December 2014

A great deal has been written about the recent reversal of two insider trading convictions.  Specifically, the U.S. Court of Appeals for the Second Circuit threw out the convictions of Todd Newman and Anthony Chiasson, hedge fund traders found guilty at the District Court level.

The press reports have treated the reversal as a major slap in the face for Preet Bharara, the U.S. Attorney for the Southern District of New York.  Bharara has made a big name for himself on the backs of numerous alleged – and quite a few convicted – insider traders, including Raj Rajaratnam.  While I’m sure Mr. Bharara isn’t happy about the reversal, he should take solace from the convoluted – no, byzantine – legal route by which insider trading convictions are achieved.

I suspect that most readers will not remember the SEC’s pursuit of Ray Dirks and a few others charged with insider trading many years ago.  Dirks, a securities analyst, uncovered a massive fraud perpetrated by a company named Equity Funding.  He alerted the SEC and some media about the matter, but neither did anything.  When he couldn’t gain any traction, Dirks advised his clients to sell the company’s stock.  For reasons that remain murky (including rumors of bad blood between the SEC and Dirks), the SEC decided to pursue insider trading charges against Dirks and a few other people who arguably should never have been prosecuted.

The courts have a way of dealing with cases that shouldn’t have been brought in the first place, and in this and some other prosecutions the outcome was the “misappropriation” theory of insider trading.  Simplistically stated, insider trading is not insider trading unless the tipper owed some duty to the company whose information was misappropriated (though not necessarily the company about which information was leaked) and derived a personal benefit from leaking the information.  Subsequent cases have generated many more wrinkles in what the theory really means.  As for Messrs. Newman and Chiasson, their convictions were reversed because even though their tipper derived a personal benefit from giving the tip, they didn’t know that he was deriving that benefit.

So if you think that the point of insider trading prosecutions is to maintain a level playing field, think again.  It’s not about what you know, or who you know; apparently, it’s about what you know about who you know.  There ought to be a law, but this isn’t it.

I’d like to know what you think.

A few weeks ago – “From the same wonderful folks who brought you conflict minerals (among other things)” – I complained about Senator Blumenthal’s attempt to tell the SEC what to regulate and how to regulate it.  I had an equal and opposite reaction to the recent news that Commissioner Gallagher and former Commissioner Grundfest had gone after the Harvard Shareholder Rights Project, in effect telling the Project (AKA Lucian Bebchuk) that its actions violate the federal securities laws.

I agree with some (though not all) of Commissioner Gallagher’s views.  I’m also troubled by the notion of an esteemed academic institution taking aggressive, one-size-fits-all positions on corporate governance matters.  However, in this case, I’m inclined to think that Commissioner Gallagher should have taken a higher road – encouraging discussion, maybe even holding an SEC Roundtable on the topic.  And if he really thinks that there’s a violation here, perhaps he should have whispered in the ear of the Enforcement Division that it might want to look into this.  Instead, he’s behaving somewhat like a bully – not that the Good Professor is likely to be quaking in his boots about it.

Also, it strikes me as downright inappropriate for a Commissioner to make a statement about a matter that the Commission could conceivably have to rule on if the matter ever does result in an enforcement action.  At a minimum, he’d have to recuse himself on the matter, which could mean the difference between victory and defeat.  And given recent criticisms of the SEC for (1) pursuing more matters as administrative proceedings than court cases and (2) unfairly touting its enforcement record, does Commissioner Gallagher think he’s enhanced the stature of the SEC by doing this?

Your thoughts?

money laundering
Photo by Seth M.

In recent years, the Financial Crimes Enforcement Network (“FinCEN”) and federal regulators of the financial services industry have more aggressively enforced the Bank Secrecy Act (“BSA”) and the economic sanctions imposed by the US Treasury’s Office of Foreign Assets Control (“OFAC”).  While this should in of itself be a matter of particular attention to the directors and officers of those entities in the financial services industry, so too should the recent trend toward increased scrutiny for directors and officers failing to address alleged BSA or OFAC compliance shortfalls. An August 2014 agreement reached by FinCEN and a former casino official permanently barring the official from working in any financial institution drives the point home: When it comes to liability for BSA or OFAC violations, FinCEN and federal regulators might not limit penalties to the entity actually committing violations, and instead, may also penalize the individual directors and officers of those entities. 

Even before FinCEN’s August 2014 bar of the casino official, a number of enforcement actions assessed personal monetary penalties against financial institution directors and officers over the past few years. In February 2009, the directors of Sykesville Federal Savings Association were collectively fined Continue Reading Directors and Officers Beware: You could be individually liable for your entity’s Bank Secrecy Act or Office of Foreign Assets Control violations