Insider Trading Ring Has Over $1 Million in Profits
Insider trading has long been a staple of the Commission’s enforcement division. Over the years the agency has filed numerous actions alleging insider trading. Some actions were high profile and high risk such as the “suspicious trading” case, typically filed quickly after the trades in an effort to thwart the traders’ efforts to move the profits out of the grasp of the agency. Others were novel such as the early misappropriation cases when the theory was first introduced. Many are what might be called “routine” cases, assuming there is such a thing. The latest insider trading case filed by the Commission centers on a trading ring at one firm operated by company employees and trading by their friends. SEC v. Sure, Civil Action No. 3:22-cv-01967 (N.D. Cal. Filed March 28, 2022).
The action centers on trading formed in advance of the first quarter 2020 earnings release, published on May 6, 2020 of Twilio, Inc., a San Francisco based cloud computing communications firm. Three defendants were employed at Twilio: Hari Sure, Lokesh Lagudu and Chotu Pulagam. The three were friends. Each was employed as a software engineer at the company. Others named as defendants in the action are: Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar and Chetan Pulagam.
Between late March and early May the employee Defendants each obtained inside information regarding the firm’s revenue for the period by accessing Twilio data bases. Each either tipped friends or traded for their personal account as depicted below:
–Defendant Sure tipped Kamujula, a close friend
–Defendant Laguda tipped Nekkalapudi, his girlfriend
–Defendant Laguda also tipped Dhrmapurika, a former roommate
–Defendant Chotu Pulagam tipped Chetan Pulagam, his brother
–Defendant Kekkalapudi traded for his account
–Defendant Dharmapurikar traded for his own account
Essentially each tippe traded while the tipper did not; each Defendant who did not tip anyone traded profitably.
The trading ring netted over $1 million in illicit profits from trading Twilio securities prior to the announcement. The complaint alleges violations of Exchange Act Section 10(b). The U.S. Attorney’s Office for the Norther District of California announced criminal charges against Dileep Kamujula. See Lit. Rel. No. 25350 (March 29, 2022).
High Court Petitioned to Review Constitutionality of Commission “Gag Orders”
Today SECACTIONS presents a guest post by Erica Andrews, Attorney, Dorsey & Whitney, LLP, Washington. The ultimate ruling in the case Erica discusses below could impact every settlement in an enforcement action — Tom
Former Xerox executive, Barry D. Romeril, petitioned the Supreme Court last week to hear his challenge on the constitutionality of what he calls the SEC’s “Gag Orders,” a provision that the Commission typically incorporates into settlements as a matter of policy, and is based on a rule enacted in 1972. Romeril v. Securities & Exchange Commission, No. 21-1284 (Filed: March 21, 2022).
Romeril settled with the Commission in 2003 on a neither admit nor deny basis. He agreed to pay over $5 million in disgorgement and penalties based on a complaint which alleged that he and other executives had manipulated financial reports of the company from 1997 to 2000. Under the terms of the consent decree Romeril agreed to:
“[C]omply with the Commission’s policy ‘not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings.’ 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”
In May 2019, Romeril challenged the constitutionally of his Gag Order, arguing that the provisions it violated his First Amendment and due process rights. See SEC v. Allaire et al., Civ. Action No. 03-4087 (S.D.N.Y.) Romeril claimed that the Gag Order unconstitutionally prevented him from defending himself in the media, and petitioning Congress for securities law reforms. Judge Cote of the Southern District sided with the Commission, finding Romeril’s claims untimely and without merit.
Romeril appealed the decision to the Second Circuit (Case. No. 19-4197-cv). That court affirmed the ruling of the district court last September in a 3-0 opinion. The Circuit Court held that the Gag Order was not unconstitutional. The court concluded that Romeril’s First Amendment rights were not violated since he entered into the consent decree with the Commission voluntarily as part of a settlement. The Second Circuit also determined there was no due process violation as Romeril could have challenged the Commission’s claims in court, and by doing so would not have been bound by such a Gag Order. Finally, the Second Circuit found that the Gag Order was not unconstitutionally vague, and that the Commission had statutory authority to implement such a rule.
In his petition for certiorari Romeril requests that the Supreme Court review the provisions of his Gag Order, asserting that the Second Circuit’s decision conflicts with the high court’s “long-standing Jurisprudence prohibiting such prior restraints, content- and viewpoint-based discrimination, and unconstitutional conditions which violate the First Amendment, and due process of law.” If the high court grants certiorari based on Romeril’s challenge, a key component of Commission settlements—the requirement that a defendant agree to the judgment on a “no deny” basis—will be at risk – the ultimate decision could impact a decades long Commission policy and future settlements.