Navigating the complexities of insider trading allegations requires a legal partner with a nuanced understanding of securities laws and a proactive approach to compliance.
We offer tailored defense and compliance solutions to individuals and organizations facing insider trading investigations or enforcement actions. With a commitment to strategic counsel and vigorous advocacy, we empower our clients to navigate the challenges of insider trading allegations with confidence and clarity.
Insider trading allegations can arise from the unauthorized buying or selling of securities based on material, non-public information about a company. This practice can undermine market integrity and expose individuals and entities to civil and criminal liability. Compliance with insider trading laws and regulations is critical to avoiding violations and safeguarding against enforcement actions. On the other hand, efficient market purists argue that insider trading has the advantage of helping investors and the market because trades made with inside information affect the market pricing of securities and actually have a positive market impact because the market price more accurately reflects the securities’ actual values with the undisclosed information factored in. It will come as no surprise that this view has not gained traction with the courts, the SEC, or the DOJ and, for the foreseeable future, companies and individuals will need to ensure policies are in place and followed to minimize insider trading risk.
“Classical Theory” of insider trading. This is when an “insider,” that is someone who is an employee, director, or officer of a public company, commits securities fraud in violation of Exchange Act Section 10(b) and Rule 10b-5 by trading in the securities of their own company on the basis of material, non-public information. The insider must either owe a fiduciary duty to the public to disclose the information or to their company to maintain the confidentiality of the information. Also under the classical theory, an insider who tips an outsider by providing the outsider with material non-public information which the outsider uses to trade in the insider’s company’s securities, may have engaged in insider trading if the insider personally benefited from the tip. The outsider is a “tippee” and the insider is a “tipper” under these circumstances.
“Misappropriation Theory” of insider trading. Under this theory, an individual trades stock in a company in which they are not employed or associated on the basis of material non-public information which they obtain through a breach of a fiduciary duty owed to the source of the information. The trader does not need to owe a fiduciary duty to the company the security of which is traded. This theory, pushed by the SEC, came to fruition in U.S. v. O’Hagan, a 1997 Supreme Court case, where a partner at a large law firm purchased stock futures in a company conducting a tender offer based on inside information that he gleaned from other partners at the firm working on the deal. Although the partner had no fiduciary duty to the companies in whose stock he traded, the Supreme Court found him liable under SEC Rule 10 b-5 on the grounds that he used confidential information to trade securities. The Court reasoned that such insider trading is fraudulent because it is akin to embezzlement; that is, the owner of the confidential information has exclusive use of such information, and the trader misappropriates that information by trading on it and not disclosing the use of the information to the owner of the information. The SEC has since codified the misappropriation theory into Rule 10b-5-1.
“Shadow Trading Theory” of insider trading. More recently, the SEC has extended the misappropriation theory to situations where a person lawfully obtains material, nonpublic information but, instead of trading in the securities of the company to which the person owes a duty of trust and confidence, the person uses the information to trade in the securities of another company to which the person does not owe such a duty. The shadow trading theory was first accepted by a court in SEC v. Panuwat, Case No. 3:21-cv-06322-WHO (N.D. Cal. Jan. 14, 2022), when the court denied the defendant’s motion to dismiss. It remains to be seen how often this theory will come into play (and whether it will be overturned by appellate courts), but the SEC sees no problem in pushing the envelope of what constitutes insider trading.
Represented two siblings in an SEC investigation into allegations that one sibling had tipped off the other to an impending merger at his company; the investigation ended with no case brought against our client.
Represented a senior executive at a public healthcare company who the SEC alleged had made trades in a personal IRA account to avoid losses ahead of the company’s quarterly disclosure of its financial results, in which the company disclosed significant losses; the investigation concluded with no case brought against our client.
Conducted an internal investigation on behalf of a large, publicly traded company into allegations that several executives in one of its business units had executed trades in the company’s stock in their own accounts and tipped off friends and relatives in advance of a large merger announcement. The company self-reported the results of the investigation to the SEC, terminated a number of executives and employees, overhauled its internal compliance processes and procedures, and resulted in a favorable SEC settlement.
The acronym SEC is ambiguous when it comes to the people within this government agency:
(1) In the strictest sense, the SEC is the “Commission”—the Securities Exchange “Commission”—which has five commissioner slots, one of which the chairman occupies. The SEC chairman is not simply the primus inter pares (“first among equals”), but more like the chief executive officer with the final decision-making power over employment decisions within the agency, agenda-setting authority, and so on. The chairman, however, has no employment-decision power over any of the other commissioners.
(2) In another strict sense, the SEC is the staff of the Commission, or the “SEC Staff.” The staff work for the Commission and consist of supervisory federal employees and non-supervisory employees. Sometimes some SEC employees who are not Commissioners (that is, are staff members) refer to other employees as staff, but all employees other than the Commissioners are staff members.
