Friday, April 16, 2021

Avci, Schipani, Seyhun & Verstein on "Insider Giving"

With recent studies suggesting that insiders are availing themselves of SEC Rule 10b5-1(c) trading plains to beat the market by trading their own company’s shares based on material non-public information, Congress may be poised to act. In March of 2021, Representative Maxine Waters reintroduced a bill entitled the Promoting Transparent Standards for Corporate Insiders Act. The same bill passed the house in the 116th Congress, but died in the Senate. If passed, the bill would require the SEC to study a number of proposed amendments to 10b5-1(c), report to Congress, and then implement the results of that study through rulemaking. I identified some problems with the bill in my article, Undoing a Deal with the Devil: Some Challenges for Congress's Proposed Reform of Insider Trading Plans. But if significant reforms are in store for insider trading plans, then insiders may look to other creative “loopholes” that permit them to monetize access to their firms’ material nonpublic information.

Professors Sureyya Burcu Avci, Cindy Schipani, Nejat Seyhun, and Andrew Verstein, have identified “insider giving” as another strategy for hiding insider trading in plain sight. Here’s the abstract for their article, Insider Giving, which is forthcoming in the Duke Law Journal:

Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and legal restrictions. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed. In particular, we show that it is not limited to officers and directors. Large investors appear to regularly receive material non-public information and use it to avoid losses. Using a vast dataset of essentially all transactions in public company stock since 1986, we find consistent and economically significant evidence that these shareholders’ impeccable timing likely reflects information leakage. We also document substantial evidence of backdating – investors falsifying the date of their gift to capture a larger tax break. We show why lax reporting and enforcement encourage insider giving, explain why insider giving represents a policy failure, and highlight the theoretical implications of these findings to broader corporate, securities, and tax debates.

April 16, 2021 in John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, March 19, 2021

Chambers and Martin on a Foreign Corrupt Practices Act for Human Rights

The University of Connecticut School of Business hosts The Business and Human Rights Initiative, which “seeks to develop and support multidisciplinary and engaged research, education, and public outreach at the intersection of business and human rights.” Professor Stephen Park, Director of the Business and Human Rights Initiative, invited me to be a discussant at the most recent meeting of the Initiative’s workshop series. The workshop focused on Rachel Chambers' and Jena Martin's excellent paper, A Foreign Corrupt Practices Act for Human Rights. Here’s an abstract:

The global movement towards the adoption of human rights due diligence laws is gaining momentum. Starting in France, moving to the Netherlands, and now at the European Union level, lawmakers across Europe are accepting the need to legislate to require that companies conduct human rights due diligence throughout their global operations. The situation in the United States is very different: on the federal level there is currently no law that mandates corporate human rights due diligence. Civil society organization International Corporate Accountability Roundtable is stepping into the breach with a legislative proposal building on the model of the Foreign Corrupt Practices Act to prohibit corporations from engaging in grave human rights violations and to give the Securities and Exchange Commission and the Department of Justice the power to investigate any alleged violations.

The draft law, called the Foreign Corrupt Practices Act – Human Rights (FCPA-HR) follows the general framework of the FCPA, but with certain enumerated human rights violations as the prohibited conduct rather than bribery and corruption. The FCPA-HR continues where the FCPA left off by requiring companies to engage in substantive conduct to prevent any human rights violations from occurring in their course of business and to make regular reports regarding their compliance and success. This paper situates the draft law within the current picture for business and human rights legislation both in the United States and in Europe, identifies the strengths of using the FCPA model, and analyzes the FCPA-HR proposal, addressing the likely critiques of the proposal.

Though I have been following developments in the area of business and human rights for years, I must admit that I have not paid sufficient attention to the movement in my classroom and scholarship. Chambers’ and Martin’s paper reminds us all of the need for reform, and of the reality that legislation in this area is imminent (at home and abroad). Imposing civil and criminal liability on corporations and individuals for their direct or indirect involvement in human rights violations would force dramatic changes in corporate compliance practices. If the SEC will have primary responsibility for enforcement (as it does for the FCPA), then we can expect dramatic organizational changes at the Commission as well. With so much at stake, there is a real need for collaboration among human rights experts, lawyers, scholars, regulators, and issuers to find the right model. There’s a lot of work to do, and Chambers’ and Martin’s paper offers an excellent start. The paper remains a work in progress, but it will be available soon—I look forward to its publication!

March 19, 2021 in Business Associations, Comparative Law, Compliance, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, February 19, 2021

Regulatory Ritualism and other Lessons from the Global Experience of Insider Trading Law

I just posted a new article, Regulatory Ritualism and other Lessons from the Global Experience of Insider Trading Law, on SSRN. This article is the culmination of a five-year research project. It offers a comprehensive comparative study of insider-trading regimes around the globe with an eye to much-needed reform in the United States. It is the first article to consider global insider trading enforcement in light of the problem of regulatory ritualism. Regulatory ritualism occurs where great attention is paid to the institutionalization of a regulatory regime without commitment to, or acceptance of, the normative goals that those institutions are designed to achieve. The article develops and expands upon some themes and arguments that were first sketched out in Chapters 5 and 11 of my book, Insider Trading: Law, Ethics, and Reform. Here's the article's abstract:

There is growing consensus that the insider-trading regime in the United States, the oldest in the world, is in need of reform. Indeed, three reform bills are currently before Congress, and one recently passed the House with overwhelming bipartisan support. As the U.S. considers paths to reforming its own insider trading laws, it would be remiss to ignore potential lessons from global experimentation and innovation, particularly in light of the fact that so many insider trading regimes have been recently adopted around the world.

Any such comparative study should, however, be cautious in drawing its conclusions. Reformers should pay close attention to the political, social, and economic motivations that might explain the recent trend toward near-universal adoption of insider trading regulations around the globe. Evidence suggests that at least some countries have adopted their insider trading regimes ritualistically. Regulatory ritualism occurs where great attention is paid to the institutionalization of a regulatory regime without commitment to or acceptance of the normative goals that those institutions are designed to achieve. If countries' insider trading regimes are adopted only ritualistically (e.g., to receive geopolitical carrots or to avoid geopolitical sticks), then comparative analysis should account for the fact that these regimes may not reflect its citizens' (or markets') lived experience or normative commitments.

This Article aids the effort of reforming our insider-trading laws here in the United States by considering lessons that can be learned from the global experience. Part I makes the case that the insider-trading regime in the U.S. is in need of reform. Part II charts the global rise of insider trading regulation in the twentieth century. Part III summarizes important features of representative regimes around the globe (e.g., in Japan, Europe, China, Russia, India, Canada, Australia, and Brazil). Part IV notes the trend toward universality in insider trading regulations and considers some of the moral and economic conclusions scholars and regulators have drawn from this trend. Part V identifies the problem of regulatory ritualism, and its implications for global enforcement and compliance. Part VI then turns to the constructive exercise of determining what can be learned from the global experience of regulating insider trading with an eye to reforming the American regime.

