Thursday, July 30, 2015
Since the financial crisis in 2008, the DOJ has been teaching yet another generation of insider traders the important lesson that one shall not trade on confidential inside information. However, that campaign took a big - one might say devastating - hit when the Second Circuit overturned Judge Rakoff and threw out insider trading convictions in US v Newman. In Newman, the court held:
[W]e hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government's evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants' purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders' fiduciary duties.
Under Dirks, in order for an insider to generate 10b-5 liability, they have to breach their fiduciary duty by receiving some personal benefit. Until Newman, courts have generally construed the personal benefit requirement fairly broadly. So, where friends share inside information until Newman courts have generally agreed with the government's position that that was sufficient for purposes of Dirks' personal benefit requirement. Newman narrowed that area of agreement significantly:
We have observed that "[p]ersonal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, any reputational benefit that will translate into future earnings and the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend." Jiau, 734 F.3d at 153 (internal citations, alterations, and quotation marks deleted). This standard, although permissive, does not suggest that the Government may prove the receipt of a personal benefit by the mere fact of a friendship, particularly of a casual or social nature. If that were true, and the Government was allowed to meet its burden by proving that two individuals were alumni of the same school or attended the same church, the personal benefit requirement would be a nullity. To the extent Dirks suggests that a personal benefit may be inferred from a personal relationship between the tipper and tippee, where the tippee's trades "resemble trading by the insider himself followed by a gift of the profits to the recipient," see463 U.S. at 664, 103 S.Ct. 3255, we hold that such an inference is impermissible in the absence of proof of a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. In other words, as Judge Walker noted in Jiau, this requires evidence of "a relationship between the insider and the recipient that suggests a quid pro quo from the latter, or an intention to benefit the [latter]."
I suppose an explicit quid pro quo requirement is consistent with where the US Supreme Court has been going in recent years in its political corruption cases, so one shouldn't be too surprised that a circuit court also goes this way.
Judge Rakoff who heard the Newman case at the District Court level was obviously none to happy with being overruled. Why do I say that? Well, because of a Ninth Circuit case handed down this past June. In US v. Salman, the Ninth Circuit, in an opinion written by ... Judge Rakoff sitting by designation, declined to follow Newman:
[Appellant] Salman reads Newman to hold that evidence of a friendship or familial relationship between tipper and tippee, standing alone, is insufficient to demonstrate that the tipper received a benefit. In particular, he focuses on the language indicating that the exchange of information must include "at least a potential gain of a pecuniary or similarly valuable nature," id. at 452, which he reads as referring to the benefit received by the tipper. Salman argues that because there is no evidence that Maher received any such tangible benefit in exchange for the inside information, or that Salman knew of any such benefit, the Government failed to carry its burden.
To the extent Newman can be read to go so far, we decline to follow it. Doing so would require us to depart from the clear holding of Dirks that the element of breach of fiduciary duty is met where an "insider makes a gift of confidential information to a trading relative or friend." Dirks, 463 U.S. at 664. Indeed, Newman itself recognized that the "`personal benefit is broadly defined to include not only pecuniary gain, but also, inter alia, . . . the benefit one would obtain from simply making a gift of confidential information to a trading relative or friend.'" Newman, 773 F.3d at 452(alteration omitted) (quoting United States v. Jiau, 734 F.3d 147, 153 (2d Cir. 2013)).
In our case, the Government presented direct evidence that the disclosure was intended as a gift of market-sensitive information. Specifically, Maher Kara testified that he disclosed the material nonpublic information for the purpose of benefitting and providing for his brother Michael. Thus, the evidence that Maher Kara breached his fiduciary duties could not have been more clear, and the fact that the disclosed information was market-sensitive — and therefore within the reach of the securities laws, see O'Hagan, 521 U.S. at 656 — was obvious on its face. If Salman's theory were accepted and this evidence found to be insufficient, then a corporate insider or other person in possession of confidential and proprietary information would be free to disclose that information to her relatives, and they would be free to trade on it, provided only that she asked for no tangible compensation in return. Proof that the insider disclosed material nonpublic information with the intent to benefit a trading relative or friend is sufficient to establish the breach of fiduciary duty element of insider trading.
And just like that - a circuit split! According to Alison Frankel, the DOJ has just filed for cert in Newman to resolve this split. No doubt, this is going to be the biggest and most consequential insider trading case before the Supreme Court in recent years if the court decides to grant cert.
