Are There Any Lessons From The SEC’s Insider Trading Cases Brought Over The Last 17 Months?
The recent publication of the SEC Division of Enforcement’s 2018 Annual Report provided an opportunity to look back over the SEC’s insider trading cases brought from October 2017 (the start of the SEC’s 2018 fiscal year) through the present. In that 17 month period there were 59 insider trading cases brought, compared to 52 cases brought in the prior 17 month period. Although an increase of over 10%, none of the cases in the most recent period involved hedge funds or investment advisory firms. Rather, the SEC cases in this period all involved trading by individuals for their own accounts – although several tried to hide their trading by using a relative’s or friend’s account. Compare that to 2012, when the SEC filed 58 insider trading cases in a 12 month period, and hedge funds and industry professionals featured in a significant portion of those insider trading cases (and in the majority of the DOJ’s criminal insider trading cases). Over 60% of the recent cases involved trading by officers and employees of public companies or traders who had obtained the MNPI from them (most of the traders had been tipped by the insiders, but some had misappropriated the information from the insiders). The remainder of the cases involved the usual mix of lawyers, bankers, accountants, hackers, and others. None of the cases involved paid experts or third-party research providers.
As far as the MNPI in the cases, was any of it the type of subtle, borderline material information that keeps CCOs up at night? Not at all, at least according to the SEC’s allegations. Almost 60% of the cases involved MNPI about acquisitions – which is as material as information gets. Information about upcoming earnings announcements, also almost always material, was the next largest category at about 12% of the cases. The complete breakdown of MNPI topics in the cases is as follows:
(investments, strategic partnerships, licensing agreements)
|Drug Trials/FDA Approval||10.2%|
(oil discovery, secondary offering, product milestones)
Almost 14% of the cases involved situations where MNPI was misappropriated from a friend or family member. The typical fact pattern in these cases involve spouses, where one is alleged to have violated an explicit or implied agreement to keep confidential the MNPI shared by the other spouse. Familial and fraternal misappropriation cases used to be rare, and it is hard to know if there are simply more of these situations being uncovered or if they are increasing because they offer an easier way to settle cases (since it allows one of the parties to avoid liability and any allegation of wrongdoing). A quarter of the cases were brought as administrative proceedings (APs), which is regarded as a signal of a less serious case than those brought in the traditional venue of federal district court. The meaningful proportion of the cases brought as APs reflects the SEC’s acknowledgement that some insider trading cases are less egregious than others and also a willingness to be flexible to settle cases. Notably, all of the APs were settled cases, as litigating contested insider trading cases in the administrative forum continues to be a controversial tactic (and generally regarded as less fair to the accused).
Is there anything useful for hedge funds and compliance professionals to learn from these cases? The fact that the vast majority of MNPI originates with public company insiders is a reminder that direct contacts with public company officers and employees remains the most likely vector for receiving MNPI. One case reaffirmed that information about a secondary offering is material and that agreeing with a broker to “go over the wall” to learn of the secondary is a “duty” for insider trading purposes. A few cases reaffirmed the SEC’s position that a consultant’s nondisclosure agreement creates a duty on their part to refrain from trading (or tipping) if they become aware of MNPI. Unbelievably, one case also reminds us that in-house attorneys at public companies who review earnings announcements before their release and who are responsible for insider trading compliance cannot themselves trade in front of the earnings announcements. Beyond these (hopefully) generally understood concepts, the parsing of this information is mostly just interesting (to some of us). Certainly no one should take comfort from the fact that no private funds or fund professionals were named in these cases, and compliance practices should remain as vigilant as ever. The fact, for example, that there was not an expert network case brought last year does not mean that there will not be one next month. Large-scale insider trading enforcement in the securities industry is a cyclical phenomena. Some firms’ compliance practices will deteriorate over time, new entrants to the business will not have had first-hand experience with the last wave of insider trading cases, practices will get sloppy, and the cycle will repeat itself. Prepare now so that when it does, it is some other firm that gets in trouble and not yours.
The list of the cases with links to the SEC’s releases can be found here.