February 19, 2021 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Saturday, February 6, 2021

GameStop and Retail Securities Trading as Political, Social, or Aesthetic Speech

    Commenters have likened the recent retail “meme” trading in stocks such as GameStop Corp. to buying a ticket on a roller coaster—“You don’t go on a roller coaster because you end up in a different place, you go on it for the ride and it’s exciting because you’re part of it.” See, Bailey Lipschultz and Divya Balji, Historic Week for Gamestop Ends with 400% Rally as Shorts Yield, Bloomberg (January 29, 2021).

    The comparison is apt in a number of respects. These retail traders, led by some members of the “WallStreetBets” group on the Reddit social media platform, “got on” GameStop a couple weeks ago at just under $20 a share, and, despite its rapid rise to a high of just under $500 a share, I think most people expect (including the meme traders) that the price at which this turbulent ride will end is somewhere around where it began. After all, GameStop’s fundamentals have not changed. It remains a brick-and-mortar business that was devastated by the pandemic, and it is expected to steadily lose market share to online vendors.

    For anyone interested in the mechanics of the “short squeeze” and how these traders managed to move price of GameStop so far out of whack with its presumed value, see some helpful articles here, here, and here. For some thoughts on the controversial limitations on trading by retail brokerage firms such as Robinhood, see my Co-bloggers Ben Edwards’ and Anne Lipton’s recent posts here and here. And see some other interesting takes from my Co-blogger Joan Macleod Heminway here. My purpose in this post is to highlight one aspect of the meme-trading phenomenon that has, I think, been underappreciated.

    Given that we all have a pretty good idea of how this roller-coaster ride is going to end, why did many retail traders (along with others) continue to pile on? One answer is that these traders were just blinded by greed and FOMO. Indeed, concern that amateur traders are being led astray in this way by social media influencers and "game-like" trading interfaces has led some to call for paternalistic trading restrictions by brokerage firms and/or regulatory intervention. But it seems to me that something quite different may be going on here as well. There is evidence to suggest that at least some of the meme traders who have taken the markets by storm over the last couple weeks are not (and never were) buying these heavily-shorted stocks simply to make money, but rather to make a point.

    The “points” being made by these traders are not necessarily coordinated or consistent. They range from the oft-expressed goal of “taking it to” Wall-Street hedge funds to "hurt the big guys" in the same vein as the Occupy Wall Street movement of 2008, to protesting the demise of bricks-and-mortar businesses by Big-Tech and mega online vendors, to the populist rejection of perceived top-down elitism (private and public) that elevated Donald Trump to the Presidency in 2016. Indeed, former SEC Commissioner, Laura Unger, recently compared the recent social-media-driven short squeezes to the Capitol Hill riots on January 6. Some have even gone so far as to suggest that some meme traders are buying stocks on aesthetic grounds, to bring back retro companies like Blackberry and Blockbuster as “nostalgia plays.”

    If retail traders are trading as a form of political, social, or aesthetic expression, then what are the implications? What does this mean for the Efficient Market Hypothesis? What (if anything) should (or can) regulators and/or legislators do about it? These are some questions my co-authors Jeremy Kidd, George Mocsary, and I plan to explore in a forthcoming article. I plan to post some more thoughts on the possibility of retail securities trading as a form of speech (and its social, market, and regulatory implications) in the coming weeks.

February 6, 2021 in Corporations, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, January 8, 2021

New Edition of Problem-Based White Collar Crime Textbook Forthcoming

    Along with my co-authors J. Kelly Strader, Mihailis E. Diamantis, and Sandra D. Jordan, I am pleased to announce that the Fourth Edition of our textbook White Collar Crime: Cases, Materials, and Problems has gone to press and is expected to be available through Carolina Academic Press by June of 2021, in plenty of time for Fall 2021 adoptions.

    Professor Diamantis and I are excited to join Professors Strader and Jordan in the new edition. We hope that our unique practice experiences and theoretical perspectives will add value to what is already a popular White Collar casebook. We have posted the current drafts of Chapter 1 (Overview of White Collar Crime) and Chapter 5 (Securities Fraud) on SSRN as samples for review. Here, also, is an excerpt from the Preface summarizing our approach to the new edition:

[W]e have endeavored to write a problem-based casebook that provides a topical, informative, and thought-provoking perspective on this rapidly evolving area of the law. We also believe that the study of white collar criminal law and practice raises unique issues of criminal law and justice policy, and serves as an excellent vehicle for deepening our understanding of criminal justice issues in general. For the fourth edition, we have continued to emphasize the text’s focus on practice problems while also deepening policy and theoretical discussion. …

Throughout the text, our goal has been to provide leading and illustrative cases in each area, focusing where possible on United States Supreme Court opinions. …

In the introductory materials to each of the substantive crime chapters, we have included an overview of the law and the statutory elements. Because our goal is to teach principally through the study of the cases, we have tried to edit the cases judiciously. We include a number of concurring and dissenting opinions, both because these opinions help elucidate the issues and because in close cases today’s dissent may be tomorrow’s majority. Following the cases, we also include notes on important issues those cases raise on matters of law, policy, and theory. We have tried to keep the notes concise, where possible, and hope that they will service as starting points for rich class discussions.

Finally, we intersperse practice problems throughout the casebook. The problems focus on substantive law, procedural issues, and ethical dilemmas that arise in white collar practice. The text is designed to be used flexibly and thus lends itself both to comprehensive study of black letter law and to a problems-based approach.

    The textbook includes a teacher's manual with teaching tips, possible side topics for course discussion, and detailed solutions to practice problems.

