Category: Insider Trading

The Supreme Court Weighs in Insider Trading

If you were expecting a tidal wave of changes from the Supreme Court, you will be disappointed. On Tuesday, the Court delivered its opinion in Salman v. U.S. Prosecutors can see a glimmer of upside because they do not have to prove that something valuable changed hands in order to prove the crime of insider trading.

Supreme Court

Newman was a setback because the U.S. Court of Appeals for the 2nd Circuit, that the insider must “also receive something of a ‘pecuniary or similarly valuable nature’ to prove illegal insider trading.

In a 1983 case, Dirks v. SEC, the Supreme Court had ruled that  someone who receives confidential information from an insider and then uses the information to trade can be held liable under insider trading laws when the insider violates his duty to shareholders by disclosing the information. But that depends on whether the insider receives “a direct or indirect personal benefit from the disclosure.” In Dirks, the Court said that jurors could infer a “personal benefit” when the insider either (1) receives something of value in exchange for the tip or (2) “makes a gift of confidential information to a trading relative or friend.”

Newman was under the first option. The prosecutors did not prove that the information was passed between friends or relatives and did not prove that there was an exchange of value. The Salman case is under the second option when the material non-public information was passed between friends and relatives.

The Court’s reasoning is simply that “giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” You are not likely to give a gift to a stranger so there needs to be some other value. You are likely to give a gift to a friend or relative.

I think the Court used the Salman case to state that Dirks is still the standard for insider trading and Newman did not change it. The opinion was forcefully narrow and limited itself to insiders passing material non-public information to friends and relatives.

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Personal Benefit in Insider Trading

While Mr. Cooperman was accused of making millions on insider trading. Sheren Tsai made $23,914.41 on her illegal trades. The relatively small amount of the gains caught my eye in the press release, but a particular line in the pleadings made me think it was worth highlighting.

Ms. Tsai was (is?) in a romantic relationship with Colin Whelehan.  Both worked at different investment advisory firms. Mr. Whelehan was involved in a significant corporate event. He told this material non-public information to Ms. Tsai. She bought stock in the target company and made the above-mentioned $23,914.41 in profits.

The pleading that caught my eye was the statement about personal benefit:

“25. As a result of his tip, Whelehan received a personal benefit in the form ova gift to his closest personal friend, his live-in girlfriend and romantic partner, Tsai.”

Clearly, the SEC is trying to sort the law out in the post-Newman world.

Then there is the insider trading catch.

Ms. Tsai’s compliance group noticed the trades in her account. Clearly it looked strange to have the purchase so close to the announcement and spike in price. Most insider trading platforms will flag that trade.

The compliance group also had Ms. Tsai’s emails. Mr. Whelehan had sent an email from his work email to her work email  writing in part:

“one of Apollo’s portfolio companies would be buying out ADT.”

Ms. Tsai later sent a message using her work email

“So when is it [target’s stock price] going to BOUNCE”

Both had compliance training and knew about insider trading. They are caught as about red-handed as you can get for insider trading.

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Is Cooperman The New Cuban?

The Securities and Exchange Commission brought charges against Mark Cuban for insider trading. The SEC claimed he was an insider based his status as a big shareholder in the company or that he had agreed to not trade on material non-public information disclosed to him.

The SEC brought charges against Leon Cooperman for trading on material non-public information. The SEC is alleging that Cooperman used his status as a big shareholder in Altas Pipeline Partners to obtain confidential details about an upcoming company transaction.

According to the SEC complaint, an executive at Atlas Pipeline shared confidential information with Cooperman believing he would keep in confidential and not trade on that information. That seems a lot like the Cuban facts.

The SEC alleges that the Cooperman explicitly agreed to not use the information to trade. Going back to the Cuban case, he never agreed to keep the information confidential.

The trading activity outlined in the SEC order shows Cooperman making a huge bet on Atlas Pipeline. At one point his activity was 95% of the daily volume of trading on a set of Atlas Pipeline call options.

It looks there was a parallel action of criminal charges. But the Newman case from the Second U.S. Circuit Court of Appeals sets a standard that a recipient of an inside tip must know the confidential information came from an insider and that the insider disclosed the information for a personal benefit.

