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)

Thursday, August 31, 2017

Does Uber Need to Learn from Walmart about the FCPA?

Uber has a new CEO. Perhaps his first task should be to require one of his legal or compliance staff to attend the FCPA conference at Texas A & M in October given the new reports of an alleged DOJ investigation.. I might have some advice, but Uber needs to hear the lessons learned from Walmart, who will be sending its Chief Compliance Officer. Thanks to FCPA expert, Mike Koehler, aka the FCPA Professor, for inviting me. Mike has done some great blogging about the Walmart case (FYI- the company has reported spending $865 million on fees related to the FCPA and compliance-related costs). Details are below:

 

THE F​CPA TURNS 40:
AN ASSESSMENT OF FCPA ENFORCEMENT POLICIES AND PROCEDURES

FCPA ConferenceThursday, October 12, 2017
Texas A&M University School of Law
Fort Worth, Texas

This conference brings together Foreign Corrupt Practices Act enforcement officials, experienced FCPA practitioners, and leading FCPA academics and scholars to discuss the many legal and policy issues relevant to the current FCPA enforcement and compliance landscape.

Register here

AGENDA

[Click here to download agenda pdf]

Registration, 8:30 a.m.

Morning Session, 9:00 a.m. to Noon

FCPA Legal and Policy Issues

  • Daniel Chow, Professor, Ohio State School of Law
    China’s Crackdown on Government Corruption and the FCPA
  • Mike Koehler, Professor, Southern Illinois School of Law
    Has the FCPA Been Successful In Achieving Its Objectives?
  • Peter Reilly, Associate Professor, Texas A&M School of Law
    The Fokker Circuit Court Opinion and Deferred Prosecution of FCPA Matters
  • Juliet Sorensen, Professor, Northwestern School of Law
    The Phenomenon of an Outsize Number of Male Defendants Charged with Federal Crimes of Corruption
  • Marcia Narine Weldon, Professor, Univ. of Miami School of Law
    What the U.S. Can Learn from Enforcement in Other Jurisdictions and What Other Jurisdictions Can Learn from Us

Luncheon, Noon to 1:00 p.m.

Afternoon Session, 1:00 to 3:00 p.m.

FCPA Conference JorgensenKeynote address

(1:00 to 2:00 p.m.)

  • Jay Jorgensen
    Executive Vice President, Global Chief Ethics and Compliance Officer, Walmart

Follow-up panel (2:00 to 3:00 p.m.):

FCPA Enforcement and Compliance Landscape: Past, Present, and Future

  • Kit Addleman, Attorney, Haynes and Boone LLP, Dallas and Fort Worth Offices
  • Jason Lewis, Attorney, Greenberg Traurig LLP, Dallas Office

CLE Credit for Attendees

All attendees are eligible for ​​5 hours of CLE credit. The morning session offers ​3 CLE credits. The afternoon session offers 2 CLE credits, one of which will be an Ethics credit. Forms will be provided to attendees at the conference. CLE ​credit is free for all attendees.
 
 
 

August 31, 2017 in Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Saturday, August 5, 2017

SEALS 2017 - White Collar Crime Discussion Group

I have been at the Southeastern Association of Law Schools (SEALS) conference all week.  As usual, there have been too many program offerings important to my scholarship and teaching.  I have participated in and attended so many things.  I am exhausted.

But I know that all of this activity also energizes me.  Once I am back at home tomorrow night and get a good night's sleep, I will be ready to rock and roll into the new academic year (which starts for us at UT Law in a few weeks).  I use the SEALS conference as this bridge to the new year every summer.

One of my favorite discussion groups at the conference was the White Collar Crime discussion group that John Anderson and I organized.  A number of us focused on insider trading law this year.  John, for example, shared his preliminary draft of an insider trading statute.  I asked folks to ponder the result under U.S. insider trading law of a tipping case with the following general facts:

  • A person with a fiduciary duty of trust and confidence to a principal conveys material nonpublic information obtained through the fiduciary relationship to a third person;
  • The recipient of the information is someone with whom the fiduciary has no prior familial or friendship relationship;
  • The conveyance is made to the recipient by the fiduciary without the consent of the principal;
  • The conveyance is made to the recipient gratuitously;
  • The fiduciary’s purpose in conveying the information is to benefit the recipient;
  • Specifically, the fiduciary knows that the recipient has the ability and incentive to trade on the information or convey it to others who have the ability and incentive to trade; and
  • The fiduciary has clear knowledge and understanding of resulting detriment to the principal.

The question, of course, is whether the fiduciary has engaged in deception that constitutes a willful violation of insider trading proscriptions under Section 10(b) and Rule 10b-5.  The answer, based on what we now know under U.S. insider trading law, depends on whether the fiduciary's sharing of information is improper.  What do you think?  I shared my views and others in the group shared theirs.  I may have more to say on this problem and my related work in a later post.

August 5, 2017 in Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, May 1, 2017

The Criminalization of Insider Trading: Has It Gone Too Far?