January 8, 2021 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, December 18, 2020

Ten Business Questions for the Biden Administration

If you read the title, you’ll see that I’m only going to ask questions. I have no answers, insights, or predictions until the President-elect announces more cabinet picks. After President Trump won the election in 2016, I posed eleven questions and then gave some preliminary commentary based on his cabinet picks two months later. Here are my initial questions based on what I’m interested in -- compliance, corporate governance, human rights, and ESG. I recognize that everyone will have their own list:

  1. How will the Administration view disclosures? Will Dodd-Frank conflict minerals disclosures stay in place, regardless of the effectiveness on reducing violence in the Democratic Republic of Congo? Will the US add mandatory human rights due diligence and disclosures like the EU??
  2. Building on Question 1, will we see more stringent requirements for ESG disclosures? Will the US follow the EU model for financial services firms, which goes into effect in March 2021? With ESG accounting for 1 in 3 dollars of assets under management, will the Biden Administration look at ESG investing more favorably than the Trump DOL? How robust will climate and ESG disclosure get? We already know that disclosure of climate risks and greenhouse gases will be a priority. For more on some of the SEC commissioners’ views, see here.
  3. President-elect Biden has named what is shaping up to be the most diverse cabinet in history. What will this mean for the Trump administration’s Executive Order on diversity training and federal contractors? How will a Biden EEOC function and what will the priorities be?
  4. Building on Question 3, now that California and the NASDAQ have implemented rules and proposals on board diversity, will there be diversity mandates in other sectors of the federal government, perhaps for federal contractors? Is this the year that the Improving Corporate Governance Through Diversity Act passes? Will this embolden more states to put forth similar requirements?
  5. What will a Biden SEC look like? Will the SEC human capital disclosure requirements become more precise? Will we see more aggressive enforcement of large institutions and insider trading? Will there be more controls placed on proxy advisory firms? Is SEC Chair too small of a job for Preet Bharara?
  6. We had some of the highest Foreign Corrupt Practices Act fines on record under Trump’s Department of Justice. Will that ramp up under a new DOJ, especially as there may have been compliance failures and more bribery because of a world-wide recession and COVID? It’s more likely that sophisticated companies will be prepared because of the revamp of compliance programs based on the June 2020 DOJ Guidance on Evaluation of Corporate Compliance Programs and the second edition of the joint SEC/DOJ Resource Guide to the US Foreign Corrupt Practices Act. (ok- that was an insight).
  7. How will the Biden Administration promote human rights, particularly as it relates to business? Congress has already taken some action related to exports tied to the use of Uighur forced labor in China. Will the incoming government be even more aggressive? I discussed some potential opportunities for legislation related to human rights abuses abroad in my last post about the Nestle v Doe case in front of the Supreme Court. One area that could use some help is the pretty anemic Obama-era US National Action Plan on Responsible Business Conduct.
  8. What will a Biden Department of Labor prioritize? Will consumer protection advocates convince Biden to delay or dismantle the ERISA fiduciary rule? Will the 2020 joint employer rule stay in place? Will OSHA get the funding it needs to go after employers who aren’t safeguarding employees with COVID? Will unions have more power? Will we enter a more worker-friendly era?
  9. What will happen to whistleblowers? I served as a member of the Department of Labor’s Whistleblower Protection Advisory Committee for a few years under the Obama administration. Our committee had management, labor, academic, and other ad hoc members and we were tasked at looking at 22 laws enforced by OSHA, including Sarbanes-Oxley retaliation rules. We received notice that our services were no longer needed after the President’s inauguration in 2017. Hopefully, the Biden Administration will reconstitute it. In the meantime, the SEC awarded record amounts under the Dodd-Frank whistleblower program in 2020 and has just reformed the program to streamline it and get money to whistleblowers more quickly.
  10. What will President-elect Biden accomplish if the Democrats do not control the Congress?

There you have it. What questions would you have added? Comment below or email me at mweldon@law.miami.edu. 

December 18, 2020 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, White Collar Crime | Permalink | Comments (2)

Friday, December 11, 2020

Podgor on Whether Being Gay Mattered in Carpenter v. United States

Many of us have been looking for new opportunities to raise and discuss issues of diversity and inclusion (including, but not limited to, race, gender, and LGBTQ issues) in our Business Associations and Securities Regulations classes. Along these lines, I’ve been inspired by a number of my BLPB co-editors’ recent posts. (See, e.g., here, here, and here—just in the last week!) With these thoughts in mind, and as we start preparing our course syllabi for the spring semester, I recommend you read Professor Ellen Podgor’s forthcoming article, Carpenter v. United States, Did Being Gay Matter?, 15 Tenn. J. L. Pol’y 115 (2020). Here’s the abstract:

Carpenter v. United States (1987) is a case commonly referenced in corporations, securities, and white collar crime classes. But the story behind the trading of pre-publication information from the "Heard on the Street" columns of the Wall Street Journal may be a story that has not been previously told. This Essay looks at the Carpenter case from a different perspective - gay men being prosecuted at a time when gay relationships were often closeted because of discriminatory policies and practices. This Essay asks the question of whether being gay mattered to this prosecution.

This article was written for the same symposium on insider trading stories held at the University of Tennessee College of Law that my BLPB co-editor Joan Heminway wrote about here and here.

Oh, and while I’m touting the excellent work of Professor Podgor, I should note another of her forthcoming articles recently posted to SSRN: The Dichotomy Between Overcriminalization and Underregulation, 70 Am. U. L. Rev. __ (forthcoming 2021). Here’s an edited version of the abstract:

The U.S. Securities and Exchange Commission (SEC) failed to properly investigate Bernard Madoff’s multi-billion-dollar Ponzi scheme for over ten years. Many individuals and charities suffered devastating financial consequences from this criminal conduct, and when eventually charged and convicted, Madoff received a sentence of 150 years in prison. Improper regulatory oversight was also faulted in the investigation following the Deepwater Horizon tragedy. Employees of the company lost their lives, and individuals were charged with criminal offenses. These are just two of the many examples of agency failures to properly enforce and provide regulatory oversight, with eventual criminal prosecutions resulting from the conduct. The question is whether the harms accruing from misconduct and later criminal prosecutions could have been prevented if agency oversight had been stronger. Even if criminal punishment were still necessitated, would prompt agency action have diminished the public harm and likewise decreased the perpetrator’s criminal culpability? …

This Article examines the polarized approach to overcriminalization and underregulation from both a substantive and procedural perspective, presenting the need to look holistically at government authority to achieve the maximum societal benefit. Focusing only on the costs and benefits of regulation fails to consider the ramifications to criminal conduct and prosecutions in an overcriminalized world. This Article posits a moderated approach, premised on political economy, that offers a paradigm that could lead to a reduction in our carceral environment, and a reduction in criminal conduct.

December 11, 2020 in Corporations, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, December 7, 2020

Spousal Misappropriation - A Special Breed of Insider Trading Action

In a recently published article just posted to SSRN, I examine spousal misappropriation as a basis for an insider trading claim.  The article, Women Should Not Need to Watch Their Husbands Like [a] Hawk: Misappropriation Insider Trading in Spousal Relationships, leverages the facts of a specific Securities and Exchange Commission enforcement action (SEC v. Hawk, No. 5:14-cv-01466 (N.D. Cal.)), to undertake an analysis of applicable statutory and regulatory principles, existing decisional law, and the realities of the legal and social context.  The SSRN abstract, derived from the text of the article, follows.