Tuesday, January 13, 2015
In China, a merger between two large state-owned railroad companies may be heading for trouble. Why? Apparently 20 executives in both companies AND their families were engaged in insider trading in the 6 months leading up to the announcement of the deal. According to the China Daily:
Last October's merger plan actually disclosed the stock holdings of the executives and their relatives. It claimed that the executives were unaware of the plan when they engaged in the stock trading, and their various investment decisions were made solely based on the value and prospect of the companies.
The merger document showed that Cui Dianguo, president of the CNR, bought 15,000 shares in CSR at an average of price 5.14 yuan (87 cents) per share and sold 50,000 shares at the price of 5.96 yuan from April to October last year, according to the public information. But the company did not disclose how many shares Cui owned before April.
The largest amount of stocks traded were by Gao Zhi, CNS's vice-president and his relatives. They bought and sold nearly 2 million shares in CSR with total investment exceeding 10 million yuan prior to the trading suspension, according to the information.
So, the president of one of the two companies involved in this transaction claims not to have known that the deal was pending? You know ... we can see you.
Tuesday, October 21, 2014
Ken Ahern has posted a new paper, Information Networks: Evidence from Illegal Insider Trading Tips
Abstract: This paper exploits a novel hand collected dataset to provide a comprehensive analysis of the demographics and social relationships behind illegal insider trading networks. I find that the majority of inside traders are connected through family and friendship links and a minority are connected through professional relationships. Traders cluster by age, occupation, gender, and location. Traders earn prodigious returns of about 35% over 21 days, where traders farther from the original source earn lower percentage returns, but higher dollar gains. More broadly, this paper provides some of the first evidence on information networks using direct observations of person-to-person communication.
The paper is really interesting. There's a ton of data. Let's start with the most important for my purposes: more than 51% of all insider trading tips involve M&A announcements. Ahern had access to the LexisNexi Public Records Database (LNPRD) for his work and was able to give us a look at who inside traders - who have been caught - are:
There are 622 people in the data set. Of these, 162 people are tippers only, 249 are tippees only, 152 are both tippees and tippers, and 59 are original information sources who do not tip anyone else. Table IV presents summary statistics of the people. Across the entire sample, the average age of the people in the sample is 44.1 years old and 9.8% of the people are women. The youngest person is 19 years old and the oldest is 80. The large majority of insiders (92%) are married.
On of the most common occupation among inside traders is top executive with 107 people. Of these, 24 are board members and the rest are officers. There are 55 mid-level corporate managers and 59 lower-level employees in the sample, including 8 secretaries, 11 information technology specialists, and a few nurses, waiters, and a kindergarten teacher. There are 61 people who work in the “sell side” of Wall Street including 13 accountants, 24 attorneys, 4 investment bankers, and 3 sell side analysts. I divide the “buy side” into two groups by rank in investment firms: there are 60 portfolio and hedge fund managers and 65 lower-level buy side analysts and traders. Small business owners and real estate professionals account for 39 people in the sample and 38 people have specialized occupations, including 16 consultants, 13 doctors, and 9 engineers. There are 135 people for which I cannot identify an occupation.
As a final set of summary statistics, I compare inside traders to their neighbors. For the 448 inside traders that I can identify in the LNPRD [date set], I randomly pick a neighbor of the same gender as the insider. Neighbors are literally next-door-neighbors, as I choose the person that lives on the same street as the insider with the street number as close to the insider’s street number as possible. ... Choosing a comparison sample from the same neighborhood and of the same gender helps to control for wealth, age, and occupation, and highlights the remaining differences between insiders and non-insiders. ...
Insiders are statistically different than their neighbors in many ways. Insiders have a higher likelihood of owning residential real estate, are more likely to be accountants and attorneys, and significantly less likely to be registered as a Democrat, compared to their neighbors. ... [I]nside traders are less likely to declare bankruptcy, but are about twice as likely to have liens and judgments filed against them, compared to their neighbors. ... [I]nsiders are considerably more likely to have a criminal record compared to their neighbors (53.7% versus 12.8%).
And then, there's this: an analysis of the ethnic surnames of the tipper/tippees. The message? Inside traders like to keep their tips within their ethnic group or as currency to buy their way into the dominant 'inside' group.
Very interesting paper. Download it now!
Tuesday, June 17, 2014
I am shocked! Shocked that there is insider trading in advance of merger announcements! OK, so I'm not. But, what is surprising is just how much of that insider trading happens via equity options. Seriously. I know you can make a lot of money in equity options, but you're also going to get caught. Anyway, there is a new study by Augustin, Brenner and Subramanian, Informed Options Trading Prior to M&A Announcements: Insider Trading? I think that's a rhetorical question. Here's the abstract:
Abstract: We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash offers for large target firrms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.
