Series: SEC Enforcement Program 2007, Projecting Trends and Key Issues (Part IX)

Market Timing/Late Trading is Winding Down, Permitting Enforcement to Focus on Other Areas

Last week we reviewed recent enforcement actions involving the Foreign Corrupt Practices Act in connection with the criminal action against Chiquita, although that case was not specifically based on the FPCA (post of 3/21/07).  Clearly the FPCA is an area of increasing focus for both the SEC and DOJ. 

The reverse is true of market timing/late trading.  Since the initial efforts of former New York Attorney General Eliot Spitzer several years ago, this has been a key focus for the SEC Enforcement Division.  Market timing of course is not in and of itself a violation of the federal securities laws.  Although the SEC has claimed repeatedly that late trading is a violation of the securities laws, its argument is questionable at best.  Nevertheless, in recent years the SEC enforcement staff has conducted a wide-ranging investigation into the practices, largely under an omnibus order of investigation.  From that investigation the SEC has brought a number of cases, typically tying the market timing/late trading conduct to some other practice that clearly violates the securities laws.  

Last year the SEC continued to bring cases in this area.  For example: 

In the Mater of Prudential Equity Group, (Aug. 28, 2006),;/litigation/admin/2006/34-54371.pdf  Prudential consented to the entry of an order directing it to pay $600 million as a global settlement with the SEC, U.S. Attorney’s Office, the Mass. Securities Division, the NASD, the New Jersey Bureau of Securities, the New York Attorney Generals Office and the NYSE to resolve a claimed illegal market timing scheme.  This case is also a good example of the benefits of parallel proceedings for all parties (see Series: Part III, post dated 2/28/07).  A group of regulators were able to coordinate to investigate a common practice yielding obvious economies in the use of resources; the company was able to achieve a global settlement.  

SEC v. James Tambone and Robert Hussey, (D. Mass. Dec. 28, 2006),  In this case, the court dismissed claims brought by the SEC against two former executives of Columbia Funds Distributor Inc., in connection with a claimed undisclosed market timing scheme.  

In the matter of Flynn, (Aug. 2, 2006),  An ALJ dismissed aiding and abetting charges alleging that former CIBC director Paul Flynn aided a late trading and market timing scheme.  This was the second time Mr. Flynn prevailed in actions based on this conduct.  Earlier former New York Attorney General Spitzer dismissed criminal charges against Mr. Flynn based on the same conduct. 

In contrast to the FCPA, which will become an area of increasing focus in 2007, we can expect to see cases in the market timing/late trading area winding down.  While cases will still be brought in 2007 in this area, expect them to be the remnants of the earlier investigative efforts.  This will permit the Enforcement Division to shift resources to focus on other areas such as insider trading, financial fraud and the Foreign Corrupt Practices Act.  This suggests that issuers and their executives should carefully review their compliance procedures in those areas.