This article endeavors to sort through and begin to resolve key unanswered questions regarding spousal misappropriation as a basis for U.S. insider trading liability, some of which apply to insider trading more broadly. It identifies and describes misappropriation insider trading liability under U.S. law, recounts and analyzes probative doctrine and policy relevant to spousal misappropriation cases, and (before briefly concluding) offers related observations about the impact of that doctrine and policy on a specific motivating Securities and Exchange Commission ("SEC") enforcement action and other spousal misappropriation cases.

The analysis undertaken in the article supports enforcement actions based on a strong threshold presumption of a relationship of trust and confidence in spousal relations, as recognized by the SEC through its adoption of Rule 10b5-2(b)(3). This support derives from a focus on two fundamental building blocks of spousal misappropriation cases addressed in the article—a broad understanding of deception as it is relevant to these cases and longstanding accepted sociolegal wisdom on the nature of marital relationships as evidenced in the spousal communications privilege. Essentially, marriage is best seen as a relationship of trust and confidence. To the extent a spouse’s breach of that trust or confidence is deceptive and occurs in connection with the purchase or sale of securities, the breach should be deemed to provide a basis for insider trading enforcement (and liability). Market integrity is damaged through marital deception in the same way that it is damaged through the deception by an attorney of a client or the attorney’s law firm partners. Market actors depend on the confidentiality of information shared in marriages as well as information shared in attorney-client relationships and partnerships.

The article is one of a number that were written for a symposium on insider trading stories held at The University of Tennessee College of Law last fall.  They all occupy the same issue of the Tennessee Journal of Law & Policy, which hosted the symposium.  The other authors include (in the order of their respective article's appearance in the journal): Donna Nagy, BLPB co-editor John Anderson, Eric Chaffee, Mike Guttentag, Ellen Podgor, Kevin Douglas, and Jeremy Kidd.  The ideas for these articles were originally the subject of a discussion group convened by John Anderson and me at the 2019 Annual Conference of the Southeastern Association of Law Schools ("SEALS"). 

That reminds me to note for all that it is now time to submit proposals for the 2021 SEALS conference.  John Anderson and I will again convene an insider trading group for this meeting.  And I also will be proposing a discussion group (based in part on the colloquy between Ann Lipton and me here) on the treatment of business entity organic documents (including corporate charters and bylaws, limited liability company/operating agreements, and partnership agreements) as contracts and the application of contract law to their interpretation and enforcement.  If you have a desire to participate in either group or want to propose a program of your own (whether it be a panel or a discussion group), please let me know in the comments or by private message.

December 7, 2020 in Ann Lipton, Corporate Governance, Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, October 30, 2020

Verstein on Insider Trading and the "Use-versus-Possession" Controversy

The courts have interpreted Section 10b of the Securities and Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis of” material nonpublic information. This element of scienter for insider trading liability is sometimes tricky for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade will often claim they did not use that information. The insider may claim that her true motives for trading were entirely innocent (e.g., to diversify her portfolio, to pay a large tax bill, or to buy a new house or boat). Such lawful bases for trading can be easy for insiders to manufacture and are often difficult for regulators and prosecutors to disprove.

Historically, the SEC and prosecutors sought to overcome this challenge by taking the position that knowing possession of material nonpublic information while trading is sufficient to satisfy the "on the basis of" test. This strategy met mixed results before the courts, with some circuits holding that proof of scienter under Section 10b requires proof that the trader actually used the inside information in making the trade.

Facing a circuit split, the SEC attempted to settle the “use-versus-possession” debate by adopting Rule 10b5-1, which defines trading “on the basis of” material nonpublic information for purposes of insider trading liability as trading while “aware” of such information. A number of commentators, however, question the statutory authority for Rule 10b5-1, and some courts have simply “ignored” it. See Donald C. Langevoort, “Fine Distinctions” in the Contemporary Law of Insider Trading, 2013 Columbia Bus. L. Rev. 429, 439 (2013).

Professor Andrew Verstein’s forthcoming article, Mixed Motives Insider Trading, (Volume 106 of the Iowa Law Review) charts a “third way” to resolve the ongoing use-versus-possession controversy. Professor Verstein would impose liability for mixed-motives insider trading only where material nonpublic information provides the “primary motive” for the trading. While I have argued elsewhere that a strict “use” test best complies with Section 10b’s scienter requirement, Professor Verstein’s primary-motive test offers a significant improvement over the strict awareness test reflected in both SEC Rule 10b5-1 and the Insider Trading Prohibition Act recently passed by the House of Representatives. For these reasons, Professor Verstein’s proposal warrants serious consideration as regulators and legislators consider paths to reform.

The SSRN abstract to Professor Verstein’s article follows:

If you trade securities on the basis of careful research, then you are a brilliant and shrewd investor. If you trade on the basis of a hot tip from your brother-in-law, an investment banker, then you are a criminal. What if you trade for both reasons?

There is no single answer, thanks to a three-way circuit split. Some courts would forgive you according to your lawful trading motives, some would convict you in keeping with your bad motives, and some would hand the issue to the jury. Sometimes called the “awareness/use” debate or the “possession/use” debate, the proper treatment of mixed motive traders has occupied dozens of law review articles over the last thirty years.

This Article demonstrates that courts and scholars have so far followed the wrong reasons to the wrong answers. Instead, this Article takes trader motives seriously, drawing on insights and solutions from the broader jurisprudence of mixed motive. This analysis generates a new legal test and demonstrates the test’s superiority.

October 30, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Wednesday, September 23, 2020

What Do People Really Think of Insider Trading? Part IV

This is the fourth installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the ethics of insider trading in different factual scenarios.

The survey presented each respondent with five basic insider-trading scenarios. In each scenario, the inside information pertained to the acquisition of a small company by a larger company. Respondents were placed in the shoes of (1) the CEO of the small firm being acquired by the larger firm; (2) a janitorial employee of the small firm; (3) an outside accountant hired to audit the small firm; (4) the friend of a middle manager of the small firm who learns the inside information at a holiday party; and (5) a stranger who overhears the material nonpublic information in an elevator. The survey instrument randomly directed respondents down multiple question paths for each of these scenarios. I will summarize just some of the results for the CEO scenario in this post, but see here for the complete results.

When asked whether it would be ethical for the CEO of the smaller company to trade in her own company’s shares based on material nonpublic information of the imminent acquisition, 37% said yes. That number increased to 50%, however, when respondents were asked if it would be ethical for the CEO to trade in the larger, acquiring company based on the same information. The 13-point difference may be explained by the fact that the CEO's trading in her own company implicates both the classical and misappropriation prohibitions for insider trading under our current enforcement regime, while trading in the other firm's shares would only implicate the misappropriation theory. Under the classical theory, the harm of insider trading is said to stem from a breach by the insider of a duty to disclose to her company's current or prospective shareholders on the other side of the trade (so this theory would not apply to the trade in the other, large company's shares). Under the misappropriation theory, the harm of insider trading is located in a breach of duty to the source of the information (so in both scenarios the source is the same). The difference in responses therefore suggests there are some respondents whose intuitions align with either the classical theory or the misappropriation theory, but not both.  If all respondents found the classical and misappropriation theories equally compelling, we would not expect a difference.

