Part VI: SEC Enforcement Trends and Priorities 2008 – Insider Trading (cont)

Many of the insider trading cases brought last year involved trading ahead of mergers. Others were based on trading before the announcement of some other significant corporate event. Regardless of the nature of the inside information involved however, there was clearly a trend toward cases which were international in scope. This may stem in part from the increasing internationalization of the markets. Policing such cases also requires the cooperation of regulators around the globe. Another disturbing trend seems to be reflected in cases involving Wall Street professionals which some attribute to a new generation of professionals who do not remember the blockbuster cases of the late 1980s. Whether this is an accurate assessment or not, insider trading seems to be on the rise.

The News Corp./Dow Jones is one of the most significant international insider trading case brought by the SEC last year. It is also an example of a case the aggressive manner in which some cases are being brought, as well as one in which the SEC obtained its settlement, but curious with a curious omission.

The case was brought within days of the announcement of the News Corp. bid for Dow Jones. The initial defendants were Kan King Won and Charlotte Ka On Wong Leung, a married couple living in Hong Kong. The complaint, based largely on trading data and brokerage records, charged the couple with trading on inside information regarding the proposed takeover bid. It did not identify the source of the inside information, but did claim that funds had been wired into the trading account to pay for part of the positions. SEC v. Wong, Civil Action No. 07 Civ. 3628 (S.D.N.Y. May 8, 2007).

Months later, the SEC amended the complaint, adding two defendants and resolving the case. Added as defendants were News Corp. board member David Li, a respected Hong Kong businessman, and his close friend and business associate Michael Leung. The amended complaint alleged that Mr. Li tipped his friend Mr. Leung, who in turn told his daughter and son-in-law, the initial defendants and in whose account the trading was conducted. Funds had been wired to that account from Mr. Leung’s account at JP Morgan International Bank, Brussels.

In the settlement, each defendant consented to the entry of a statutory injunction prohibiting future violations of the antifraud provisions. Mr. Leung was ordered to disgorge $8.1 million and pay prejudgment interest and a civil penalty equal to the disgorgement. K.K. Wong was ordered to pay $40,000 in disgorgement plus prejudgment interest and a civil penalty of $40,000. Mr. Li was ordered to pay an $8.1 million civil penalty. This case is a good example coordination by the SEC with foreign regulators, in this case the Hong Kong Securities and Futures Commission. At the same time, the settlement is curious. Although Mr. Li was a News Corp. director who tipped his friend, the SEC did not obtain the officer/director bar against him that it typically does.

The Petco Options case is another international insider trading case. There the initial complaint was brought against unnamed traders, alleging that over 1,400 call options were purchased prior to the announcement by Petco that it was being acquired. In a subsequent amendment, the SEC named Taher Suterwalla as a defendant, alleging the purchase of options through a Swiss broker and derivatives through U.K brokerages. In this case, which is still pending, the SEC coordinated with the Chicago Board of Options Exchange, the U.S. Financial Services Authority, the Swiss Federal Banking Commission and the Ontario Securities Commission. SEC v. One or More Unknown Purchasers of Call Options for the Common Stock of Petco Animal Supplies, Inc., Case No. 06CV1446 DMS (S.D. Cal. July 18, 2007).

Last year the SEC also brought what many believe to have been the most significant insider trading case since the days of Ivan Boesky and Dennis Levine, the Guttenberg litigation. There the SEC complaint named fourteen defendants, largely Wall Street Professionals. DOJ brought ten cases against thirteen defendants based on the same conduct.

The cases alleged two insider trading schemes. The UBS scheme involved trading in advance of investment recommendations from that firm. The Morgan Stanley scheme involved trading prior to transactions of the bank’s clients. All thirteen defendants in the criminal cases have pled guilty. U.S v. Jurman, Case No. 1:07-cr000140 (S.D.N.Y. Feb. 26, 2007) (and related cases). The SEC’s case is still pending. SEC v. Guttenberg, Case No. 1:07-cv-01774 (S.D.N.Y. 2007).

Next: Pillow talk cases