Category Archives: SEC

SEC Remote Tippee Cases Now Subject to Higher Newman Standard

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The heightened Newman requirements for remote tippee liability apply not only in criminal cases but also in civil cases brought by the SEC.  On April 6, 2015, in SEC v. Payton, Judge Rakoff of the Southern District of New York ruled that the principles set forth in the criminal case, U.S. v. Newman (2d Circuit), apply equally in civil cases brought by the SEC.  That means, among other things, that the SEC must prove that the original tipper received a significant personal benefit from the original tippee.

As Judge Rakoff pointed out, however, there is an important distinction between a remote tippee case brought by the DOJ and one brought by the SEC.  While the DOJ must prove the remote tippee actually knew of the of the personal benefit provided to the original tipper by the original tippee, the SEC can rely on the lower “recklessness” standard.  Recklessness includes conscious avoidance of learning whether there was a direct quid quo pro between the original tipper and tippee.  Thus, in a case where a remote tippee has enough circumstantial facts at hand to raise red flags but refuses to search out whether there is a quid quo pro between the original tipper and tippee, the remote tippee may be civilly liable.

By applying Newman to SEC cases, the Court made it clear that the Government will have to be careful in bringing remote tippee cases, whether they are civil or criminal.  That said, all other things being equal, the safer path for the Government will likely be to go the SEC/civil route.

Judge Rakoff’s decision can be found here.  http://www.scribd.com/doc/261139623/SEC-v-Payton-Rakoff-Opinion-April-6-2015

Employers Beware – SEC Charges Company for Stifling Whistleblower Activity

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Employers conducting internal investigations often have employees sign agreements requiring them to acknowledge the confidential nature of employee interviews. Less common are agreements that prohibit employees from discussing the interview with anyone outside the company on the pain of possible termination for such disclosure. On April 1, 2015, the SEC found such an agreement, required by a global engineering firm, to violate SEC Rule 21F-17. That Rule, adopted pursuant to Dodd-Frank, prohibits companies from taking, “any action to impede an individual from communicating directly with the [SEC] about a possible securities violation, including … threatening to enforce a confidentiality agreement.”

The firm, KBR Inc., had required witnesses in internal investigations to sign confidentiality statements with language warning that they could face discipline or be fired if they discussed the matters with persons outside KBR. Although there was no evidence that KBR had actually sought to enforce the confidentiality statement, KBR nonetheless agreed to pay a $130,000 penalty and amend its confidentiality statement to make clear that employees may report potential securities violations to the SEC and other federal agencies without fear of retribution.

Bottom line: Companies conducting internal investigations that want to have witnesses acknowledge the confidential nature of interviews should amend their agreements and statements to reflect that employees may report potential violations to the Government without fear of any adverse employment action. In fact, companies seeking to avoid this problem may want to consult the amended language adopted by KBR in the SEC Order –   http://www.sec.gov/litigation/admin/2015/34-74619.pdf.