Tag Archives: Insider trading

Senate Bill Would Increase SEC Penalties To $1 Million And Up

Under a Senate bill, the SEC would be able to administratively impose a maximum $1 million per violation penalty on individuals and a maximum $10 million per violation penalty on financial firms for the most serious (e.g., fraud, deceit) violations.  The current levels are substantially lower — at $181,071 for individuals and $905,353 for firms — though the SEC is empowered to go to federal court to get the equivalent of the ill-gotten gains in a given case.

Under the proposed measure, the SEC would not have to go to federal court to get large remedies, though the total remedy per violation would be capped – the maximum penalty for an individual could not exceed, for each violation, the greater of (i) $1 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.  The maximum amount that could be obtained from entities could not exceed, for each violation, the greater of (i) $10 million, (ii) three times the gross pecuniary gain, or (iii) the losses incurred by victims as a result of the violation.

In addition, individuals and firms that were found civilly or criminally liable for securities law violations in the 5 years leading up to a new violation could face up to three times the new caps, e.g., penalties of $3 million/$30 million.

It is important to note that SEC administrative or “in-house” courts have faced substantial constitutional challenges recently and are often considered subject to agency bias.  At a minimum, it is clear that the SEC courts lack some of the procedural safeguards provided in federal court.  If the Senate bill becomes law, the SEC will have significantly increased leverage in negotiations with respondents not only because of the amounts involved but because the Enforcement staff would not need to go to federal court to get such amounts.



California DOJ Takes Advantage of “Lower” Insider Trading Standard

The Los Angeles U.S. Attorney has brought charges against a former J.P. Morgan analyst and two of his friends alleging that the analyst tipped deal information he learned while at the bank to his friends.

Ashish Aggarwal, 27, of San Francisco, and two longtime friends surrendered to the FBI Tuesday, after being charged with a scheme that netted over $600,000 due to stock tips. While interesting in and of itself, this case is nationally significant because it appears to be the first use of the Ninth Circuit’s “lower” standard for remote tippee liability under the Salman decision issued on July 6, 2015.

One of the elements of tippee liability is that there be a “personal benefit” to the tipper (here, Aggarwal).   In Salman, the Court found that the personal benefit to the tipper can occur where an “insider makes a gift of confidential information to a trading relative or friend.” That is exactly what is alleged in the Aggarwal case: Aggarwal tipped his boyhood friends.

By contrast, the Second Circuit, in U.S. v. Newman (December 2014) found that the benefit must represent, “at least a potential gain of a pecuniary or similarly valuable nature.” The Court vacated the underlying convictions and the decision has spawned multiple challenges across the country.

Because of Newman’s significance to the Government’s entire insider trading campaign, the Solicitor General, on July 31, 2015, sought review by the Supreme Court. The Court will likely decide in October whether to hear the Newman appeal. Among other things, the Court will look at the Salman decision to determine whether there is a circuit split on these issues.

In the meantime, it is likely that the Aggarwal case will proceed in California, though there will likely be some motion practice seeking a stay pending the outcome in Newman. Here is an article summarizing the charges.


SEC Remote Tippee Cases Now Subject to Higher Newman Standard

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

Government Finally Brings Charges (Lite) Against SAC Capital Founder Steven Cohen

On July 19, 2013, with the statute of limitations for securities fraud charges set to run out at the end of July, the federal government finally decided how it would pursue charges against Steven Cohen, the founder and largest owner of investment advisor S.A.C. Capital Advisors, LLC (SAC).  Facing gaping holes in its insider trading case against Cohen, the Department of Justice (DOJ) has apparently taken a pass on criminal charges and the SEC has opted not to bring civil insider trading charges in federal court.  Instead, the SEC’s Enforcement Division has brought an administrative action (an action that will be tried (or settled) before an SEC Administrative Judge) for failing to reasonably supervise two hedge fund portfolio managers under his control.[1]

The Insider Trading Allegations

The Enforcement Division’s case, which was unanimously approved by the Commissioners, alleges improper trading by SAC and its associated entities (CL Intrinsic and Sigma Capital) in the securities of Elan, Wyeth, and Dell.[2]  Specifically, the SEC alleges that portfolio manager Mathew Martoma improperly obtained inside information from a physician-consultant to Elan and Wyeth in connection with Phase II trials of an Alzheimer drug that he used to direct CL Intrinsic and SAC trading, resulting in profits and avoided losses totaling $275 million.  With respect to Dell, the SEC alleges that Sigma portfolio manager Michael Steinberg obtained information, ultimately sourced from a Dell employee, that Dell’s quarterly numbers were going to fall dramatically and caused Sigma to profit by $1 million and SAC to avoid losses totaling $1.7 million.

