This week we highlight Professor John Coffee Jr.’s article “Hobson’s CHOICE: The Financial CHOICE Act of 2017 and the Future of SEC Administrative Enforcement”, analyzing the Financial CHOICE Act and in particular its impact on SEC enforcement. This post was published in the Columbia law school’s blog on corporations and the capital markets.
This week, the Supreme Court in Kokesh v. SEC unanimously held that the Securities and Exchange Commission’s (SEC) equitable disgorgement remedy is subject to a five-year statute of limitations because it is a “penalty” within the meaning of 28 U.S.C. § 2462, which governs “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” Before Kokesh, some circuits had held that the SEC could obtain disgorgement of the entire amount of the ill-gotten gains or losses avoided, even those that extended well beyond the five-year statute of limitations associated with most federal securities laws. Kokesh clarifies that both civil penalties and disgorgement are subject to the same five-year limitations period.
On December 6, 2016, in an opinion written by Justice Alito, the Supreme Court unanimously affirmed the Ninth Circuit’s decision in Salman v. United States, a closely-watched insider trading tipping case. Salman builds upon Dirks v. SEC, 463 U.S. 646 (1983), a landmark decision in insider trading law decided more than thirty years ago. In Dirks, the Supreme Court established the basic template for tipper-tippee liability, holding that: (a) a tipper is liable if he or she discloses material nonpublic information to someone else in breach of a fiduciary duty and in order to receive a personal benefit; and (b) a tippee is liable if he or she knows that the tipper has disclosed inside information in breach of a duty and for a personal benefit, but trades on the basis of the information anyway. 463 U.S. at 659-60.
The EU Market Abuse Regulation (MAR), which came into effect across the EU on July 3, is a timely reminder in the aftermath of the UK’s Brexit referendum, that, for the time being at least, the UK remains a member of the European Union and that EU financial services legislation continues to have effect.
As predicted in this previous AG Deal Diary post, the U.S. Supreme Court has granted certiorari in United States v. Salman, No. 14-10204 (9th Cir. July 6), cert. granted (U.S. Jan. 19, 2016), an important insider-trading tipping opinion that created a circuit split with the 2nd Circuit’s watershed decision in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), cert. denied, No. 15-137 (U.S. Oct. 5, 2015).
The 9th Circuit just denied rehearing en banc in a closely watched decision that declined to adopt a broad interpretation of its influential sister circuit’s watershed opinion in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), which raised the bar for criminal prosecutions in tipper/tippee insider trading cases. A previous post discussing this case can be found here. In United States v. Salman, No. 14-10204 (9th Cir. July 6), reh’g denied (Aug. 13, 2015), Senior Judge Jed S. Rakoff of the Southern District of New York, sitting by designation, wrote for the 9th Circuit panel that a tippee (i.e., a person who knowingly receives material, nonpublic information from a source who is bound by a duty of confidentiality (i.e., a tipper)) could be held liable for insider trading even without proof that the tipper expected any pecuniary or similarly valuable personal benefit in exchange for providing the information. In the process, Judge Rakoff narrowly construed Newman, a recent major precedent from his home circuit, which, given the 2nd Circuit’s volume of insider trading prosecutions, had appeared to many to signal a judicial retreat from expansive remote-tippee liability.
A recent decision from the United States District Court for the Southern District of New York allowing a U.S. Securities and Exchange Commission (SEC) civil enforcement action to proceed against two former stockbrokers for alleged insider trading violations sheds additional light on application of the 2nd Circuit’s decision in United States v. Newman, No. 13-1837-cr(L) (2d Cir. Dec. 10, 2014). In the new decision, SEC v. Payton, No. 14 Civ. 4644 (S.D.N.Y. Apr. 6, 2015), Judge Jed S. Rakoff upheld the SEC’s allegations that traders Daryl Payton and Benjamin Durant III of Euro Pacific Capital improperly traded software company SPSS, Inc.’s stock based on material nonpublic information regarding the company’s pending acquisition by IBM. Payton and Durant allegedly received the tips from their Euro Pacific colleague Thomas Conradt, who in turn received them from his roommate, Trent Martin. Martin, in turn, originally learned of details regarding the IBM acquisition from a law firm associate working on the SPSS/IBM deal.
As previously reported, the 2nd Circuit’s December 2014 Newman decision attempted to clarify and delineate the boundaries of insider trading liability in tipper-tippee scenarios by holding that: (1) the personal benefit provided to the tipper—which has long been recognized as a necessary precondition in order for tipper-tippee insider trading liability to attach—must amount to a potential gain to the tipper of a pecuniary or similarly valuable nature and must resemble a quid pro quo; and (2) a tippee must know that the insider received a personal benefit. The Newman decision has been the subject of much commentary and has led the government to abandon prosecution of some criminal cases in which the evidence of the personal benefit to the tipper, or the tippee’s knowledge of the benefit, was deemed insufficient under Newman. Indeed, in February 2015, the U.S. Attorney’s Office for the Southern District of New York dropped the criminal insider trading charges pending against defendants Payton and Durant in light of Newman.
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In a landmark insider trading decision issued on December 10, 2014, the U.S. Court of Appeals for the 2nd Circuit made important pronouncements favorable to the defense on two recurring and important legal issues: (1) what is the standard for an improper personal benefit to a tipper in cases where there is no direct financial quid pro quo; and (2) what level of knowledge regarding the personal benefit is required on the part of a downstream tippee. The Court of Appeals’ decision reins in recent aggressive prosecutions that have pushed the limits of insider trading law. It will also affect future U.S. Securities and Exchange Commission (SEC) enforcement cases, especially those brought in the 2nd Circuit.
In United States v. Newman, No. 13-1837-cr (L) (2d Cir. Dec. 10, 2014), the 2nd Circuit threw out the insider trading convictions of Todd Newman, a portfolio manager at Diamondback Capital Management, and Anthony Chiasson, a portfolio manager at Level Global Investors. Both defendants had been convicted of conspiracy and securities fraud for trading in the securities of Dell and NVIDIA based on material nonpublic information that they obtained from analysts who worked at their firms. The analysts, in turn, had obtained the information via a multi-level disclosure chain originating with insiders working at Dell and NVIDIA. Newman and Chiasson were three and four levels removed from the original tippers, respectively. Their trades in these securities resulted in profits of $4 million and $68 million for their hedge funds. The information at issue consisted of the companies’ nonpublic earnings numbers.