Friday, March 11, 2005

Getting the SEC on Your Side

The My Shingle blog (Carolyn Elefant) has an interesting post (here) highlighting an article in the Seattle Times (here) about how a former SEC attorney, Peter Romeo of Hogan & Hartson, was able to persuade the SEC to file an amicus brief on behalf of a selling shareholder accused of violating Section 16 (the short-swing insider trading profits provision) and being liable for returning $247 million to his company.  The executive, Naveen Jain, was the founder of InfoSpace, a casualty of the dot.com boom that is the subject of numerous shareholder lawsuits.  The newspaper article raises questions about why the SEC supported Jain on appeal of the district court's Section 16 ruling rather than investigating him for insider trading.  Moreover, the article seems to question whether Romeo traded on his contacts at the agency to get it to support Jain's position.  In reading the article, it seems that the writers may have gotten Section 16 mixed up with Section 10(b), the anti-fraud provision.  While Section 16 (here) deals with so-called short-swing trades by directors, officers, and 10% shareholders, it is not something the SEC ever pursues for enforcement purposes, and the provision is designed for companies (and individuals who discover the violations) to recover profits in private actions.  The law is also notoriously difficult to understand, as any corporate counsel can attest -- sometimes the statute is almost a "gotcha" provision that does not require any proof of scienter or even negligence.  Section 10(b) and Rule 10b-5 are the classic anti-fraud provisions used to prosecute insider trading, such as the recent civil and criminal cases involving ImClone Systems (earlier post here).  There may well be an insider trading (or other type of securities fraud) case against Jain, it's just not the one that Romeo represented him on related to his sales of InfoSpace shares.  The fact that Romeo was able to convince the SEC's General Counsel's office to file an amicus brief is not nefarious, or even surprising, if the lower court's ruling truly was incorrect.  In fact, the Ninth Circuit reversed the district court's decision, vindicating the Commission's intervention in the proceeding, and Jain eventually settled for a $65 million payment. Romeo may have known who to call at the SEC, but that is about as far as his contacts will get him.  Moreover, Romeo worked at the Commission from 1969 to 1984, and I doubt whether there are many colleagues left from his tenure that ended over 20 years ago. (ph)

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Insider Trading, Securities | Permalink

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