After providing their initial answers to these scenario-based questions, respondents were then presented with a short piece of propaganda about insider trading. They were offered a statement suggesting either that insider trading has positive, negative, or neutral consequences for markets. The propaganda had a surprising impact. For instance, respondents were much more willing (by a margin of 9%) to condone the CEO’s trading in his own company’s shares (46%) after having been presented with the short propaganda piece. These results suggest that the public’s ethical views concerning even the most straightforward insider-trading scenarios under our current enforcement regime are neither clear nor firm.

(Modified on 9/24/20 at 11:30 am CST)

September 23, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, September 15, 2020

What Do People Really Think of Insider Trading? Part III

This is the third installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the morality of insider trading.

The survey asked participants (1) whether they would trade on inside information if it came into their possession; (2) whether they believe that insider trading is morally wrong; and (3) whether they believe that insider trading should be illegal. The following table offers a demographic breakdown of the results.

 

Would you trade based on inside info?

Is insider trading morally wrong?

Should insider trading be illegal?

 

Yes

No

Yes

No

Yes

No

Overall

44.9%

55.1%

62.8%

35.5%

66.7%

33.3%

Gender

Female

45.9%

54.1%

59.4%

39.3%

62.5%

37.5%

Male

43.6%

56.4%

66.7%

31.2%

71.5%

28.5%

Race

Asian

56.1%

43.9%

56.1%

42.4%

62.1%

37.9%

Black

59.0%

41.0%

43.3%

55.1%

45.5%

54.5%

Latinx

61.5%

38.6%

45.8%

51.8%

48.2%

51.8%

Native Am.

66.7%

33.3%

58.3%

41.7%

58.3%

41.7%

White

39.7%

60.2%

68.6%

29.7%

72.6%

27.4%

Other

40.9%

59.1%

59.1%

40.9%

72.7%

27.3%

Trading Status

Invest

51.3%

48.7%

66.5%

31.6%

71.3%

28.7%

Abstain

40.3%

59.7%

59.3%

39.3%

62.4%

37.6%

As expected, a majority of respondents (63%) view insider trading as immoral and 66% think it should be illegal. These numbers are relatively close—at the margin of error for the poll. But the story is more complex when considered in light of responses concerning trading preferences. 18% of respondents said insider trading is immoral but also said they would trade on it—reflecting some cognitive dissonance or a lack of moral clarity. 10% said insider trading is not immoral but also said they would not trade on it--call them cautious abstainers.

We attempted to use these figures to get a clearer sense of respondents’ “true” moral attitudes regarding insider trading. If we take the number who said it is immoral and subtract out those who’s moral clarity is weak, we get 44.2% who have a clear sense that insider trading is wrong. If we take those who would not trade on inside information and subtract those who abstain only out of caution (e.g., fear of prosecution), we get 44.6% who abstain on moral grounds. It is interesting that these two numbers are so close, and this consistency tracks across most demographic subgroups. The numbers suggest that there is a core group of respondents (~44%) who have moral clarity that insider trading is wrong, and who would not trade on inside information for that reason.

The data therefore offers some evidence that the “true” percentage of respondents who believe that insider trading is immoral is probably less than 62%, and could be as low as 44%. See here for a more complete discussion of these and other findings from our survey.

The next installment of this post will share survey responses to a number of scenario-based questions.

September 15, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, September 8, 2020

What Do People Really Think of Insider Trading? Part II

This is the second installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on some of our results pertaining to the effect of insider trading on the public’s confidence in the integrity of our capital markets.

It turns out that most Americans believe that insider trading is pervasive. The following table breaks down respondents’ answers to the question, “How common do you think insider trading is?”

 

Very Common

Common

Rare

Very Rare

Overall

25.4%

55.0%

15.0%

4.6%

Gender

Female

24.0%

57.0%

14.4%

4.5%

Male

26.8%

52.7%

15.9%

4.6%

Race

Asian

25.8%

51.5%

18.2%

4.5%

Black

41.6%

38.8%

15.2%

4.5%

Latinx

25.3%

55.4%

14.5%

4.8%

Native Am.

25.0%

58.3%

0.0%

16.7%

White

22.3%

58.3%

15.1%

4.3%

Other

22.7%

54.6%

13.6%

9.1%

Trading Status

Invest

30.5%

52.1%

14.4%

3.0%

Abstain

21.5%

56.9%

15.9%

5.7%

           

Approximately 80% of Americans believe insider trading is common or very common. If insider trading’s perceived pervasiveness undermines market confidence, we would expect that those who actually invest in the stock market would be less likely to believe that insider trading is common or very common. But, in fact, the opposite is true: investors are actually slightly more likely (82.6%) to believe insider trading is pervasive than those who abstain from investing in the stock market (78.4%).

Respondents were also asked the following open-ended question with an opportunity to fill in a response: “If you had done your research and found a company that you liked and wanted to invest in, is there anything that might keep you from buying stock in that company?” Notably, despite knowing that the study was about insider trading, only 0.4% indicated that insider trading in the company would deter them from investing in that company. This suggests that, if awareness of insider trading does undermine market confidence, it is not among the public’s principal concerns.

The study did, however, find some support for the market-confidence theory. For example, consider the responses to the following questions that specifically address the market confidence issue:

 

 “If you thought that a small number of people were trading on inside information concerning a company you have been researching, would it make you more likely to buy stock in that company, less likely, or make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Market

Overall

48.2%

34.3%

17.5%

+4.9%

“If you knew insider trading was common in the stock market, would you be more likely to invest, less likely, or would it make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Company

Overall

43.3%

40.6%

14.9%

-4.9%

While fewer than half of the survey’s participants said that they would be less likely to trade in a given stock (48.2%) or the market generally (43.3%) if they knew insider trading was taking place, these are not trivial numbers. Assuming that some of these respondents who would be less likely to trade do actually abstain from trading for that reason, this offers support for the market confidence justification for the regulation of insider trading. For a full demographic breakdown of the answers to these questions, as well as a table summarizing respondents’ explanations for their responses, see here.

The next installment of this post will explore public perceptions of the morality of insider trading, whether it should be illegal, and what penalties should be imposed.

September 8, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, September 1, 2020

What Do People Really Think of Insider Trading? Part I

This is the first installment of a multi-part guest blog presenting some results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment situates the survey amidst the ongoing debate over the goals of the U.S. insider-trading enforcement regime, and current efforts to reform it. Subsequent installments will share some of the survey results and their implications.