The Salman case is before the Supreme Court and is looking at the Newman standard for criminal insider trading.  If that standard is upheld, it seems unlikely that Cooperman would be in an orange jumpsuit. According to reports, the DOJ has suspended its investigation into Cooperman until the Salman case is decided.

The civil charges from the SEC is based on misappropriation so it does not need to prove that the tippee received a benefit.

It seems like the case will hinge on the credibility of the Atlas Pipeline executive. That executive is not named in the complaint.

Assuming the SEC case passes the credibility standard, it will need to prove the legal standard that Cooperman’s trading should be illegal.

Given the recent history of the SEC bringing cases in front of its own administrative judges, this case was filed in federal district court.

I see two likely reasons. Cooperman demanded this venue in exchange for agreeing to the tolling of the statue of limitations. (The trading happened in 2010.) Or, the SEC is looking to set legal precedent.

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A Pair Of Pharma Insider Trading Cases

Pharmaceutical company stock is known to be volatile depending on success or failure of drug trials. As pharma companies become successful they become targets for larger pharma companies looking to supplement their lines. The Securities and Exchange Commission filed two actions recently for suspect trading in pharma companies.

Paxil by JustinLing CC BY

The first case is a bread and butter insider trading case where the SEC alleges that two brokers found a source inside a pharma company that was feeding them material non public information. In the second case, the SEC charged a doctor involved in a drug trial with trading on the non-public results of the trial.

In that first case, the SEC alleges that Paul T. Rampoldi was the ringleader of an the insider trading ring at his brokerage firm. They had an insider at Ardea Biosciences. The Ardea insider tipped one of the brokers with material non-public information in at least two instances. Once was ahead of the company’s announcement of an agreement to license a cancer drug and the second was in advance of its acquisition by AstraZeneca PLC. The SEC charged the other two brokers and the Ardea employee last year. To avoid detection by his brokerage firm, they traded in an account at a different firm.

As Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office, said: “As a stockbroker, Rampoldi should have known better than to allegedly trade on tips about significant corporate events before they were announced.”

In the second case, Dr. Edward Kosinski was working on the clinical trials for Regado Biosciences. He started with a small holding in the company. Small enough to be below its compliance reporting level. I assume that Dr. Kosinski must have thought highly of the drug being test because he dramatically increased his holdings in the company.

The things took a turn for the worse. The company announced problems with the trial. Dr. Kosinski did what most people would do on hearing bad news: he sold his stock. The problem was that he had signed a confidential nondisclosure agreement that, according to the SEC’s allegation, prohibited from trading on the stock based on the trial. In selling the stock, Dr. Kosinki realized a small gain and avoided a huge loss. The stock tanked when the problems were announced to the public.

When further details were announced to the trial group, Dr. Kosinski did a worse thing. He shorted the stock, buying put contracts that would make him more money if the stock dipped even further. It did and he did.

Perhaps with selling his stock, Dr. Kosinski could have argued that he didn’t know better. But doing the second trade in options adds a level of scienter. That’s probably why the DOJ brought criminal charges on top of the SEC’s civil case.

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Image is by JustinLing

A Bad Bet On Insider Trading

The recent insider trading case against William “Billy” Walters of Las Vegas is fascinating for all of the players involved, including him. Plenty has been written about the charges because it implicates pro golfer Phil Mickelson and former Dean Foods board member Thomas C. Davis. All three are implicated in insider trading. How did they get caught?

roulette by Chris Yiu

It looks like the getting caught was relatively straight forward. Walters made big, obvious trades around earnings releases and major news for Dean Foods and Darden Restaurants. In June 2008, Walters bought more than 4 million shares, which represented between 29 and 37% of the daily trading volume in the company during his two day buying spree. In April 2010 Walters bought 19% to 21% of the trading volume during his short buying spree.

The SEC linked Walters to Davis. Since Davis was on the board of Dean Foods and Darden Restaurants he was the obvious source of information. According to The Wall Street Journal, Davis is cooperating with the government.

