Government regulators have started 2014 as they did throughout
2013 by continuing to go after insider trading both civilly and
criminally. However, the U.S. Attorney's office has had
substantially more success in trying its criminal cases than the
SEC has had recently in its civil trials. Why the government's
criminal prosecutors are having greater success proving criminal
fraud than the SEC is having proving civil fraud might be because
the SEC is pursuing cases that push the envelope on insider trading
liability, either factually or legally. Whatever the reason, a
trend might be developing.
Jury selection began last week in the Matthew Martoma criminal
trial in New York. Martoma was an analyst for one of billionaire
Stephen A. Cohen's hedge fund vehicles, and he is accused of
trading on inside information on behalf of the fund in
pharmaceutical companies. According to the U.S. Attorney,
Martoma's trades helped Cohen's hedge fund make, or avoid
losing, $276 million. Because of this amount, a conviction could
potentially result in a sentence lasting decades. Last fall, the
Justice Department obtained a conviction at trial of an associate
of Martoma and Cohen's, Michael Steinberg, for insider trading.
This victory follows the multiple convictions arising from the
Galleon Management scandal, including Raj Rajaratnam and Rajat
Gupta. The DOJ, along with the SEC, also obtained $1.8 billion in
criminal and civil fines, a record in an insider trading case, from
one of Cohen's funds, to resolve the insider trading claims
against the firm.
The SEC's recent track record, on the other hand, has been
notably less bulletproof. On Jan. 14, 2014, a federal jury in
Chicago deliberated less than an hour before handing the SEC a
defeat in SEC v. Yang. In that case, the SEC argued that Siming
Yang "must have had" inside information based on the
timing and kind of his profitable trades in advance of a corporate
takeover, despite lacking any direct evidence that Yang ever spoke
to a "tipper" who gave him inside information. Based on
its verdict, it appears that the jury concluded that mere
circumstantial evidence of trading on non-public information
(primarily short-term, out-of-the-money call options) was
insufficient proof of insider trading.
The week before, the SEC lost a bench trial in Georgia in which
it alleged insider trading against Larry Schvacho, in connection
with his acquisition of stock of Comsys IT Partners, a company
whose CEO was a long-time personal friend of Schvacho's. The
SEC surmised that his discussions and meetings with the CEO in the
run-up to the company's acquisition by a competitor, which
coincided with some of his stock purchases, meant that insider
trading must have occurred. However, as in Yang, the SEC lacked any
direct evidence that the CEO conveyed inside information to
Schvacho; in fact, both the CEO and Schvacho denied it. In
vindicating Schvacho, the court concluded that the agency's
interpretation of its circumstantial evidence "ignored"
contrary interpretations and was "overreaching" and
"self-serving." These cases seem to suggest that juries
are less likely than the SEC to infer insider trading in the
absence of direct evidence. These two defeats follow the SEC's
loss at trial last fall when the Commission failed to prove that
Mark Cuban violated the insider trading laws when he sold his
shares of Mamma.com.
Nonetheless, SEC Chairperson Mary Jo White recently touted the
Commission's 80 percent success rate at trial, along with its
recent change to its "no admit/no deny" settlements, as
reasons why the Commission may soon take more cases to trial when
necessary, bucking the long-standing downward trend in civil
trials. Furthermore, in its recent annual report, the SEC has
stated clearly that insider trading will remain an enforcement
priority for 2014. In fiscal year 2013, the SEC brought 58 insider
trading cases (roughly 13 percent of its enforcement actions) and
resolved to make its "relentless pursuit" of individuals
engaged in insider trading a "high priority" going
forward. Whether these recent losses cause the SEC to revisit its
interest in trying tough cases, or possibly embolden defendants,
remains to be seen.
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Since the Regulation A+ effective date last month, a number of websites have emerged that promote "Regulation A+ crowdfunding" contributing even further to the confusion in the market regarding "crowdfunding."