A bit more than a year ago, I had the opportunity to participate in a conference on corporate criminal liability at the Stetson University College of Law.  The short papers from the conference were published in a subsequent issue of the Stetson Law Review.  This was the second time that Ellen Podgor, a friend and white collar crime scholar on the Stetson Law faculty, invited me to produce a short work on corporate criminal liability for publication in a dedicated edition of the Stetson Law Review.  (The first piece I published in the Stetson Law Review reflected on corporate personhood in the wake of the U.S. Supreme Court's Citizen's United opinion.  It has been downloaded and cited a surprising number of times.  So, I welcomed the opportunity to publish with the law review a second time.)

For the 2016 conference, I chose to focus on the reckless conduct of employees and its capacity to generate corporate criminal insider trading liability for the employer.  The abstract for the resulting paper, (Not) Holding Firms Criminally Responsible for the Reckless Insider Trading of their Employees (recently posted to SSRN), is as follows:

Criminal enforcement of the insider trading prohibitions under Section 10(b) and Rule 10b–5 is the root of corporate criminal liability for insider trading in the United States. In the wake of assertions that S.A.C. Capital Advisors, L.P. actively encouraged the unlawful use of material nonpublic information in the conduct of its business, the line between employer and employee criminal liability for insider trading becomes both tenuous and salient. An essential question emerges: when do we criminally prosecute the firm for the unlawful conduct of its employees?

The possibility that reckless employee conduct may result in the employer's willful violation of Section 10(b) and Rule 10b–5 (and, therefore, criminal liability for that employer firm) motivates this article. The article first reviews the basis for criminal enforcement of the insider trading prohibitions established in Section 10(b) and Rule 10b–5 and describes the basis and rationale for corporate criminal liability (a liability that derives from the activities of agents undertaken in the course of the firm’s business). Then, it reflects on that basis and rationale by identifying the potential for corporate criminal liability for the reckless insider trading violations of employees under Section 10(b) and Rule 10b–5, arguing against that liability, and suggesting ways to eliminate it.

I was not the only conference participant concerned about the criminal liability of an employer for the insider trading conduct of an employee.  John Anderson, who co-led an insider trading discussion group with me at the 2017 Association of American Law Schools annual meeting back in January and also enjoys exploring criminal insider trading issues, contributed his research on the overcriminalization of insider trading at the conference.  His paper, When Does Corporate Criminal Liability for Insider Trading Make Sense?, identifies the same overall problem as my article does (employer criminal liability for insider trading based on employee conduct).  However, he views both the problem and the potential solutions more broadly.  

Continue reading

May 1, 2017 in Conferences, Corporate Governance, Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (2)

Tuesday, December 6, 2016

U.S. Supreme Court Simply and Elegantly Affirms Dirks in Salman

In a relatively brief opinion released this morning, the U.S. Supreme Court affirmed the Ninth Circuit's judgment in Salman v. United States.  The decision of the Court was unanimous.  The big take-aways include:

  • doctrinally, the Court's complete, unquestioning reliance on the language in Dirks v. Sec's Exch. Comm'n, 463 U. S. 646 (1983), as to when the sharing of information through a tip is improper, and therefore a basis for insider trading liability (quoting from the text on page 662 of the Dirks opinion: “'[T]he test,' we explained, 'is whether the insider personally will benefit, directly or indirectly, from his disclosure.'”);
  • factually, the emphasis placed by the Court on the value proposition represented by the information-sharing between the close brothers, Maher and Michael--that information passed on with the knowledge that it will be traded on was effectively a substitute for a monetary gift ("In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher’s offer of money, and instead requested and received lucrative trading information."), noting "[a]s Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother.";
  • constitutionally, the Court finding no vagueness ("Dirks created a simple and clear 'guiding principle' for determining tippee liability") and also rejecting on a similar basis application of the rule of lenity; and
  • procedurally, because of the Court's ruling on the merits, the Court finding the jury instructions entirely proper.

The opinion offers some clarity on the application of U.S. insider trading doctrine by unanimously affirming the "gift" language from Dirks in a solid way: "To the extent the Second Circuit held that the tipper must also receive something of a 'pecuniary or similarly valuable nature' in exchange for a gift to family or friends, . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks."  Having said that, the Court also hints in several places that the facts in these cases do matter.  The following quote is particularly relevant in this respect:

Salman’s conduct is in the heartland of Dirks’s rule concerning gifts. It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” . . .  But there is no need for us to address those difficult cases today, because this case involves "precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.”

In that context, the Court reminds us that "the disclosure of confidential information without personal benefit is not enough."  This, indeed, places continuing pressure on the nature of the relationship between the tipper and the tippee and other facts relevant to the transmission of the information, all of which must be ascertained and then proven at trial.  And so, it goes on . . . .

December 6, 2016 in Joan Heminway, Securities Regulation, White Collar Crime | Permalink | Comments (0)