The case also implicated pro golfer Phil Mickelson. Mickelson made some big, obvious trades that would have attracted the attention of a compliance review. He bought a $2.4 million position in Dean Foods, while the rest of this trading account only had $250,000 in assets. He was not a frequent trader and had not bought Dean Foods before.

That they got caught is no surprise. Most trade monitoring programs would flag that activity.

What is a surprise is that Walters made such obvious bets on the market when he is well know for hiding his gambling bets. A story in ESPN tells all the steps he takes to hide his positions in sport betting. He uses runners to make bets so it does not look like his bets. He buys on the opposite side of a bet to better the spread. The story tells of other steps he takes to conceal his positions. According to the SEC, he failed to do so in his securities trades.

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Roulette by Chris Yiu CC BY SA

Love For Your Mother Can Be Insider Trading

Lawrencia Afriyie took some risky bets in the market. She bought out-of-the-money options, but made $1.5 million in profits. It just so happens that her son, John, worked for for an investment firm that had material non-public information on the target of those options.

Cash in the grass.

According to the SEC complaint, John Afriyie worked at an investment firm involved in a going private deal for ADT. He accessed documents that were designated “confidential” or several variations of confidential. He must have seen a golden opportunity to make some money on the side.

Since Mr. Afriyie had signed the investment firm’s Code of Business Ethics that prohibits trading on material, non-public information, he could not trade on the information.

Mysteriously, his mother, Lawrencia, bought 2,279 options on ADT from January 28 through February 12. The options were out of the money, with strike prices between $32 and $34 a share, while the stock was trading between $24 and $28. She was most of the trading activity on these options on many days during that period.

On February 16, ADT announced its acquisition at a price of $42. Lawrencia made a profit of $1.5 million on $24,000 in options.

Based on the trading activity in Lawrencia’s account, I would assume the compliance officers on her account saw a big red flag: extremely well timed option trades just prior to a major announcement. The complaint does not say so, but I assume that this option trading was unusual for her account.

Then it was up to the regulators to tie her to the source of information. Did she rat out her son and tell the regulators that it was him trading on her account? Her son had just made her a big pile of cash.

Probably not. FINRA would have seen the suspicious name to the firms involved in the transaction. Someone at the investment firm would have matched the last names and asked John what his mother’s name was.  Then compliance would have looked closer, reported the problem and booted him out the door in short order.

Now the SEC has brought charges to recover the gains and the DOJ has brought criminal charges.

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The SEC’s Insider Trading Case Falls Further Apart

Five years ago, the SEC came crashing into the offices of Level Global Investors accusing it of engaging in illegal insider trading. The firm agreed to pay $21.5 million in settlement money to resolve that insider trading investigation. Now it wants its money money back.

SEC Seal 2

When it comes to insider trading, it’s not the firm doing the trading, it’s individuals. The individuals fought the charges of illegal insider trading. Anthony Chiasson, was implicated in the insider trading charges and was convicted at trial.

But the verdict was overturned and the federal appeals dismissed the charges. That ruling by the United States Court of Appeals for the Second Circuit (U.S. v. Newman and Chiasson, 773 F.3d 438 (2d Cir. 2015)), made it more difficult to pursue insider trading cases. The Newman decision changed the SEC’s view of what constitutes illegal insider trading. The government now requires the government to prove a higher level of benefit than before.

The SEC appealed to the US Supreme Court, but it decided not to hear the appeal.

With the underlying charges gone, the Level Global feels it’s entitled to get its settlement back. The SEC is not contesting and a federal judge agreed to vacate the settlement.

Although the Supreme Court decided not to hear the Newman appeal, it did agree to hear another insider trading case with a similar issue.

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When a Compliance Officer Breaks Bad

There has been considerable discussion in the compliance community around the Securities and Exchange Commission bringing charges against compliance officers. There are three areas that the SEC feels it is justified in bringing charges: (1) when the compliance officer is involved in the wrongdoing; (2) when the compliance officer impedes the examination or investigation; and (3) when the compliance officer is in wholesale failure. The latest SEC charges against a compliance officer fall into the first area.

