Former SAC Capital Advisors trader Mathew Martoma, the 79th person convicted of insider-trading charges since 2009, probably thinks that the Securities and Exchange Commission was unusually tough on him. But according to legal experts, tough is the new normal at the SEC.
Since 2010, the SEC has filed more insider-trading actions than in any other three-year period in its history—58 in fiscal year 2012, 57 in 2011 and 53 in 2010—and if “recent data and a slew of page-one headlines” are to be believed, Koji Fukumura of the law firm Cooley told FINalternatives, “2013 will be another record-breaking year in this area.”
Mary Jo White wants the SEC to be "felt and feared," said Fukumura. “In her first year as chair of the Commission, the former federal prosecutor has targeted insider-trading as a top priority in her quest to achieve that goal.”
But the current year, 2014, may see even more insider-trading cases, DLA Piper partner Nick Morgan told FINalternatives, thanks to two institutional changes that are gaining steam at the Commission:
“First,” said Morgan, “the Dodd-Frank Whistleblower Program provides a financial incentive for people to provide the SEC with information about possible violations of the federal securities laws. According to the SEC’s Office of the Whistleblower, fiscal year 2012 saw 190 tips about insider trading and 2013 saw 196 such tips. As those matters work their way through the investigative and litigation process, informants will receive payments and, the SEC hopes, more tips will be made, resulting in more enforcement cases.”
The second change involves the formation, in 2010, of specialized enforcement units within the Commission designed to focus on particular areas of misconduct.
“One such group,” said Morgan, “the market abuse unit, focuses on suspected large-scale insider trading networks and rings—'organized' insider-trading of the sort alleged in Galleon-related matters.”
Previously, the head of that unit was also head of one of the SEC's regional offices, but he recently stepped down from the latter post to focus on the market abuse unit.
“This move signals the SEC’s strong institutional support for devoting resources to bringing more insider-trading cases,” said Morgan.
Michael Attanasio, another Cooley attorney, agreed:
“Expert networks and hedge funds remain near the top of the list,” Attanasio told FINalternatives. “In the wake of Galleon and SAC Capital, the SEC has charged more than three dozen individuals and firms in enforcement actions arising out of its investigation into the exchange of specialized information between expert networks and investment firms. According to the Commission, this investigation 'has uncovered widespread insider trading at several hedge funds and other investment advisory firms.'”
We'll See You In Court
But it's not simply that the SEC is pursuing more insider-trading cases, it's that more of these cases are ending in litigation. One reason for this, said Morgan, is that the Commission is less inclined to allow individuals charged with insider-trading to settle by paying back any profits made or losses avoided (as well as civil penalties) while neither admitting nor denying the SEC’s allegations—a form of settlement common in the past.
“This year,” said Morgan, “the SEC has said that in an increasing number of cases, it will not settle...unless the defendant admits wrongdoing. The combination of the SEC’s unwillingness to agree to no-admission settlements [combines] with increasingly aggressive legal positions virtually guarantees that 2014 will see more insider trading cases litigated in court.”
But those increasingly aggressive legal positions have produced mixed results for the SEC, according to Cooley's Attanasio.
While it reached a record $616 million settlement with CR Intrinsic, a unit of SAC, in March and saw SAC plead guilty to criminal fraud charges as part of a $1.2 billion deal with federal prosecutors in November, in between, the Commission lost a high-profile case:
“In October,” Attanasio told FINalternatives, “the SEC failed to convince a jury that billionaire Mark Cuban engaged in insider trading when he sold his stake in a Canadian internet company to avoid a $750,000 loss. The SEC’s defeat grabbed national attention and raised questions about the agency’s recent track record in the courtroom. Time will tell whether this setback will have any effect on the SEC’s willingness to take similar cases to trial—though statements Chair White has made recently suggest otherwise.”
Morgan said the Cuban verdict was the “poster child” for the SEC's “envelope-pushing claims that ultimately fail.”
“The jury in that case found that the SEC failed to prove the most elemental parts of its case, including whether the information at issue was nonpublic or material and whether Mr. Cuban had a duty not to trade on it,” said Morgan.
And the Cuban case was not the only example of SEC insider-trading claims being rejected in litigation. As recently as November 21, said Morgan, New York Federal District Court Judge Oetken dismissed an SEC insider-trading complaint and modified an asset freeze over trading proceeds.
Other trends to watch for in 2014, according to the Cooley attorneys, include an increase in SEC filings of administrative proceedings seeking civil monetary penalties, a practice recently authorized under Dodd-Frank.
“These proceedings are generally less favorable for defendants than federal court, which probably explains the SEC’s recent decision to file an administrative action for 'failing to supervise' against SAC Capital founder Steven A. Cohen,” said Fukumura.
Another trend to watch, he said, is the Commission's reliance on analytic technology to identify suspicious trades—technology like the Advanced Bluesheet Analysis Program which “Chair White describes as a 'force multiplier' designed to expand the agency’s enforcement footprint.”
These initiatives, said Fukumura, “evidence the SEC’s commitment 'to create an environment where you think we are everywhere.'”
As the attorneys from Cooley said, “Stay tuned.”