Three in a trillion? Those are pretty long odds. You'd be better off buying a lottery ticket than replicating the results they find here in the absence of material inside information ... a lottery ticket! It's odd, because it's so dumb of the traders, but the authors find that in the run-up to an announcement of a merger, there is increased abnormal trading volume in single equity options of the target. If it's not obvious, that means if you are in possession of material non-public information and you are trading in single equity options prior to a merger announcement, you might as call the SEC and tell them to arrest you.
Monday, June 2, 2014
The news over the weekend that Phil Mickelson is subject of an insider trading investigation is surprising and not surprising at the same time. Celebrities and high profile athletes will naturally attract a lot of investigator attention when their names show up on lists of suspect trades. Imagine you are a FINRA staffer and your job involves scanning lists of hundreds of names of people involved in suspect trades. Frankly, it can be a boring job. Not all that different from doc review or a never ending diligence exercise. Of course, if a name that looks familiar pops up on a list, you are definitely going to stop and take a look. Who wouldn't?
Add to that the pedagogic effect of possibly catching a high profile athelete/celebrity with their hand in the cookie jar. Prosecution of such cases doesn't only make a career, but it's also going to send a much bigger message to the trading public about insider trading than prosecuting an anonymous hedge fund trader. So, there are real incentives for prosecutors to run down every lead when the name of a high profile individual pops up on a suspect trade list.
Of course, having one's name on a suspect trade list is not the same as actually engaging in insider trading. Don't get me wrong. If you are a deal lawyer, you never want to see you father's name turn up on a suspect trade list of a deal that you've been working on. That will take you down a long, dark road to be sure.
No, what I mean is that since the news of the Phil Mickelson investigation has leaked, precious little evidence beyond the fact that Mickelson may have traded in Clorox stock options in the week before Carl Icahn announced his intent to acquire Clorox in 2011. Given how thin the market for single stock options are, it's not good - really not good - that Mickelson happened to buy call options just before announcement of a potential acquisition. That's going to mean a huge legal bill for Mickelson as he explains himself to the SEC, but that, in and of itself, is not going to be enough to tag Mickelson with any liability.
To get to liability - exam review for students who just took my exam - the SEC will first have to find someone with a fiduciary duty to the source of the information. Second, the SEC will have to prove that the person with the information about Icahn's bid actually tipped Mickelson (let's make this sumple and not daisy-chain the information, yet). Third, that the when tipping Mickelson the source of the information received a "personal benefit" and therefore breached his or her fiduciuary duty to the source. And then finally, that when Mickelson traded on the information, he knew or should have known that the information he received was tainted because it was inside information received via a breach. That's a lot of dots to connect. And so far, there's not a lot of ink to connect them.
Monday, May 12, 2014
It was late on a Tuesday in September last year when one of his young client service team handed him the daily transaction report and said: ''Boss, you better take a look at this.''
Mr Kerr’s team had noticed one of their clients, National Australia Bank associate director Lukas Kamay, was making sizable bets on the Australian dollar, minutes and sometimes seconds before the announcement of significant economic news. Mr Kerr, the founder and owner of Pepperstone Financial, looked up Kamay’s profile via his gold LinkedIn account and found he was friends with an Australia Bureau of Statistics employee Christopher Hill through Monash University. “That was when it suddenly clicked that this guy was only trading ABS data and had a man on the inside,” Kerr told Fairfax Media from his Gippsland farm on Sunday.
Years ago, connecting the dots for investigators was hard. It required lots of guys sitting around with index cards, cross-referencing names and schools and places of birth. They were lucky to catch anyone. Now? They just look you up on LinkedIn.
OK, back to grading exams.
Thursday, April 24, 2014
Just in time for final exams, Bill Ackman schools CNBC on insider trading rules and the misappropriation theory while discussing his combined bid with Valeant for Allergan. For those of you who can't do video, here's a write up care of the Times:
“The way the rules work is, you’re actually permitted to trade on inside information as long as you didn’t receive the information from someone who breached a fiduciary duty or a duty of confidentiality, et cetera”
Wednesday, March 19, 2014
So, if you find yourself standing in the middle of Grand Central Station eating Post-It notes in order to destroy evidence, I have a life tip for you. Something has gone terribly wrong and you should reconsider what you're doing.