U.S. insider-trading law has been mired in controversy for most of its sixty-year history. Many scholars have argued that restrictions on insider trading should never have been adopted because it is victimless and improves market performance. Others claim that insider trading is unfair, imposes a tax on market participation, and undermines the public’s confidence in our capital markets. Some such critics advocate for broader theories of liability along with stiffer penalties.

Arguments on both sides of this controversy regularly appeal to claims that turn crucially on the public’s actual attitudes concerning insider trading. For example, the recently-published Report of the Bharara Task Force on Insider Trading opens with the declaration that “[m]ost agree that there is something fundamentally unfair about [insider trading].” And in United States v. O’Hagan, Justice Ginsburg averred that “investors would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” Such empirical claims (and their contraries) are rarely backed by data. They therefore amount to little more than speculation. With stiff civil fines and up to 20 years of imprisonment at stake, however, these laws should be based on more than guesswork.

My co-authors and I hope to shed new light on this decades-old debate. Our findings come at a crucial time. Congress may be poised to implement a statutory overhaul of our sixty-year old insider trading regime, with the recent passage of the Insider Trading Prohibition Act in the House with a near-unanimous 410-13 vote. We hope that the survey data will inform these efforts and facilitate intelligent reform.

The survey was administered to a census-representative group (across age, gender, race, and other categories) of 1,313 respondents in April 2019, providing a survey-level margin of error of ±3 percent.

The questions addressed a broad swath of topics covering respondents’ attitudes concerning, inter alia, the pervasiveness of insider trading; how knowledge of widespread insider trading would affect market confidence; whether insider trading is morally wrong, should be illegal, or should be punished; and whether they would personally trade on inside information if they had the opportunity. Some of the results are surprising, and reflect a great deal of ambivalence. For example, what does it mean that nearly a fifth of respondents would engage in insider trading even though they believe it is immoral?

The survey also asked a number of scenario-based questions to test respondents’ intuitions concerning insider trading in a variety of contexts from the boardroom to the cocktail party. Finally, the survey looked to test the firmness of respondents’ views by subjecting them to “propaganda” for and against insider trading, and measuring the extent to which such influence changed their views. The results show a significant change in views after exposure to propaganda, suggesting the public’s views on insider trading are not firmly held.

The next installments to this post will detail some of the survey’s results and point to further empirical research that my co-authors and I plan to undertake.

September 1, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, April 20, 2020

The Ins-and-Outs of Corporate Leniency Programs

Friend-of-the-BLPB Miriam Baer recently posted a draft of her forthcoming book chapter on corporate leniency programs to SSRN.  The abstract follows.

Corporate leniency programs promise putative offenders reduced punishment and fewer regulatory interventions in exchange for the corporation’s credible and authentic commitment to remedy wrongdoing and promptly self-report future violations of law to the requisite authorities.

Because these programs have been devised with multiple goals in mind—i.e., deterring wrongdoing and punishing corporate executives, improving corporate cultural norms, and extending the government’s regulatory reach—it is all but impossible to gauge their “success” objectively. We know that corporations invest significant resources in compliance-related activity and that they do so in order to take advantage of the various benefits promised by leniency regimes. We cannot definitively say, however, how valuable this activity has been in reducing either the incidence or severity of harms associated with corporate misconduct.

Notwithstanding these blind spots, recent developments in the Department of Justice’s stance towards corporate offenders provides valuable insight on the structural design of a leniency program. Message framing, precision of benefit, and the scope and centralization of the entity that administers a leniency program play important roles in how well the program is received by its intended targets and how long it survives. If the program’s popularity and longevity says something about its success, then these design factors merit closer attention.

Using the Department of Justice’s Yates Memo and FCPA Pilot Program as demonstrative examples, this book chapter excavates the framing and design factors that influence a leniency program’s performance. Carrots seemingly work better than sticks; and centralization of authority appears to better facilitate relationships between government enforcers and corporate representatives.

But that is not the end of the story. To the outside world, flexible leniency programs can appear clubby, weak and under-effective. The very design elements that generate trust between corporate targets and government enforcers may simultaneously sow credibility problems with the greater public. This conundrum will remain a core issue for policymakers as they continue to implement, shape and tinker with corporate leniency programs.

That last paragraph rings true to me in so many ways.  The remainder of the abstract also raises some great points that engage my interest.  Looks like I am adding this to my summer reading list!

April 20, 2020 in Corporations, Joan Heminway, Litigation, White Collar Crime | Permalink | Comments (0)

Thursday, April 9, 2020

New Paper: Congressional Securities Trading

Iowa's Greg Shill has a new paper out on Congressional Securities Trading.  As a former congressional staffer, he brings a special appreciation to the issue.

Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler.  The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.

In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading.  He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives.  This approach should help manage ordinary securities transactions by members of Congress and their staff.  He also advocates for limiting Congressional investing to U.S. index funds and treasuries.  This would reduce the incentive to favor one market participant over another.

The proposed reforms would be a substantial improvement over the status quo.  We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy.  We should also not subsidize public service by tolerating Congressional trading on Congressional information.

Of course, we'll still face some implementation challenges.  When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios?  What kinds of exceptions would we make for private-company investments where no ready, liquid market exists?  These implementation challenges strike me as mild compared to the benefits.

And Congressional adoption of the proposal would certainly yield substantial benefits.  Although difficult to quantify, two broad benefits seem clear. First, adopting the proposal would generally increase confidence in government's integrity.  As we're seeing with the pandemic, public trust in public officials can shift how society responds in times of collective crisis.  

Allowing federal officials to trade securities generates real harm, confusion, and suspicion.  Consider the hubbub over Trump's indirect ownership of a tiny stake in drug-maker Sanofi.  Some have seized on the small, indirect interest to contend that he now hypes a particular drug for personal gain.  A public-trust-focused regime limiting all elected officials to only broad index funds and U.S. Treasuries would likely cut down on the fear that officials recommend particular things to the public because of their economic interests.  To be clear, it strikes me as extremely unlikely that the President now hypes the drug because of his minuscule ownership stake.  The much likelier explanation is simply disordered magical thinking.

Many politicians have been targeted by similar attacks. This particular type of ill-informed charge has also been leveled at Senator Elizabeth Warren.  One deeply misleading headline claimed she "invested in private prisons" before going on to explain that she owned a Vanguard index fund.  It would be better to remove this line of attack entirely by sharply limiting the ways public officials invest.

Limiting Congressional ownership would also advance another vital national interest by increasing confidence in American securities markets.  Our ability to attract capital and move it from investors to the real economy depends on confidence in the system.  If investors fear that Congressional insiders have a leg up, they may not be as likely to participate in our markets.

As Congress considers how to regulate on these issues in the future, it should pay close attention to Shill's recommendations.

