The Week in Review (September 28 to October 4, 2007): SEC Enforcement, Insider Trading and Sentences Are Up

SEC enforcement cases, along with the number of insider trading cases, and perhaps criminal sentences for insider trading, all seem to be increasing.  According to a Bloomberg report (available here), the number of SEC enforcement cases rose last year for the first time in four years.  In the last fiscal year, SEC enforcement cases rose by about 10%.  That is contrary to the trend in recent years, when the number of cases declined each year by about 5%.  While the significance of an increase or decrease in the number of cases may not in and of itself be significant – SEC enforcement officials have said this in the past as the numbers went down – it should be considered with other trends. 

A second news report concerns actions against general counsels.  According to the National Law Journal (see here), for the first nine months of 2007, a record number of 10 General Counsels were charged with or pled to civil or criminal fraud charges.  Many of those cases are part of the stock-options backdating scandal.  This trend seems to be consistent with SEC pronouncements that they will focus on the “gatekeepers.”  At the same time, it suggests that there may be much less tolerance for the actions of in-house counsel and perhaps even outside counsel.   The SEC is also continuing to focus on insider trading cases.  The SEC closed out the government fiscal year last week by filing more insider trading cases.

In SEC v. McKay, the Commission settled insider trading action filed against the husband of a Triangle Pharmaceutical Co. executive who allegedly misappropriated inside information from his wife.  This case is discussed in a prior post here.    

In SEC v. Chavarria, the Commission brought a partially settled insider trading action brought against three Dell, Inc. accountants accused of trading in advance of earnings announcements.  This case is also discussed here.    

In addition, the SEC filed another “friends and family” insider trading case (see earlier post discussing these types of cases herecase on Thursday.  SEC v. Calder, Civil Action No. 07-01786 (D.D.C. Filed October 4, 2007).  In this settled action, the SEC’s complaint alleged that the defendant traded on misappropriated inside information about a possible acquisition of Commercial Federal Corporation.  Mr. Calder is alleged to have misappropriated the information from his brother, who in turn obtained the information from his wife.  The wife is the executive assistant to the Chairman and Chief Executive Officer of Commercial Federal.  Both the wife and the brother communicated the information on the understanding that it would be kept confidential.  Defendant traded while in possession of the material non-public information and, in addition, tipped a friend.  Defendant consented to the entry of a statutory injunction and an order requiring him to pay disgorgement in an amount equal to his trading profits and those of his friend, a penalty in an equal amount and prejudgment interest.  The Commission discusses this case further in its Litigation Release here.    

The SEC’s war on insider trading seems to be having an impact.  According to a study by Professor Darren T. Roulstone, University of Chicago Graduate School of Business, and Professor Joseph D. Piotroski, Stanford University on how corporate insiders limit their trading, there is a reluctance on the part of executives to trade on extreme news events.  This trend is particularly telling as to bad news.  In sum, the study concludes that there is a marked reluctance to trade on such information.  The study is reported here

Finally, those who have ignored the clear warning from the trend of SEC civil insider trading cases should consider a recent decision by the First Circuit Court of Appeals.  Earlier this week, that court reversed the sentence given to a hedge fund manager convicted of insider trading as being too lenient.  The District Court had imposed a sentence of 36 months of probation after defendant Michael Tom pled guilty to making about $750,000 in insider trading profits.  The government appealed, seeking a harsher sentence.  The appeals court concluded that “the sentence is unreasonable and that it did not give adequate consideration to the seriousness of the offense, the need for general deterrence for white collar crimes, and the need for some imprisonment …,” and remanded the case for re-sentencing,  U.S. v. Tom, No. 07-1074 (1st Cir. October 1, 2007) (a copy is here).   The message from all of this is clear.  SEC enforcement actions are increasing.  This trend is particularly evident in the insider trading area both on the civil and criminal side.  Company counsel and their advisors would do well to consider this trend as they review compliance programs and executive Rule 10b5-1 one plans – and perhaps their own activities given the emphasis on gatekeepers.