That bit of million dollar advice alas comes a little too late for three characters involved in the latest insider trading shenanigans to be uncovered by the SEC. As alleged by the SEC:
The SEC alleges that Vladimir Eydelman and Steven Metro were linked through a mutual friend who acted as a middleman in the illegal trading scheme. Metro, who works at Simpson Thacher & Bartlett in New York, obtained material nonpublic information about corporate clients involved in pending deals by accessing confidential documents in the law firm’s computer system. Metro typically tipped the middleman during in-person meetings at a New York City coffee shop, and the middleman later met Eydelman, who was his stockbroker, near the clock and information booth in Grand Central Terminal. The middleman tipped Eydelman, who was a registered representative at Oppenheimer and is now at Morgan Stanley, by showing him a post-it note or napkin with the relevant ticker symbol. After the middleman chewed up and sometimes even ate the note or napkin, Eydelman went on to use the illicit tip to illegally trade on his own behalf as well as for family members, the middleman, and other customers. The middleman allocated a portion of his profits for eventual payment back to Metro in exchange for the inside information. Metro also personally traded in advance of at least two deals.
Wednesday, September 4, 2013
First day of classes...this semester, I've brought the traveling roadshow down Commonwealth Ave to BU. They will soon get to know what I think about the following topic... Sam Waksal - (memba him?!) is now out and about and making the rounds on Bloomberg TV. He calls his insider trading conviction a "personal event." Okay, then. Thankfully, his insider trading conviction appears to have changed his approach to business...
Monday, July 1, 2013
Maybe it's just me, but there have got to be other fish in the sea. You want my advice? Don't marry him, dump him. He's a bum.
On July 1, 2013, the Securities and Exchange Commission announced that it charged a former officer of The Dow Chemical Company (Dow), his long-time friend, and a broker with insider trading that generated more than $1 million in illicit profits based on confidential information ahead of Dow's acquisition of Rohm & Haas Co. (Rohm)....
The SEC's complaint alleges that [Mack] Murrell, who was the Vice President of Information Systems for Dow, obtained confidential details about the acquisition of Rohm from his then live-in girlfriend, now wife, who was the administrative assistant to Dow's Chief Financial Officer at the time. Murrell's girlfriend knew about and worked on the pending acquisition. The complaint alleges that the day after learning from his girlfriend of a special Board meeting at which the Rohm acquisition was discussed, Murrell tipped his long-time friend [David] Teekell during a telephone call. Immediately following the telephone call, Teekell called [Charles] Adams, his broker at Raymond James, and tipped him.
The complaint further alleges that the next business day after learning of the pending acquisition, Teekell and Adams began purchasing common stock and call options in Rohm. In addition to purchasing call options in his own account, Adams purchased stock in two discretionary customer accounts. Teekell's and Adams' purchases continued until the day before the acquisition announcement on July 10, 2008, when the price of Rohm stock jumped 64 percent. Teekell made an illicit profit of $534,526 and Adams and his discretionary customers made illicit profits of $107,043 through the insider trading. Raymond James made illicit profits of $373,497 when Teekell and Adams decided not to keep certain Rohm options that Adams had purchased in Teekell's account.
Here. Call options...again with the call options...sheesh.
Thursday, June 6, 2013
This came across the Twitter-machine while I was sitting in the 8th Annual Carroll School Finance Conference this morning:
The Securities and Exchange Commission today announced an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.
OK, so this guy is an idiot of huge proportions. Why? Well, because he was asking to get caught. It's really, really awful. OK, so first and foremost. This guy doesn't have a trading account until May 10 when he opened one. It seems he was in quite a hurry to get started trading, too. According to the complaint:
On May 17, 2013, Rungruangnavarat e-mailed Interactive Brokers and inquired whether the account was open. Rungruangnavarat wrote: "Please let me know if the account opening is done, so i can start funding the account. I want to trade US options, so please confirm if my account is readily trad-able [sic]."
R. then funded the account to the tune of $2.92 million. He immediately started trading -- however, only exclusively in Smithfield call options and futures. Nothing else. OK, so he's a little single minded.
And when R. traded, he swamped the market - making up almost 80% or so of all July 29 call options and 99%(!) of all July 30 call option trades cleared in the month of May. What?! That's right, he might as well have put a "kick me" sign on his butt. If that weren't enough, R. also purchases Smithfield futures. There his purchases were 100% of the total cleared market. Ugh. He cornered the market in Smithfield options and futures and made a 3,400% when the acquisition was announced.
