or other relationship of trust and confidence. There are two primary theories of insider trading liability: the “classical” theory and “misappropriation” theory, which are discussed below under “Breach of Duty.”
On the Basis Of
Liability for insider trading requires that a trader purchase or sell securities “on the basis of” material non-public information. “On the basis of” sounds like it means that the trader’s decision to purchase or sell securities was influenced by material, non-public information. However, this is not how the “on the basis of” requirement is applied by the SEC in practice. Pursuant to the SEC’s Rule 10b5-1, a purchase or sale of a security is “on the basis of” material non-public information if the trader was aware of the material non-public information when he made the purchase or sale.
Also, as set forth in the definition above, in order to be liable for insider trading the information being traded on must be non-public. The dividing line between what is “non-public” and “public” is not exact.
Information is most likely to be considered public when it has been disclosed in a manner sufficient to ensure availability to the investing public, for example, through a major news wire service, and sufficient time has passed since its dissemination for investors to have absorbed the information. Information that has not been widely disseminated, such as government records that are publicly available and information obtained through Freedom of Information Act requests may also be deemed public. However, under certain circumstances, hard-to-find information, although publicly available, may be considered non-public by the SEC and courts.
There is also no bright line between information that is material and not material. In general, for information to be material there must be a substantial likelihood that a reasonable investor would consider it important in deciding whether or not to purchase or sell a security. Said slightly differently, there must be a substantial likelihood that the information would be viewed by a reasonable investor as significantly altering the total mix of information available about the security. Material, non-public information includes both confidential information originating from within a company, so called “corporate information,” and information that originates from outside of a company but is price sensitive with respect to a company’s securities, so called “market information.”
Breach of Duty
The statutory basis for insider trading is Section 10(b) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5, which make it unlawful for any person to engage in any act, practice or course of business that would operate as a fraud or deceit upon any other person in connection with the purchase or sale of a security. The breach of duty requirement reflects that insider trading is a deceit or fraud on the source of the information.
Under the classical theory of insider trading, which applies to insiders of a corporation, an insider breaches his or her duty of trust and confidence to the corporation and its shareholders when the insider trades on material, non-public information learned by reason of his or her position with the corporation.
The misappropriation theory of insider trading is a complement to the classical theory that applies to market participants other than corporate insiders. Under the misappropriation theory, a person engages in illegal insider trading when he or she trades while in possession of material, non-public information in breach of a duty owed to the source of information. For purposes of the misappropriation theory, such a duty may arise as a result of a fiduciary relationship, such as an attorney-client relationship, or a result of an agreement, such as an agreement to maintain information in confidence, and under other circumstances as well.
Tipper and Tippee Liability
Under both the classical and misappropriation theories of insider trading, tippers and tippees of material, non-public information may face liability for insider trading. The standards for liability under both theories generally overlap.
Tipper liability requires that (1) the tipper had a duty to keep material non-public information confidential, and the tipper knew that the information was non-public and material, or acted with reckless disregard of the nature of the information; (2) the tipper breached that duty by intentionally or recklessly relaying the information to a tippee who could use the information in connection with securities trading; and (3) the tipper received a personal benefit from the tip.
Tippee liability requires that (1) the tipper breached a duty by tipping confidential information; (2) the tippee knew or had reason to know that the tippee improperly obtained the information (i.e., that the information was obtained through the tipper’s breach); and (3) the tippee, while in knowing possession of the material non-public information, used the information by trading or by tipping for a personal benefit.
The “personal benefit” requirement referred to above for tipper liability is broadly construed and is not limited to pecuniary benefit. If the tipper and tippee are friends, relatives or business associates, the existence of a personal benefit will almost always be found.
Also, a tippee need not know definitively that the tipper disclosed the material, non-public information in breach of a duty. Insider trading liability will attach if the tippee should have known of the tipper’s breach. Whether a tippee should have known of the tipper’s breach is a fact specific inquiry, but an important factor may be the sophistication of the tippee. Financial professionals may be viewed as being particularly sophisticated.
Insider Trading in the Context of Tender Offers
The SEC’s Rule 14e-3 governs insider trading in the context of tender offers. Rule 14e-3 provides that if a bidder has taken a substantial step to commence a tender offer, no other person who possess material, non-public information relating to the tender offer that was acquired, directly or indirectly, from the bidder, the target company, or any insider or other person act on behalf of the bidder or the target company, can buy or sell the target company’s securities, unless the material, non-public information is publicly disclosed. Rule 14e-3 also prohibits “tipping” of material, non-public information regarding a tender offer to third parties. Note that there is no requirement under Rule 14e-3 that trader be in breach of a duty of trust and confidence for liability to attach.
Foreign Insider Trading Laws
It is also important to appreciate that there are differences between the regulation of insider trading in the United States and foreign jurisdictions. In Canada, Europe, Australia, Japan and other foreign jurisdictions laws prohibiting insider trading differ substantially from insider trading laws in the U.S. and in some cases extend to conduct that would not be considered wrongful under U.S. laws. For example, in some foreign jurisdictions a breach of a duty of trust and confidence is not required to establish insider trading liability.
In light of the SEC’s enforcement efforts, investors, financial firms and issuers of securities need to be aware of insider trading laws, properly train and educate employees concerning insider trading compliance, develop policies and procedures that anticipate insider trading compliance concerns and when necessary consult experienced legal counsel.
Greg Kramer is a partner in the corporate and securities practice areas of Kleinberg, Kaplan, Wolff & Cohen, P.C. He has extensive experience advising clients in connection with trading and compliance issues such as evaluating potential trading restrictions, insider trading issues and advising on compliance with short sale rules, Regulation M and Rule 144. Kleinberg, Kaplan, Wolff & Cohen is a leading New York law firm representing clients in transactional, regulatory, trusts and estates, tax, real estate, litigation and securities matters. For more information, please visit www.kkwc.com..
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author.
NEW YORK (Reuters)â€”A former hedge fund consultant who cooperated with the government’s sprawling insider trading probe was sentenced to two years probation on Wednesday [Jan. 9] by a federal judge.
U.S. District Judge Jed Rakoff sentenced Wesley Wang in an afternoon proceeding during which the judge said, “the extent of Mr. Wang’s cooperation goes beyond that of most cooperators.”
Mr. Wang, who is required to continue to assist authorities as part of his sentence, pled guilty in July to two counts of conspiracy to commit securities fraud.
Prosecutors used testimony from Mr. Wang this past summer in the insider trading trial of a former employer, money manager Doug Whitman, who ran Whitman Capital in Menlo Park, Calif. Mr. Whitman was convicted in August on securities fraud and conspiracy charges.
Prosecutors said Mr. Wang provided them with information on as many as 20 people who may have been involved in improper trading. Another person he named was Dipak Patel, a former portfolio manager at Steven A. Cohen’s $14 billion hedge fund SAC Capital Advisors.
Mr. Wang, who once worked for Mr. Patel at SAC, said he passed on inside information to Patel about several technology companies, according to a sentencing filed by prosecutors before the proceeding.
“I am disappointed in myself and I am trying to contribute back to my society,” Mr. Wang said during the proceeding. Mr. Wang currently lives in northern California.
Mr. Patel recently surfaced in a letter filed by federal prosecutors in connection with Wednesday’s sentencing. Mr. Patel, who left SAC Capital in February 2011 and has not been charged with any wrongdoing, could not be reached for comment.
An SAC Capital spokesman did not return a request for comment.
The case is U.S. v. Wesley Wang, case No. 12-cr-00541, in US District Court, Southern District of New York.