by T. GormanPosted on Posted in SECActions

For months the SEC and other regulators here and abroad have been focusing on insider trading with reports that it is rampant in U.S. markets and those around the world. A new academic study appears to be helping focus regulators on at least one suspected source: Wall Street.

A new academic study reported by Reuters and others suggests that the trading side of Wall Street investment banks may be using information about future deals obtained from their investment banking divisions. All banks, of course, have strict procedures to maintain the confidentiality of the information they obtain on the deal side and ensure it is not used by their trading divisions. Nevertheless, a paper authored by three European finance professors entitled “The Dark Role of Investment Banks in the Market for Corporate Control” is raising questions. The three professors examined data from 1,600 merger deals between 1984 and 2003 and conclude that in the last quarter before a merger announcement, investment banks serving as lead adviser to the acquirers purchased shares in the target company over 19% of the time. In those instances, the banks either began acquiring the shares or added to an existing position. The 19% rate is nearly double that of banks not serving in a lead role.

While the study does not establish insider trading, it has been sufficient to spark an investigation by FINRA, the Financial Industry Regulatory Authority. Apparently, FINRA is looking into the findings of the study. The SEC also has an obvious interest in the study given its recent efforts in the area. Indeed, the SEC has for months been analyzing data concerning the use of trading information by large Wall Street investment banks and has made limited use of a controversial survey directed at hedge funds in an apparent effort to profile those who may insider trade as discussed here.

While the professors who authored the current study do not claim that it establishes violations of the law and many may dispute the findings, similar studies have sparked other investigations by regulators. The current options backdating scandal is perhaps the most well known. At the same time the SEC’s enforcement staff has repeatedly make it clear that they are investigating the use of Rule 10(b)5-1 plans by executives. As discussed here, this inquiry is based on another academic study. The bottom line seems to be that the increasing use of investigative academic studies in a fashion that is reminiscent of the origins of a similar trend in journalism years ago is an increasing source information for the SEC and other regulators. All of this suggests that perhaps it would be prudent to survey the academic literature periodically to spot future enforcement trends.

by T. GormanPosted on Posted in SECActions

The key securities litigation event this week is of course the Supreme Court’s decidedly pro-business – but also pro-SEC enforcement – decision in Stoneridge, the case many thought might be the decision of the century. In addition, the SEC continued its high-profile war on insider trading and a defendant in the options backdating class action learned his fate.

First, the Supreme Court handed down its decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., Case No. 06-43, slip. Op. (Jan. 15, 2008), resolving a key question concerning the scope of liability under the securities antifraud provision, Section 10(b). The High Court rejected the plaintiff’s argument that third-party vendors could be held liable under the theory of “scheme liability” for allegedly contributing to a transaction later used by the issuer to falsify its books and defraud its shareholders.

The significance of the ruling is twofold. First, it defines and charts a focused and narrow course for future private damage actions by focusing on a key element that must be established in these types of cases. It gives business entities much of the certainty they have long sought in this difficult area. Second, the decision defines the type of conduct prohibited by Section 10(b) and rejects the efforts of some circuit courts to constrict the reach of the provision. This portion of the ruling is important not only for private damage class actions, but also SEC enforcement cases, since Section10(b) is frequently the predicate of both types of actions. Thus, while Stoneridge narrows the scope of liability in damage actions, it reaffirmed the broad reach of SEC enforcement actions.

Second, the SEC charged two former PricewaterhouceCoopers employees with insider trading. In a settled complaint, the SEC alleged that Gregory Raben, a former PwC auditor, and William Borchard, a former PwC senior associate, used their access to sensitive inside information about the audit firm’s clients to allow Mr. Raben and two others he tipped to trade ahead of a series of corporate takeovers on six different occasions. The scheme continued until October 2006 when PwC’s Office of General Counsel discovered the matter and referred it to the SEC. Both defendants consented to the entry of statutory injunctions. In addition Mr. Raben agreed to disgorge his trading profits and those of two acquaintances he tipped totaling over $23,000 and pay a civil penalty in an equal amount. Mr. Borchard agreed to a civil penalty equal to Mr. Raben’s trading profits. SEC v. Raben, Case No. CV-08-0250 EMC (N.D. Cal. Filed January 15, 2008). The SEC’s Litigation Release is available here.

Finally, Gregory Reyes, the former Brocade Communications CEO and the defendant in the first government enforcement action in the options backdating scandal, learned his fate, as he was sentenced 21 months in prison. Mr. Reyes, who was convicted in August, was also ordered to pay a $15 million fine