The DOJ has already brought criminal insider trading charges against Martoma and Steinberg and both men, to date, have refused to provide testimony against Cohen in return for lesser charges.  If they do proceed to trial the odds are stacked against them – of the 81 people charged with insider trading since 2009, 10 went to trial, all of whom were convicted.  SAC, for its part, already consented to an SEC settlement pursuant to which it will ultimately pay in excess of $616 million.

The Failure to Supervise Allegations Against Cohen

The failure to supervise or “red flag” allegations against Cohen are two-fold.  First, in the months leading up to the Phase II announcement in July 2008, Cohen was getting diametrically opposed information from certain analysts at SAC and Martoma.  In a series of text messages back and forth between Cohen and various SAC analysts, Cohen rebuffed the analysts’ skepticism of Martoma’s sanguine views about the drug trials even though Martoma was opining before the test data was publicly available.  Cohen sent a number of texts expressing confidence in Martoma, saying things like, “seems like mat [Martoma] has a lot of good relationships in that area.”  The SEC also contends that, on July 20, 2008, almost immediately upon receiving negative news from his insider source, Martoma e-mailed Cohen saying “[i]t’s important” they talk, which was followed by a 20-minute call between the men.  The SEC asserts that Cohen should have seen Martoma’s abrupt about face on the drug trials as a red flag and should have heeded SAC’s analysts’ concerns about Martoma and looked into whether Martoma had insider information.

Second, with respect to Dell, in August 2008, Cohen, through SAC, bought over $11 million of Dell stock.  On August 26, 2008, Cohen allegedly received an e-mail from a Sigma analyst stating that “someone at the company [Dell]” had indicated that Dell’s results would be off by “50-80” basis points.  That e-mail was forwarded to Cohen at or around 1:29 p.m. on August 26, 2008, and Cohen began selling his long position at 1:39 p.m. that same day.  By 3:49 p.m., Cohen had sold SAC’s entire position avoiding losses of $1.7 million.  As with Elan and Wyeth, the SEC alleges that the information that Cohen received should have caused him to immediately investigate the source of the information rather than simply trading on it.


Despite years of investigation, neither the SEC nor the DOJ have been able to put together an insider trading case against Cohen.  This is in large part because they did not have phone taps on Cohen at the relevant times and because his lieutenants have refused to turn on him in exchange for leniency from the government.  By charging Cohen civilly and not criminally, however, the government does get one huge benefit.  In civil matters, if a defendant asserts his Fifth Amendment rights, the Judge is permitted to draw an adverse inference of guilt.  That is not permitted in criminal trials.[3]

Even if successful, however, the SEC is only seeking to bar Cohen from the financial services industry.  That is because SEC has been unable to justify bringing fraud-based charges against Cohen or charges that he personally profited at the expense of his clients, which would permit the SEC to seek disgorgement of any money from him and civil penalties. This is a far cry from the jail time that his loyal subordinates appear to be willing to risk.

[3] This may be a moot point anyway, since the statute of limitations for criminal insider trading charges will have run out by the time Cohen would have to decide whether to assert the 5th.   And, since he’s already refused to testify in any criminal proceedings, there is no possibility of him contradicting himself, unless there is independent evidence (e.g., e-mails) that runs counter to his putative testimony.

SAC Capital’s Steven Cohen – Innocent Man or Elusive Fish?

According to the Wall Street Journal, Steven Cohen, the founder and principal owner of SAC Capital Advisors LP (“SAC”), will likely not face criminal charges relating to certain trades SAC made in July 2008 allegedly at the recommendation of former SAC portfolio manager, Mathew Martoma.[1]  Martoma, currently under indictment in Manhattan federal court, is accused of recommending to Cohen that SAC sell large amounts of shares in Wyeth and Elan based on insider information Martoma obtained prior to public announcements that adversely affected those companies’ share prices.[2]  The indictment alleges that the trades SAC made in July 2008 based on Martoma’s recommendations netted SAC $276 million, and resulted in Martoma receiving a $9.3 million bonus from SAC.