OK, so maybe he is just a bright guy sitting in Bangkok with a good idea. Yeah, maybe. The SEC complaint drops this little tidbit:
Rungruangnavarat has a Facebook friend who is a former employee ofthe company where Rungruangnavarat works, and who is an associate director at the Thai investment bank that advised Charoen on its contemplated Smithfield bid.
Bit in the ass by Facebook. Idiot.
Friday, January 4, 2013
You remember that former Wilson, Skadden, Cravath, Fried Frank associate who pleaded guilty to insider trading last year? He got 12 years. Oh, and he just got disbarred, too. Word to the wise starting a new career...
Monday, November 26, 2012
Tuesday, November 20, 2012
Be careful when you start thinking like this:
"At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."
Chances are, once the SEC picks that up, you'll be next. That's the lesson this group of high school buddies is learning now.
Here's the complaint.
Friday, September 28, 2012
OK, so you've heard this from me before....and this is directed at all those juniors about to start. Don't do it. Sure, there are lots of academic debates about why insider trading is ok. I get that. But don't do it. Today's installment: idiot former investment analysts. Did you pick that up? Former. In any event, the SEC just charged Jason Lee and his friends from college, one of whom lived in the saame condo complex with him, with insider trading. The complaint itself is full of lots of cicumstantial evidence. It doesn't look like the giovernment had access to a wiretap or that any of the alleged co-conspirators has flipped, so the case is a series of internal investment emails lining up with times of cell phone calls and text messages, the kind of stuff you get from a pen register, and bank cash withdrawals and deposits.
In any event, this is where everything seems to go really south for Jason Lee:
OK, so a decision point for Lee. Come clean and say that you know Chen. Or ... well ...
Yeah ... this isn't going to turn out well. Don't do it. It's not a good career choice. Ok, off my soapbox.
Thursday, August 2, 2012
OK ... I know I've said that if you are going to trade on inside information that you should trade in call options, cause you're just going to swamp the market and put a target on your back. But, here's a tip I thought I wouldn't have to give you. If you are going to trade on inside information, please don't use your work computer to do the following searches:
"can option be traced to purchaser?"
"can stock option be traced to purchase inside trading"
"how to detect can stock option be traced to purchase inside trading"
"insider trading options"
"insider trading options trace"
"illegal insider trading options trace"
"insider trading options trace illegal"
Can you say "scienter"?
You'd think it would go without saying, but apparently not everyone is smart enough to simply not trade on inside information. In fact, some people are stupid enough to do internet research from the office computers before doing the deed. You think I'm kidding? Well, the SEC has just charged a Bristol-Meyers-Squib executive with trading on inside information in advance of a series of acquisitions.
Just don't do it.
Wednesday, May 9, 2012
What?! You think only lawyers can be idiots? The first two paragraphs of the SEC's complaint tells you more than you need to know:
This case involves insider trading in the securities of Semitool, Inc., a semiconductor manufacturer based in Kalispell, Montana that was acquired in a tender offer by Applied Materials, Inc. in December 2009. Beginning in at least October 2009, defendant Angela Milliard, a legal assistant at Semitool, learned confidential information regarding the terms and timing of the acquisition. Basedon this information, Angela Milliard secretly wired $38,000 to her boyfriend's account and purchased 5,400 Semitool shares in the account, as well as 300 Semitool shares in her own brokerage account. Angela also tipped her father, defendant Kenneth Milliard, about the then-secret acquisition, and he purchased 10,800 Semitool shares and helped other family members purchase another 4,000 Semitool shares.
When the acquisition was publicly announced on November 17, 2009, the company's stock price jumped over 30 percent, and defendants immediately profited that day, selling all of their Semitool shares for total realized profits of $68,160.
This being the end of exams and the start of graduation season, I suppose it's as good a time as any to give some good advice to recent law grads. This year, I'll give it in the form of a link to a memo written seven years ago to employees of public corporations, titled Your Future (or Lack Thereof).
Thursday, February 23, 2012
Wednesday, February 22, 2012
I don't usually troll the Fox Biz sites, but this caught my eye. Apparently, the recent insider trading investigations are far from over. According to Charlie Gasparino, the DOJ/SEC have only just begun:
--They have “scheduled out” cases for the next five years, meaning that the use of wire taps and informants have netted far more cases than they had originally thought.
--Though it’s difficult to predict future case loads, law enforcement officials are in general agreement that “hundreds” of additional people could be charged in the years ahead. “In five years, we can easily see hundreds of people arrested and charged,” another senior law enforcement official told FOX Business.
Scheduled out for years? Wow.
Thursday, February 9, 2012