Saturday, April 5, 2014

SEC Expanding the Scope of Insider Trading

Despite all of the insider trading investigations and cases we have handled there are two aspects of these cases that still amaze us - the convoluted charges that the Commission  sometimes files, and the contortions that some folks go through to avoid detection. For the latter, we recently saw the cases of the middleman who ate the notes with the stock symbol, the investors who thought cell phones would avoid detection, trading in a girlfriend's account to pay alimony Some of these cases involve mere allegations that the SEC cannot prove - like the case against the Florida doctor where attorneys from Sallah Astarita & Cox successfully defended the doctor, and the loss against Mark Cuban, but others involve a poor scheme, or a poor defense strategy.

The SEC has now announced charges in two separate cases against men who allegedly profited by insider trading on confidential information they learned from their wives about Silicon Valley-based tech companies.

"Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust," said Jina L. Choi, director of the SEC's San Francisco Regional Office. "In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it."
It is a questionable legal theory, and a continued expansion, beyond all logical bounds, of 10b-5 liability, but a theory that the SEC continues to pursue.

Image representing Oracle Corporation as depic...In the first case the SEC alleges that Tyrone Hawk of Los Gatos, Calif., violated a duty of trust by trading after he overheard work calls made by his wife, a finance manager at Oracle Corp., regarding her company's plan to acquire Acme Packet Inc. Hawk also had a conversation with his wife in which she informed him that there was a blackout window for trading Oracle securities because it was in the process of acquiring another company. According to the SEC's complaint, Hawk bought Acme Packet shares before the acquisition was announced in February 2013, and reaped approximately $150,000 by selling after the stock price rose 23 percent on the news. According to the SEC, Hawk decided not to fight the charges, and without admitting or denying the allegations, agreed to pay more than $300,000 to settle the SEC's charges.

For those of you not familiar with the SEC penalty and disgorgement calculations, that $300,000 is TWICE his alleged profits. The SEC will typicall seek penalties and disgorgement of THREE TIMES their calculation of the profit, in order to force their targets to settle.

In an unrelated case, the SEC alleges that Ching Hwa Chen of San Jose, Calif., profited from gleaning confidential information in mid-2012 that his wife's employer, Informatica Corp., would miss its quarterly earnings target for the first time in 31 consecutive quarters. During a drive to vacation in Reno, Nev., Chen overheard business calls by his wife, who previously advised Chen not to trade in Informatica securities under any circumstances. However, after they returned from Reno, he established securities positions designed to make money if the stock price fell. Informatica's shares declined more than 27 percent after it announced the earnings miss, and Chen realized nearly $140,000 in profits.

According to the SEC, Chen also decided not to fight and without admitting or denying the allegations, agreed to pay approximately $280,000 to settle the SEC's charges, again twice his alleged profits from the trades.

The SEC has brought other insider trading cases involving individuals who traded on material, nonpublic information misappropriated from spouses. For example, last year the SEC charged a Houston man with insider trading ahead of a corporate acquisition based on confidential details that he gleaned from his wife, a partner at a large law firm that was consulted on the deal. In 2011, the SEC charged an Illinois man who bought the stock of an acquisition target of a company where his wife was an executive despite her requests that he keep the merger information confidential. In a different 2011 case, the SEC charged the spouse of a CEO with insider trading on confidential information that he misappropriated from her in advance of company news announcements.

Unfortunately, because these cases settle, the questionable legal theory is not being tested. Is trading on information gleaned from overhearing a spouse's telephone conversation truly a misappropriation of information. While the misappropriation theory of insider trading has turned the securities statutes on its head, it is the law of the land. Now we have additional expansion of this already expanded theory of liability to cases where nothing is stolen or misappropriated.

The SEC is enacting legislation through its enforcement powers. That is unconstitutional and needs to be addressed by Congress.

The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in representation of brokers and investors in regulatory investigations, including insider trading cases. For a free consultation on any securities regulatory matter, contact Mark Astarita at 212-509-6544 or email us.

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