April 9, 2020 in Financial Markets, Securities Regulation, White Collar Crime | Permalink | Comments (1)

Friday, May 10, 2019

Managing Compliance Across Borders Conference at the University of Miami- June 26-28

 

 

 

Join me in Miami, June 26-28.

 

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Managing Compliance Across Borders

June 26-28, 2019

Managing Compliance Across Borders is a program for world-wide compliance, risk and audit professionals to discuss current developments and hot topics (e.g. cybersecurity, data protection, privacy, data analytics, regulation, FCPA and more) affecting compliance practice in the U.S., Canada, Europe, and Latin America. Learn more

See a Snapshot: Who Will Be There?
You will have extensive networking opportunities with high-level compliance professionals and access to panel discussions with major firms, banks, government offices and corporations, including:

  • BRF Brazil
  • Carnival Corporation
  • Central Bank of Brazil
  • Endeavor
  • Equal Employment Opportunity Commission
  • Eversheds Sutherland
  • Fidelity Investments
  • Hilton Grand Vacations
  • Ingram Micro
  • Jones Day
  • Kaufman Rossin
  • LATAM Airlines
  • Laureate Education, Inc.

 

  • MasterCard Worldwide
  • MDO Partners
  • Olin Corporation
  • PwC
  • Royal Caribbean Cruises
  • Tech Data
  • The SEC
  • TracFone Wireless
  • U.S. Department of Justice
  • Univision
  • UPS
  • XO Logistics
  • Zenith Source

 

Location
Donna E. Shalala Student Center
1330 Miller Drive
Miami, FL 33146

 

CLE Credit
Upwards of 10 general CLE credits in ethics and technology applied for with The Florida Bar

 

Program Fee: $2,500 $1,750 until June 1 
Use promo code “MCAB2019” for discount 

Non-profit and Miami Law Alumni discounts are available, please contact:
Hakim A. Lakhdar, Director of Professional Legal Programs, for details

Learn More: Visit the website for updated speaker information, schedule and topic details.

This program is designed and presented in collaboration with our partner in Switzerland

University of St. Gallen

 

 

 

 

 

 

 

May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Thursday, March 28, 2019

Nike, Avenatti, and the Business Judgment Rule

 
This Michael Avenatti extortion case is fascinating to me. I am not really sure why, other than it seems so absurd.  You may recall Avenatti as the lawyer who represented Stormy Daniels in her lawsuits against President Trump. He is a big personality and known for being outlandish at times.  
 
According to federal prosecutors, Avenatti tried to extort Nike for millions of dollars because he claimed to have evidence that Nike employees were illegally paying people to help recruit college basketball players.  Apparently, Avenatti believed he would be able to get Nike to pay him millions of dollars in exchange for the evidence. Instead, he ended up with the FBI. 
 
The New York Time reports:
According to people with knowledge of the cases, once Nike heard Mr. Avenatti’s claims, it acted to inform federal officials of the allegation that the company’s employees were paying players. The nature of the discussion with Mr. Avenatti raised the possibility that extortion was taking place.
That is, as soon as Nike was on notice of a potential problem right to the authorities.  How very Allis-Chalmers of them.  I am a fan of that old business judgment rule case, which state “it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, [only] then liability of the directors might well follow . . . “ Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 85, 188 A.2d 125, 130 (1963).  So, as soon as Nike was on notice of wrongdoing, they disclosed it to officials.  
 
Nike took action to deal with the problem quickly, rather than acting like Caremark did years ago, when "there was an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss [from fines resulting from bad employee behavior]." By taking action, Nike likely insulates the company (or at least mitigates the harm) it could face from alleged wrongdoing. Rather than engaging in a cover up (and potentially paying to hide the problem), the company acted proactively by disclosing the actions.  
 
Was this Avenatti's first attempt at such a thing?  It seems unlikely one would start with a company like Nike, but maybe the potential payoff seemed worth it. On the other hand, maybe such tactics have worked in other circumstances with smaller companies, so it seemed like a good idea. 
 
Regardless, it seems like Nike handled this wisely. The company recognized the issue before it, and fairly quickly realized that any of the alleged bad behavior was already done.  When such things happen, it is disappointing, to be sure, but it can't be undone.  The only question then is, "how are you going to respond."  For my money, going to the authorities was the right call, even though Nike had to know some bad press was going to follow.  
 
Now, I recognize it is possible that Nike knew about the behavior and reported nothing until Avenatti showed up. It would be interesting to find out, and if so, the analysis of whether they should have reported earlier would be an interesting one.  For example, would the company have faced more or less scrutiny had they reported on their own?  Or did they inoculate themselves to some degree by waiting and having the alleged Nike behavior overshadowed by Avenatti's alleged acts? Tough questions that require the exercise of business judgment. Thank goodness there is a rule about that.  

March 28, 2019 in Corporations, Current Affairs, Joshua P. Fershee, White Collar Crime | Permalink | Comments (2)

Monday, February 4, 2019

Summer Opportunity for Business Law Students - Hofstra Law

This from our friend Heather Johnson at Hofstra Law:

This May and June, Hofstra Law will offer a three-credit or five-credit study abroad program on International Financial Crimes and Global Data Regulation. Both programs will begin Sunday, May 19; the three-credit program will conclude on June 1, 2019 and the five-credit program will conclude on June 13, 2019. The courses will be taught by Hofstra University School of Law Professor Scott Colesanti and Professor Giovanni Comande from the Scuola Superiore Sant’Anna.

It will be held in Pisa, Italy, and is co-sponsored by the Scuola Superiore Sant’Anna. This year, we have added a dinner with the Dean of our Law School, Gail Prudenti and an excursion to Milan to visit the Borsa headquarters!

The deadline is Friday, March 29, 2019 — those interested should apply as soon as possible!

The course is open to law students around the country; students must have completed their full-time 1L course work by the start of this program. Attached to this e-mail you’ll find the up-to-date application, a poster about the program as well as the tentative schedule. Interested students should apply by AS SOON AS POSSIBLE.

Students joining us from other universities should have these credits verified to transfer to your home institution, submit a letter of good standing to our office and work with financial services to complete a consortium agreement. Feel free to reach out to me with any questions regarding the above information.

Warmly,

Heather Johnson

Heather N. Johnson, M.A. International Education
Assistant Director of International Programs and Student Affairs Coordinator
Maurice A. Deane School of Law at Hofstra University
121 Hofstra University, Suite 203 | Hempstead, NY 11549
Heather.N.Johnson@hofstra.edu | Phone: (516) 463-0417 |Fax: (516) 463-4710

HofstraLaw

Sounds like a great opportunity for the right student.  Contact Heather for more information.