SAC, itself, appears to have avoided criminal prosecution, at least for now.  This is perhaps because it entered into a civil settlement with the SEC, which a federal judge conditionally approved on April 16, 2013.[3]  Assuming that settlement is made final at some point, SAC will pay over $600 million in disgorgement, penalties, and interest, the largest amount ever in an insider trading case.[4]  SAC, however, neither admitted nor denied any wrongdoing, as is customary in SEC settlements.[5]

The 5-year statute of limitations for an SEC action against Cohen based on the July 2008 trades runs out on July 29, 2013.  So does the statute for a potential criminal prosecution against Cohen.  Despite the impending deadlines, neither federal prosecutors nor SEC enforcement lawyers have filed an indictment or civil complaint against Cohen, or sought to supersede or amend the existing criminal and civil actions against Martoma to add Cohen.

Why not?

It appears that the government lacks sufficient evidence, at least to meet the higher criminal standard of “beyond a reasonable doubt,” connecting Cohen to the July 2008 trades.  The government’s principal evidence appears to be an e-mail from Martoma to Cohen on July 20, 2008 in which Martoma says, “[i]t’s important” that they speak, which was followed by a 20-minute phone call between the two men.[6]  And, in a series of trades over the following week leading up to the July 29, 2008 drug trial announcement, SAC unloaded its entire long position in Elan and Wyeth, engaged in short sales, and entered into various options contracts.

But the government does not appear to know what was said during the July 20, 2008 call because the relevant phones were not subject to wiretap at that time.  Further, though the government has been able to “flip” a number of current and former SAC employees, by offering lesser charges, those employees apparently lack specific information tying Cohen to the July 2008 trades.  And, Martoma, for his part, has refused to do a deal with the government for reduced charges.

Notwithstanding the government’s apparent reluctance to bring charges, it may, still, file them in time to satisfy the statute of limitations based on two things.  First, the government may discover additional evidence linking Cohen to the July 2008 trades in time to indict or bring civil charges against Cohen.  For example, in the SEC’s case against SAC and Martoma, the remaining parties (i.e., the SEC and Martoma) have reached an agreement pursuant to which all of the e-mails of the original tipper to Martoma, a neurologist associated with the University of Michigan who sat on the drug companies’ safety boards, is going to be reviewed by the defendant and by the SEC.  It is possible that something in that large quantity of electronic data could substantiate the government’s belief that Cohen is criminally liable for the July 2008 trades.

Second, the government may have until late August 2013 to bring an indictment against Cohen because another SAC trader, Michael Steinberg, has already been indicted for insider trading in Dell stock for the benefit of SAC through August 2008.[7]  If the government can connect Cohen to the Dell trades and also link those trades to the July 2008 trades as part of a “continuing conspiracy” between Cohen and others, it is possible that the statute would be extended to the end of August 2008.

At all events, absent significant new evidence, it looks like the best the government might do is to have the SEC bring a civil case and attempt to satisfy the lower civil standard of proof of “more likely than not.”  If the SEC did bring such a case and was successful, it could permanently bar Cohen from the securities industry and obtain disgorgement of any personal gains he made as well as impose monetary penalties.  But, again, the evidence would have to be more than tangential and circumstantial.  Thus, in the final analysis, we may never know whether Mr. Cohen is an innocent man or elusive fish.

[2] See U.S. v. Martoma, 12-cr-973, Dkt. No. 7 (S.D.N.Y. Dec. 12, 2012).

[3] See SEC v. CR Intrinsic Investments, Inc. et al., 12-cv-8466, Dkt. No. 33 (S.D.N.Y. Apr. 16, 2013).

[4] See id.

[5] See id.

[6] See SEC v. CR Intrinsic Investors, LLC, 12-cv-8466, Dkt. 1 (Complaint) (S.D.N.Y. Nov. 20, 2012).

[7] See U.S. v. Steinberg, 12-cr-121, Dkt. No. 230 (S.D.N.Y. Mar. 28, 2013).