Monday, December 10, 2012

Tipper-Tippee Liability Issues in Insider Trading

Insider trading cases can often become widespread, as the Commission moves through the chain of tips. In another case announced this week, the Securities and Exchange Commission charged an investment banker who was primarily based in Charlotte, N.C., and nine others involved in an insider trading ring that garnered more than $11 million in illicit profits trading on confidential information about impending mergers.

Keeping in mind that tippers are responsible for the trades of their tippees, this case takes on a whole new angle. And remember that the fines can include disgorgement of all profits (without giving effect to losses) and a two times penalty.

In the newest case the SEC alleges that John W. Femenia misused his position at Wells Fargo Securities to obtain material, nonpublic information about four separate merger transactions involving firm clients. Upon learning inside information about an impending deal, Femenia’s first call to set the insider trading ring in motion was typically to his longtime friend Shawn C. Hegedus, who worked as a registered broker. Femenia and Hegedus illegally tipped other friends who in turn tipped more friends or family members in a ring that spread across five states.

The SEC has obtained a court order freezing the assets of the illegal traders.
“Here you have an investment banker who clearly knew better that inside information can’t form the basis of trading decisions,” said William P. Hicks, Associate Director for Enforcement in the SEC’s Atlanta Regional Office. “Instead he basically started a phone tree of nonpublic information to enrich friends and others.”
More details are available at SEC Charges 10 in Insider Trading Ring Around Investment Banker's Illegal Tips on Impending Mergers; 2012-255; December 5, 2012.
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