In December 2014, I posted my concerns with the law on insider trading.  Perhaps someone read it, because the following year, H.R. 1625, the “Insider Trading Prohibition Act,” was introduced in the House of Representatives.  I regarded it as imperfect but a start.   Of course, it went nowhere, and the state of the law has not changed.

Well, it’s back – sort of – and may have a bit of life.   H.R. 2534, with the same title as in 2015, was introduced by Congressman Jim Himes (D-CT), who introduced the 2015 bill, and co-sponsored by Carolyn Maloney (D-NY) and Denny Heck (D-WA).  What’s new about the bill is that it was approved – unanimously – by the Financial Services Committee in May.  That probably doesn’t mean anything, as Congress seems to be the place where legislation goes to die, but I suppose anything is possible.

Like its predecessor, it’s a start.  But I still think it’s imperfect.  The title of the first section is promising: “Prohibition Against Trading Securities While In Possession Of Material, Nonpublic Information.”  Sounds good, right?  The mere possession of MNPI means you can’t trade.  Wrong.  The text of the section gives the lie to its title.  Specifically, the prohibition exists only if the person trading “knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.”  In other words, (1) the bill seems to say it’s OK to trade while in possession of inside information as long as the information was not known to have been obtained wrongfully or is being used wrongfully (whatever the latter means), and (2) it would get us right back into the very issues that make the present state of the law so confusing.  You can’t trade in a stock if you know (or should have known) that the MNPI was wrongfully obtained, but what if you don’t know or have no reason to know it was wrongfully obtained?  If someone suggests that you buy (or sell) a particular stock, what is your duty of inquiry, and where does it end?


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A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”

It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session.  A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters.  And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.

Problems with the Approach

I’m not saying that all of the ideas being floated are awful, or even bad.  (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.)  In fact, some of the ideas merit consideration.  However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question.  (I have problems with some of the ideas, as well, but more on that later.)

  • First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address.  At the risk of hearing you say “duh”, this does not lead to good legislation.
  • Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.

Problems with the Proposals

As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.
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No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.


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On February 21 the SEC issued a  “Commission Statement and Guidance on Public Company Cybersecurity Disclosures”. The Release contains new guidelines and requirements regarding public companies’ disclosure responsibilities for cybersecurity situations. No new rules or regulations have been issued at this point, but the Release contains some valuable guidance. It is also clear that cybersecurity is a hot button for the SEC and for Chair Clayton, and I believe that cybersecurity disclosure issues will be subject to more rigorous scrutiny going forward. All public companies should carefully review the Release and evaluate their disclosure obligations in connection with cybersecurity.

The Release updates the SEC’s position on cybersecurity. The SEC’s previous guidance in this area was primarily a Corporation Finance Division Release issued in 2011 that did not contain specific disclosure requirements. The cybersecurity landscape has changed radically since then. The substantial increases in the number and severity of cybersecurity incidents, coupled with the growing dependence of businesses on cyber systems and the associated problems that arise in a cybersecurity incident, have clearly convinced the SEC that additional disclosure is required.
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This is a first for The Securities Edge – a book review.  The book in question is The Chickenshit Club – Why the Justice Department Fails to Prosecute Executives by Jesse Eisinger.  Mr. Eisinger is a writer for Pro Publica.  He’s a very smart man and a good (even great) reporter; among other things, he’s won the Pulitzer Prize.  I met him once and was impressed by his intellect and commitment.

However, the book bothers me greatly, and that’s why I’ve decided to post this review.  As indicated by his title, he is concerned with the failure to prosecute executives, both generally and in connection with the financial collapse.  That concern is legitimate; many people – including people in business – share it, and some hold the failure at least partially responsible for our political situation today.  The problem with the book is that in Mr. Eisinger’s view there are heroes and villains and nothing in between; those who prosecute are good, and those who don’t (or who do so halfheartedly) are bad – and the businessmen themselves are the worst of all.

For example, among the people he idolizes is Stanley Sporkin, a retired USDC judge who previously served as the SEC’s Director of Enforcement. Mr. Sporkin’s integrity may be beyond question, but in Mr. Eisinger’s view, his judgment is (and was) as well.  Those of us who practiced during Mr. Sporkin’s tenure at Enforcement may have a different view.  Among other things, Mr. Sporkin was responsible for pursuing insider trading cases against Vincent Chiarella and Ray Dirks.   Mr. Eisinger lauds Mr. Sporkin for going after Mr. Chiarella – a typesetter for a financial printer who saw some juicy (nonpublic) information and traded on it.  Did he trade on the basis of inside information?  Yes, but at the end of the day he was a schnook who should have gotten a slap on the wrist rather than being subjected to a (literal) full court press by the federal government.  The courts apparently felt the same way, and, as courts often do, they found a way to let him off the hook by developing a strained approach to insider trading law that continues to haunt us today.  (Mr. Eisinger doesn’t mention the equally ill-advised insider trading prosecution of Ray Dirks, which also contributed to the current garbled state of affairs in insider trading law.)


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14779792521_b054cf2506_zIn the few days since the Supreme Court handed down its decision in Salman v. United States, many commentators have said, in effect, that criminal prosecutions for insider trading are alive and well.  Alive, yes; well, maybe not.

At the risk of quoting myself, almost exactly two years ago I posted an item on this blog entitled “There ought to be a law”.  My belief at the time was that insider trading law is so byzantine that it’s impossible to know where legally permissible behavior becomes legally impermissible behavior.  For better or worse (worse, IMHO), nothing has changed all that much.  In the Salman decision, SCOTUS says that a prosecutor need not prove that a tipper received something of a “pecuniary or similarly valuable nature” to convict the tipper of illegal insider trading.  So far, so good.  However, as many commentators have pointed out, Salman leaves any number of other issues wide open.


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