February 4, 2019 in International Business, International Law, Joan Heminway, White Collar Crime | Permalink | Comments (0)

Monday, March 12, 2018

Martha and Carl: Untying U.S. Insider Trading's Gordian Knot

As I read recent news reports (starting a bit over a week ago and exemplified by stories here, here, here, and here--with the original story featured here) about Carl Icahn's well-timed sale of Manitowoc Company, Inc. stock, I could not help but associate the Icahn/Manitowoc intrigue with the Stewart/ImClone affair from back in the early days of the new millennium--more than 15 years ago.  As many of you know, I spent a fair bit of time researching and writing on Martha Stewart's legal troubles relating to her December 2001 sale of ImClone Systems, Inc. stock.  Eventually, I coauthored and edited a law teaching text focusing on some of the key issues.  A bit of my Martha Stewart work is featured in that book; much of the rest can be found on my SSRN author page.  For those who may not recall or know about the Stewart/ImClone matter, the SEC's press release relating to its insider trading enforcement action against Stewart is here, and it supplies some relevant background.  (Btw, ImClone apparently is now a privately held subsidiary of Eli Lilly and Company organized as an LLC.)

In reading about Icahn's Manitowoc stock sale, my thoughts drifted back to Stewart's ImClone stock sale because of salient parallels in the early public revelations. Just as Icahn had personal and professional connections with U.S. government officials who were aware of material nonpublic information regarding the later-announced imposition of steel tariffs, Martha Stewart had personal and professional connections with at least one member of ImClone management who was aware of impending negative news from the U.S. Food and Drug Administration regarding ImClone's flagship product.  We know from the law itself and Stewart/ImClone fiasco not to jump to conclusions about insider trading liability from such scant facts.  Stewart's insider trading case ended up being settled.  (No, that's not why she went to jail . . . .)  And I have argued in a book chapter (Chapter 4 of this book) that the facts associated with Stewart's stock sale may well have revealed that she did not violate U.S. insider trading prohibitions under Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, as amended.

The Supreme Court's decisions in Dirks v. SEC and Salman v. United States advise us that a tippee trading while in possession of material nonpublic information only violates U.S. insider trading prohibitions under Section 10(b) and Rule 10b-5 if:

  • disclosure of the material nonpublic information in the tippee's possession breached a duty of trust and confidence because it was shared (directly or indirectly) with the tippee improperly--typically (although perhaps not always--as I note and argue in a forthcoming essay) because the duty-bearing tipper benefitted in some way from disclosure of the information; and
  • the tippee knew or should have known that the tipper breached his or her duty of trust and confidence.

See, e.g., Dirks v. SEC, 463 U.S. 646, 660 (1983).  

Thus, there is much more to tease out in terms of the facts of the Icahn/Manitowoc scenario before we can even begin to assert potential insider trading liability.  Among the unanswered questions:

  • what Icahn knew and when he knew it;
  • whether any information disclosed to Icahn was material and nonpublic;
  • who disclosed the information to Icahn and whether anyone directly or indirectly making disclosures to him had a fiduciary or fiduciary-like duty of trust and confidence;
  • whether any disclosures directly or indirectly made to Icahn were inappropriate and, therefore, breached the tipper's fiduciary or fiduciary-like duty of trust and confidence; and
  • whether Icahn knew or should have known that the information he received was disclosed in breach of a fiduciary or fiduciary-like duty of trust and confidence.  

Icahn denies having any information about the Trump administration's imposition of tariffs on the steel industry.  (See, e.g.here.)  And the nature of the duties of trust and confidence owed by government officials is somewhat contended (although Donna Nagy's work in this area holds great sway with me).  Regardless, it is simply too soon to tell whether Icahn has any U.S. insider trading liability exposure based on current news reports.  I assume ongoing inquiries will result in more facts being adduced and made public.  This post may serve as a guide for the digestion of those additoonal facts as they are revealed.  In the mean time, feel free to leave your observations and questions in the comments.

March 12, 2018 in Current Affairs, Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (2)

Tuesday, October 31, 2017

Mistake Number Two in Mueller's Indictment: Manafort's LLCs Are Not Corporations

The distinction between limited liability companies (LLCs) and corporations is one that remains important to me. Despite their similarities, they are distinct entities and should be treated as such.

When the indictment for Paul Manafort and Richard Gates was released yesterday, I decided to take a look, in part because I read that the charges included claims that the defendants "laundered money through scores of United States and foreign corporations, partnerships, and bank accounts."  (Manafort Indictment ¶ 1.)

It did not take long for people to note an initial mistake in the indictment.  The indictment states that Yulia Tymoshenko was the president of the Ukraine prior to Viktor Yanukovych. (Id. ¶ 22.) But, Dan Abrams' Law Newz notes, "Tymoshenko has never been the president of the Ukraine. She ran in the Ukrainian presidential election against Yanukoych in 2010 and came in second. Tymoshenko ran again in 2014 and came in second then, too." Abrams continues: 

The Tymoshenko flub is a massive error of fact, but it doesn’t impinge much–if any–on the narrative contained in the indictment itself. The error doesn’t really bear upon the background facts related to Manafort’s and Gates’ alleged crimes. The error also doesn’t bear whatsoever upon the laws Manafort and Gates are accused of breaking. Rather, it’s an error which bears upon the credibility of the team now seeking to prosecute the men named in the indictment.

Perhaps. It is a high-profile mistake, but it doesn't go to the core of the charges, so I think this may overstate it a bit.  Still, it is hardly ideal, and it's definitely an unforced error.  And unfortunately, there is a second such error.  

Paragraph 12 of the indictment provides a chart of entities that were "owned or controlled" by the defendants. The chart headings provide "Entity Name," "Date Created," and "Incorporation Location." But a number of the entities are not corporations. They are LLCs,  and you do not "incorporate" an LLC.  You form an LLC.  (Also, just to be clear, LLCs are not "partnerships," either. They are LLCs.)

Similar to the Tymoshenko error, the type of entity does not appear to impact the underlying narrative or charges.  For example, entity type does not appear to impact the "conspiracy to launder money" count. And other jurisdictions, such as Cyprus, do tend to merge the corporate concept with the company concepts in a way that might make the chart headings less wrong than it is for U.S. entities.  Nonetheless, it would not have been that hard to go with "Entity Origin" or "Formation Location."  

Okay, so all of this is rather nitpicky, and I get that.  The underlying charges are serious, and I hope and expect that the charges and the surrounding facts (not these mistakes) will be the focus of the legal process as it runs its course. But, it is also proper, I think, to work toward getting the entire document right. Details matter, and at some point could mean the difference between winning and losing, even if that does not appear to be the case this time around.   

October 31, 2017 in Corporations, Current Affairs, Joshua P. Fershee, Lawyering, LLCs, Partnership, White Collar Crime | Permalink | Comments (1)