(3) In a global sense, the SEC is the Commission and its staff. This is the default meaning.
The SEC is structured into divisions, which have their offices within, and “independent” offices. The divisions are structured to address one or more federal securities statutes or parts of one or more of these statutes. The offices are generally agency-support offices. The Division of Enforcement is the division within the SEC that sues people for alleged violations of one or more federal securities laws.
When it comes to a society’s sets of written, oral, and implied rules or laws, “law,” and the studies concerning their origins, development, and justifications, such as political philosophy and jurisprudence, one discovers that lawyers, judges, and legislators create categories, use concepts, and construct social fictions and treat them as real objects in a real world.
For instance, the “state” is a categorical construct of political philosophy, even though one can apply the term to nations. Similarly, a corporation has no existence beyond the individuals who work for and interact with it. Where is the “title” to your house? If it’s in a piece of paper called a deed, and you lose the deed, do you lose your title? The “legal fictions,” as they are called, really refer to categorical concepts that we are taught to treat as if they exist, which gives them a “social existence.”
“Authority” is another social construct. It effectively binds and blends the notions of power and legitimacy. Administrative authority is the set and scope of decisions that the legislature—the maker of rules—gives to an administrative agency to administer the legislature’s statutes. It is conceived as a thing being handed from one group (the legislature) to another (the agency). The SEC is the administrative agency that Congress has tasked to administer—clarify, monitor, and enforce—Congress’s set of federal securities statutes.
Because “authority” is treated as a thing, Congress hands it to the Commission (the SEC), and the Commission can, but does not always, hand it to staff within the Division of Enforcement (“Enforcement”). This handing-off is called “delegation.” Enforcement needs delegated authority from the Commission (1) to use the Commission’s powers to issue subpoenas and compel appearance of witnesses and to take testimony of witnesses under oath during an investigation; and (2) to sue a company or individual for a certain violation (claim or “charge”) either in a U.S. district court or in-house as an administrative proceeding.
No. The SEC Enforcement staff can investigate without the Commission’s powers to compel documents and testimony (without subpoena powers) or with such powers. Often, the first level of an investigation begins without subpoena powers, to determine whether it is worth the staff’s resources (time, energy, travel costs, etc.) to continue investigating.
The SEC’s Division of Enforcement generally needs “predication” to undertake an investigation. Predication is the basis or reason for investigating, and it normally includes several questions: (1) What information exists at the time of the decision to believe that X violated one or more of the federal securities laws? (2) How likely is it that X violated the law? (3) How easy is it to obtain and process additional needed information to decide at a later date whether to continue the investigation: and (4) How important is the violation to the public, the market, etc.?
Yes. However, because the SEC’s investigations are non-public, there is no great fanfare or publicity when the investigation is closed unless the subject of the investigation puts out a press release or discusses it publicly.
The word MUI is the SEC’s acronym for a “matter under inquiry.” A matter under inquiry is an investigation that is undertaken without the authorization to use the Commission’s subpoena powers. A MUI may be opened and closed without ever becoming a formally authorized investigation in which the Commission has authorized the Enforcement staff to use its subpoena powers.
In the course of a MUI, the Enforcement staff can obtain information on their own or voluntarily from individuals and companies. Oftentimes, individuals and companies provide information (1) to show the Enforcement staff that there is no reason for an investigation, and (2) to not create an excuse for the Enforcement staff to seek and obtain a formal order of investigation.
A matter is a transaction, set of transactions, or other activities of an individual and company that the SEC is investigating; a case is a matter (or a certain part of a matter) that is before a federal court or an SEC administrative proceeding.
The SEC has only civil jurisdiction, but can nonetheless impose monetary fines. Its actions cannot cause someone to be incarcerated, although it sometimes works in parallel with the U.S. Department of Justice, typically through a U.S. attorney’s office for the federal district where the company or individual in question is headquartered or resides. Each federal district has its U.S. attorney, U.S. marshal, and U.S. district court.
Why does the SEC make public announcements about “charging” people with violations? Civil claims are the civil equivalent of criminal charges. The SEC’s “charges” are civil claims, but using the verb “to charge” in the past tense sounds more conclusive and forceful than using “the verb to claim” in the present tense: Which is better, from the SEC’s perspective: “SEC charged X with violating Y” or “SEC claims X violated Y”?
The Enforcement Manual is a public document that, according to the SEC, is a reference only for Enforcement staff. It was first published in 2008, and has been revised since.
To avoid the argument that the Enforcement Manual provides “rights” to anyone, the Manual explicitly states that “[i]t is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter, civil or criminal.” (1.1, entitled, Purpose and Scope). It is a good source of information for Enforcement operations.
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To learn more about the phases of an SEC investigation, please refer to the separate Legal FAQ called “What if it’s an SEC Investigation?”