Breaking Bad long

Yue Han was an associate in the compliance department of Goldman Sachs. That gave him access to the emails of the investment bankers to look for potential misconduct. The SEC claims that Mr. Han broke bad and used the information he gathered from those emails to spot upcoming M&A activity for his own personal gain.

Mr. Han has not settled the charges so this story is based only the SEC’s allegations. He left the country and may not dispute the charges. The SEC has gotten an asset freeze, so he will have to fight the claim if he wants the cash back.

The SEC claims that its case stems from its Market Abuse Unit’s Analysis and Detection Center, which uses data analysis tools to detect suspicious patterns. The SEC claims that its enhanced detection capabilities enabled SEC enforcement staff to spot Han’s unusual trading activity in two different accounts.

Four companies are at the center of the SEC’s case: Yodle, Zulily, Rentrak, and KLA.  In each case, he bought out-of-the-money options cheaply just before an acquisition was announced and recognized a big gain after an acquisition was announced. Goldman Sachs was an adviser in each of the deals.

In one of the Han trading accounts, the broker-dealer barred him from acquiring further trading in the account. I assume the firm noticed the suspicious trading.

The complaint leaves out whether or not Mr. Han cleared his trades with Goldman. I would assume not since the firms would have been on the blocked list.

I would guess that Mr. Han is not going to dispute the charges and try to re-gain his trading profits.

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Outside Trading Defendants Settle

A month ago, the Securities and Exchange Commission brought charges against a large network of traders who made a big pile of money by hacking into corporate press release websites and trading on the news before it was made public. Two traders, who made $25 million in the scheme, settled the charges against them and returned the profits.

New_Toronto_Stock_Exchange_trading_floor

Ukrainian-based Jaspen Capital Partners Limited and CEO Andriy Supranonok agreed to pay the SEC $30 million to settle the charges. That’s a 20% premium on the $25 million that the firm made on the trades. The firm’s assets and accounts were frozen when the charges were brought. I assume that shut down business that went through the United States.

The scheme was based on hacks into Marketwired of Toronto, PR Newswire in New York, and Business Wire of San Francisco. The hackers got an early look at the press releases and traded on the likely movement of the stock.

At times, the scheme has been labeled “insider trading”, but that seems to be a bad label to me. The defendants were using stolen data for their trading strategies. They did not get the information through working inside or for the companies involved. John Reed Stark was one of the first to use the “outside trading” label.

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What’s in your Wallet? Insider Trading

Jennifer_Garner_Capital_One

It’s clearly insider when a company’s high-level executive trades on pending earnings data not yet released to the public. It’s clearly not insider trading when you count cars in a retailer’s parking lot to get insight to sales. A recent SEC case falls somewhere in the middle.

The Securities and Exchange Commission brought charges against two men who worked at a credit card company. The two crafty traders tracked credit card use to determine revenue trends for retailers and then traded based on that data.

Their plan was solid. They made over $2.8 million on a $147,300 investment, a return of 1,819%, according to the complaint. Those returns are too good. I would bet that their brokerage accounts were flagged by compliance.

The credit card company was not disclosed in the complaint, but Capital One has acknowledged that they’ve “been working closely with the SEC on this investigation, which involves two former employees.”

This case reminds me of the Railroad Insider Trading case where an employee noticed a bunch of “suits” walking around the railroad and some unusual activity in the office. He surmised that the railroad was getting sold, traded on that assumption, and made some money on the trade. The SEC thought he was engaged in illegal insider trading. A jury thought otherwise.

In this current case, the two men were subject to the credit card company’s rules on protection of this information. According to the SEC, they broke those rules.

They “knew or were reckless in not knowing that they owed their employer a fiduciary duty, or an obligation arising from a relationship of trust and confidence, to maintain the confidentiality” of the data.

In looking at the portions of Capital One’s insider trading policy, it probably should have addressed this particular topic. The portion of the code excerpted in the SEC complaint is a rather standard ban on illegal insider trading. It seems to fail to address the use of data at the company.

What the two traders did is certainly enough to get them fired. It was enough to get them charged by the SEC. It may be harder to get a jury to agree. Unlike some other recent insider trading cases, this one was filed in federal court. So it will be up to a jury, not one of the SEC’s administrative judges, to determine guilt.

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