Insider Trading Here And Around the Globe

A key focus of the SEC in recently is insider trading – a fact evidenced by even a quick review of the cases the agency has been filing in the past few months. The SEC, however, is not the only regulator focused on insider trading. A look around the globe suggests that regulators everywhere are struggling with the problem.

? This month, the Ontario Securities Commission began its latest insider trading prosecution. Barry Landen, formerly an executive of Agnico-Eagle, is accused of trading in advance of the release by his company of poor financial results. According to the Commission, Mr. Landen avoided a loss of about $100,000.

? In Trinidad, the government is moving forward with legislation to increase the penalties for insider trading to as much as TT$2 million or US$321,151. Under proposed legislation, corporate traders found guilty will be punished with a minimum fine equal to the profit made or the loss avoided and a maximum fine equal to the greater of double the profit made or loss avoided and a term of imprisonment up to six years. The head of the Securities and Exchange Commission Osborne Nurse noted that existing legislation in the area needs to be amended because it implies that certain kinds of insider trading are lawful.

? In Ireland, regulators are struggling with a difficulty that the U.S. SEC solved a few years back – trading in possession vs. using inside information. The Fyffes case has raised this issue. There, the Irish High Court concluded that Mr. Fyffes was not guilty of insider trading because, while he possessed inside information, he did not use it in the trading. This conclusion appears to be based on the 1990 Companies Act which prohibits taking advantage of inside information.

? In Islamabad, Pakistan the Securities and Exchange Commission has enhanced the penalty for insider trading. The new Securities Act also gives the Commission greatly enhanced powers. For example, under the Act, an authorized person may forcibly enter the premise of a licensed person to review and inspect records. The Act also contains new provisions regarding insider trading and market manipulation.

? In Japan, the Japan Securities Dealers is setting up a data base that covers the employees and executives of brokerage houses as part of a crack down on insider trading. This data base will be in addition to one covering executives of listed companies which is due to be completed next May. The data bases will permit the association to closely monitor trading by registered persons and executives.

? In Australia, survey of business executives has concluded that the securities regulator there focuses on easy targets. Likewise, many executives surveyed suggested that the market regulator had the wrong priorities. As a result the survey notes there is a lack of confidence in the integrity of he markets.

This brief survey clearly suggests that the U.S. SEC is not alone in its concerns about insider trading. At the same time, the surveys in Australia suggest that a good “cop on the beat” is essential to healthy markets.

This Week In Securities Litigation (May 23, 2008)

The FCPA, option backdating and insider trading were again the key themes in securities litigation. DOJ continued a high profile and potentially politically charged FCPA inquiry, while the SEC filed a settled options backdating case and the Commission brought two insider trading cases, one settled and one in litigation.

FCPA

DOJ continued its FCPA investigation of British arms dealer BAE. The Department served subpoenas on Mike Turner, the chief executive of the company and Sir Nigel Rudd, a BAE non-executive director, when they landed in Huston. According to news reports, DOJ officials examined the laptops and wireless handheld devices of both men before returning them.

Last year, BAE acknowledged a notice from DOJ that it was investigating the company’s compliance with the FCPA. The investigation apparently focuses on Britain’s biggest arms deal – a series of warplane sales to Saudi Arabia in the mid-1980s. The deal had a value of up to $80 billion.

In December 2006, Britain’s Serious Fraud Office halted a two year old investigation into this matter at the request of then Prime Minister Tony Blair, who cited national security. Mr. Blair said at the time that the Saudis had threatened to cancel the deal and stop cooperating on terrorism.

Subsequently, Britain’s High Court ruled that the Serious Fraud Office decision to halt the inquiry was unlawful. The court criticized the determination to drop the inquiry under public pressure. The House of Lords has been requested to review the decision.

Option backdating

Rambus, Inc, several of its executives, and its auditor PricewaterhouseCoopers PLC obtained final court approval for the settlement of five consolidated option backdating cases. The cases settled for $18.3 million, above what many similar cases are settling at according to the court. The judge awarded plaintiff’s counsel $4.5 million in fees plus expenses. In re Rambus Inc., Securities Litigation, Case No. 5:06-cv-04346 (N.D. CA. July 17, 2006). Last August, a Special Litigation Committee agreed to let a derivate suit to move forward.

Brooks Automation, Inc. settled an option backdating case with the SEC, SEC v. Brooks Automation, Inc., Civil Action No. 08 CA 10834 (D. Mass. May 19, 2008). According to the SEC’s complaint, former company president and CEO Robert Therrien backdated an option grant for himself after learning that the initial grant expired. In connection with the in-the-money grant Mr. Therrien created and executed false documents. The company did not account for the grant correctly. Brooks also issued several company wide option grants for which the grant dates were inaccurate.

To resolve the matter, Brooks consented to the entry of a permanent injunction prohibiting future violations of the reporting provisions of the Exchange Act. The settlement reflected the cooperation of the company. A separate action was filed against Mr. Therrien.

Insider trading

The SEC filed two insider trading cases last week. One case was filed against Cristian De Colli, a machinery engineer residing in Rome, Italy. The complaint alleged that Mr. De Colli made more than $2.1 million in illegal profits trading in the securities of DRS Technologies, Inc. prior to the public disclosure of merger negotiations. Mr. De Colli purchases 5,700 shares and 3,116 call options of DRS between April 15, 2008 and May 7, 2008. To establish these positions Mr. De Colli liquidated holdings in two other companies. Just before the public announcement all of his holdings were in DRS. After the pubic disclosure of the merger talks he liquidated his position.

Subsequently, during an interview with the SEC staff Mr. De Colli stated that he did not have any family members or friends who had worked for Finmeccanica, the other company involved in the discussions. The Commission claims that this is a false statement because the defendant’s brother worked for the company between 2004 and 2005.

The court granted a freeze order over the defendant’s U.S. brokerage accounts. This case is in litigation. SEC v. De Colli, Case No. 1:08-cv-04520 (S.D.N.Y. May 15, 2008).

A second case settled at the time of filing. In SEC v. Bigler, Case No. 08 CV-0888 (S.D. Cal. May 20, 2008), the Commission brought an action against the former director of corporate finance and investor relations for Provide Commerce. Mr. Bigler is alleged to have traded in the shares of his company within one hour of learning confidential information about the pending acquisition of the company by Liberty Media. Mr. Bigler purchased 4,500 shares of the company. On the first trading day after the public announcement he liquidated his position for a profit of over $41,000.

To settle the case, Mr. Bigler consented to the permanent injunction prohibiting future violations of the antifraud provisions and an order requiring him to disgorge his trading profits and prejudgment interest and pay a penalty in an equal amount. The Commission’s Litigation Release is here.

For more information and commentary regarding these matters, see the latest entry on SECActions.com here.