by T. GormanPosted on Posted in SECActions

The SEC and DOJ have been waging a renewed and reinvigorated battle on insider trading, bringing more high profile cases this year than perhaps since the late 1980s.  Indeed, many have described the Guttenberg litigation (discussed here) as perhaps the most important since the days of the 1980s.  Then, a group of Wall Street traders whose exploits are chronicled in James Stewart’s book, Den of Thieves became the targets of a well publicized-string of enforcement actions which landed many in jail. 

The campaign being waged today appears no different than the one from the 1980s, focusing on a number of Wall Street professionals.  Consider for example the following cases:

SEC v. Guttenberg, Case No. 1:07-cv-01774 (S.D.N.Y. Filed March 1, 2007), and the related criminal cases which involve UBS representatives, a Morgan Stanley attorney, a Lyford Cay hedge fund manager, and other Wall Street professionals;

SEC v, Barclays Bank, Civil Action No. 07-cv-04427 (S.D.N.Y. Filed May 30, 2007), brought against a major bank and one of its senior officers; and

SEC v. Joseph A. Frohua, Civil Action No. 07-C-0702 (E.D. Wis. Filed August 1, 2007), filed against a fund manager.

The common theme to these cases is insider trading allegations against Wall Street professionals – just like Den of Thieves.  Some say these cases stem from the fact that the current generation of Wall Street traders is too young to remember the prior wave of prosecutions on Wall Street. 

An interesting theory.  But then consider the most recent case – SEC v. Gregg Ashley Smith, Civil Action No. 07-CV08394 (Filed September 27, 2007) which was brought against two securities professionals (previously discussed here).  Defendant Ashley Smith, age 37, perhaps does not recall the prior round of cases.  Codefendant and father of the first defendant, Elliot Joel Smith, at age 75 surely, however must remember those celebrated cases.  If so, then what accounts for this apparent return to Mr. Stewart’s Den of Thieves?  Perhaps it is simpler than lack of memory.  Perhaps Gordon Gekko in the movie Wall Street got it right. 

by T. GormanPosted on Posted in SECActions

The SEC is clearly telling the markets that it will come down hard on insider trading. After years of huge financial fraud cases, where the subject of insider trading seemed to fade in the background, this last year has seen the filing of more insider trading cases than in any recent year. Some may argue that this trend is consistent with the fact that the SEC’s Enforcement Division filed more cases last year than in the prior year for the first time in several years.

Statistics about the number of enforcement cases filed, however, are not very meaningful, standing alone. Consider, for example, that last year SEC enforcement brought a number of delinquent filing cases in which it sought to have penny stock companies delisted. Now, this is not to say those cases are not significant, but they are hardly the stuff of huge financial fraud cases or insider trading cases or many of the other enforcement actions brought by the agency. The point is that to understand the significance of the number of cases filed, one has to look beyond the numbers and analyze the type and quality of cases that the division filed.

As to the insider trading cases, there should be little doubt that this is a current enforcement priority. In many instances, the SEC has been very aggressive in filing actions, bringing them within days of a significant event. For example, in the case the TXU options case, the complaint was filed within days of the public announcement of a KKR lead takeover of TXU. See SEC v. One or More Unknown Option Purchasers, Civil Action No. 1:07-cv-01208 (N.D. Ill. March 2, 2007) (public announcement February 26, 2007). Likewise, the case based on trading in advance of the News Corp. – Dow Jones announcement was filed within seven days of the takeover announcement. SEC v. Kan King Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. Filed May 8, 2007).

The Enforcement Division deserves credit for the swift aggressive manner in which it has brought these and other large insider trading cases this year. This is particularly true in view of the fact that in many instances the Division has moved far to slowly and brought stale cases, which are clearly not effective enforcement.

The question with many of the new and high profile insider trading cases, however, is whether the SEC can prove them and prevail. The swiftly-filed cases were brought in large part without the benefit of an extensive investigation. In many instances, the cases appear to be based on little more than the basic trading data and information which the agency probably obtained from the brokers. While suspicious trading may suggest insider trading, as we have repeatedly noted (here), standing alone, such trading is not sufficient to prove insider trading. It does, however, counsel corporate insiders that they should take care to review their compliance programs to avoid perhaps getting caught up in what may be viewed as suspicious trading.

For the SEC, the key to their current campaign on insider trading will be to prevail on the swiftly-brought blockbuster cases they filed this year. Winning these cases will send a clear and effective enforcement message. Since many of these cases are in discovery, it will be some time before it can be determined whether this new round of cases is effective enforcement.

So too, with the repeated warnings of Enforcement Chief Linda Thomsen regarding Rule 10b5-1 plans. Last week, Ms. Thomsen reportedly again cautioned executives that the staff is reviewing reported abuses regarding these plans. No doubt these comments suggest that prudent corporate executives carefully review their trading plans.

Ms. Thomsen’s comments prompt other more significant questions about effective enforcement, however This is not the first time that Ms. Thomsen has cautioned executives about the safe harbor plans. Earlier this year, the Enforcement Chief warned executives that the staff was reviewing these plans following the publication of an academic study suggesting that executives might be abusing them. To date, there are no enforcement actions from the staff reviews.

Effective SEC enforcement promotes investor confidence and deep, liquid markets. Ineffective enforcement can be worse than no enforcement. Bringing cases quickly is fine and can be effective. Increasing numbers of enforcement cases is fine and may caution the markets. Warning the markets of perceived abuses is fine and can be caution the markets. The key, however, is the results. The SEC will have to prevail in these insider trading cases. The review of trading plans will have to produce results. We will have to wait to see the results from these efforts and whether they constitute effective enforcement.