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.

 

by T. GormanPosted on Posted in SECActions

Stoneridge – On Tuesday, what has been billed by many as the most important securities case to be decided in years was argued before the Supreme Court, Stoneridge Investment Partners v. Scientific-America, Inc.  To be sure, Stoneridge has the potential to be a blockbuster decision, redefining liability under Section 10(b) – the weapon of choice in most securities class actions – and perhaps even the way corporate America does business.  The question in Stoneridge is whether business partners of a public company can be held liable when that company uses a three-way barter transaction to falsify its books and defraud its shareholders.  Plaintiffs claim the business partners are accountable based on “scheme liability,” a concept crafted by the SEC which posits that third parties involved with public companies that commit securities fraud can be held liable under Section 10(b) as primary violators under certain circumstances.  Defendants claim they were just involved in a business transaction and any fraud was committed by Charter Communications against its shareholders. 

While adopting either of the positions advocated by the parties could produce the landmark decision many have speculated about for months, questions from the Justices during the argument suggest that result is unlikely.  Rather, a middle position construing the scope of Section 10(b) and vesting substantial discretion in the District Courts to evaluate fraud claims seems the more likely result as previously discussed (here).  

Insider trading – Last week, another chapter in the “pillow talk” insider trading cases was written, while the enforcement spotlight was again focused on executive trading or Rule 10b5-1 plans. 

This pillow talk insider trading case seems to prove that the couple that trades together stays together – at least most of the time.  Randi Collota, a former Morgan Stanley lawyer, and her lawyer husband Christopher, were sentenced on October 5 following their guilty pleas last spring to criminal charges on an insider trading scheme which some have labeled the largest since the 1980s (here).  Ms. Collota was order to serve four years probation with only 60 days in custody, primarily on nights and weekends.  Mr. Collota was ordered to serve three years probation.  Each defendant is required to pay a fine of $3,000 and forfeit $4,500.  Both defendants accepted full responsibility for their actions.  Prior to being sentenced, Ms. Collota requested that she be permitted to remain out of prison with her husband, who has a heart condition, and so she can continue to work.

The misuse of executive trading or Rule 10b5-1 plans may again be the focus of SEC scrutiny for insider trading.  Last spring, SEC Enforcement Director Linda Thomsen stated that the staff was reviewing these plans to see if they were being abused (discussed here).  In an October 8, 2007 letter to SEC Chairman Christopher Cox, Richard H. Moore, treasurer of North Carolina, asked the Commission to investigate the abuse of such plans by Countrywide CEO Angelo Mozilo.  According to Mr. Moore, “CEO Angelo Mozilo apparently manipulated his trading plans to cash in, just as the subprime crisis was heating up and Countrywide’s fortunes were cooling off.  It has been reported that Mr. Mozilo unloaded 4.9 million Countrywide shares – worth more than $138 million – between November 2006 and August 2000.  He reportedly changed the plans outlining how many of his shares would be sold monthly at least three times in a five-month period beginning in October 2006, allowing him to sell the stock before its price fell dramatically.”  While the SEC, in accord with its policy, would not comment on what action, if any, it would take, Ms. Thomsen noted the next day in a speech to the National Association of Stock Plan Professionals that the staff was looking closely at Rule 10b5-1 plans.  If Mr. Moore’s allegations are correct, the SEC may have found the case it has been looking for since at least last spring.

Option backdating – For months, the SEC has had in excess of one hundred companies and a host of related individuals under the investigative microscope for backdating options.  DOJ has done the same, although it appears to have a lesser number of persons under scrutiny.  Last week, another of these cases dribbled out.  Former SafeNet Inc. CFO Carole D. Argo pled guilty to securities fraud in connection with her role in backdating option grants worth millions of dollars for herself and others at the company.  Sentencing is scheduled for January 21, 2008.  Since most issuers conduct an internal investigation to determine what happed when a question about the backdating and the SEC has been investigating these same companies for months, one can only wonder when these cases will be resolved.  U.S. v. Argo is a continuation of the trickle of cases brought to date.  One can only wonder when the dozens of remaining cases will be resolved.