Insider Trading: The SEC’s FY 2019 Cases
Last week the SEC’s Division of Enforcement published its Annual Report for the fiscal year ended September 30, 2019 (available here). The Report showed that in FY 2019 the Commission brought 526 stand-alone enforcement actions, an increase of over 7% from the 490 cases brought in 2018. Likewise, a total of $4.349 billion of disgorgement and penalties was ordered in 2019, an increase of about 10% from 2018. Against this backdrop of increased enforcement activity, one decline – in the number of insider trading cases – stood out quite noticeably. The 30 insider trading cases the SEC brought in 2019 represented a 40% drop from the 51 insider trading cases brought in 2018 and a 35% drop from the average number of cases brought annually in the preceding three years (2016-2018). Insider trading cases, a mainstay of the SEC’s enforcement program for decades, have typically constituted about 10% of the SEC’s enforcement actions. In 2019 they represented only 6% of the cases the Commission brought. It seems unlikely that the incidence of insider trading in the market has dropped so dramatically. Rather, the lower numbers in 2019 undoubtedly reflect the Division’s use of its limited resources to focus on other areas such as retail issues (for example, the 96 cases brought against investment advisers in the share class initiative) and ICO related matters.
None of the 2019 insider trading cases involved an action against an investment adviser or hedge fund, although the Rooney case involved a registered representative of a dual registered broker/adviser and in the Blakstad case the defendant allegedly used an acquaintance’s hedge fund account to (unsuccessfully) conceal his trading. Continuing the trend from 2018, about 20% of the cases involved an alleged misappropriation of information from a family member or close friend. Typical of these cases is the Hengen case, where the defendant is alleged to have breached a duty of trust and confidence to his wife when he traded after overhearing her discuss an acquisition on a telephone call. The cases in 2019 also saw about 25% of the actions brought as administrative proceedings – largely unheard of a decade ago, but in recent years more common and now a negotiating point in settlement discussions (since administrative proceedings are regarded as less serious than a federal district court lawsuit). Almost a quarter of the cases, 23%, involved a parallel criminal case brought by the Department of Justice.
The nonpublic information alleged in the cases continued to be, by and large, unquestionably material. While not an aspect of the legal definition of materiality, the one-day stock price movement caused by the information at issue in the 2019 cases averaged about 47%. The variation in individual cases was, however, quite extreme, with stock price movements ranging from 4% to 393%. As always, the material, nonpublic information in the 2019 cases primarily concerned acquisitions and earnings announcements. The breakdown of MNPI topics was as follows:
|Mergers & Acquisitions||17 cases||57%|
|Joint Venture/Strategic Partnership||2 cases||7%|
|Secondary Offering||1 case||3%|
|Withdrawal of FDA Application||1 case||3%|
Since the number of insider trading cases was dramatically lower in 2019 should regulated entities ratchet back their insider trading compliance program and focus their attention elsewhere? No. First, the 2019 numbers don’t change the fact that the SEC is still looking for insider trading and the risk of detection remains significant. For example, the Commission’s examiners are still actively looking at insider trading issues when conducting their regular examinations of investment advisers and brokers. Also, the SEC has gotten much better at using data analytics to detect suspicious trading, and has been much more effective in uncovering insider trading rings and efforts to conceal illicit trading. Second, insider trading enforcement has historically been cyclical and we are clearly in the down phase of the cycle. With fewer cases brought and less publicity around insider trading, practices get sloppy, risk taking expands, and new entrants to the industry have no historical memory of vigorous enforcement to temper the temptation of a quick buck – which invariably means that the seeds of the next wave of insider trading cases are being sown now.
The Division of Enforcement’s 2019 Annual Report confirms the anecdotal evidence that insider trading enforcement is in a bit of a lull at present. However, the lull will not last, insider trading enforcement will not disappear, and the number of insider trading investigations and cases the SEC brings will certainly rebound to historical levels.
A list of the SEC’s FY 2019 insider trading cases with links to the SEC’s releases can be found here.