Insider Trading Enforcement In 2022

Jones Day


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United States Compliance
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Amendments to Rule 10b5-1 Trading Plans & Disclosures

On December 14, 2022, the SEC adopted new requirements for so-called "10b5-1 plans" that act as an affirmative defense to insider trading allegations for senior executives.1 Given the growth of equity compensation as a portion of total executive compensation in recent decades, companies and executives rely on 10b5-1 plans to sell company securities in a manner designed to prevent insider trading. For almost as long as 10b5-1 plans have existed, regulators and industry analysts have expressed concern that corporate insiders have manipulated the rules to their benefit. Specifically, these concerns related to insiders (i) entering into multiple, overlapping trading plans; (ii) entering into plans that become effective soon after adoption and in advance of corporate news; and (iii) opportunistically entering into plans contemplating a single transaction. The new rules come after a year-long review by the SEC and a 10b5-1 trading sweep from the DOJ and the SEC earlier in 2022.

Exchange Act Rule 10b5-1 provides issuers and corporate insiders with an affirmative defense to insider trading claims if a person trades—subject to certain conditions—pursuant to a binding contract, an instruction to another to execute the trade for the person's account, or a written plan, in each case adopted in good faith and when the person is not aware of material nonpublic information ("MNPI"). The new rules impose a variety of new conditions on trading plans intended to satisfy the affirmative defense offered by Rule 10b5-1. Among other new requirements, plans for officers and directors may not become effective until the later of (i) two business days after the issuer files a Form 10-Q or 10-K or (ii) 90 days. At the time of adoption, directors and officers must certify that they are not aware of MNPI related to the issuer and that they are adopting the plan in good faith. And no person except an issuer can have multiple, temporally overlapping plans, though the rules exempt qualified "sell-to-cover" transactions to satisfy tax withholding arising from equity award vesting where the individual does not exercise timing control.

The final rules also impose on issuers more frequent and comprehensive disclosure requirements related to directors' and officers' use of Rule 10b5-1 plans, issuer insider trading policies, and issuer grants of certain equity compensation awards. For more information regarding the new plan requirements and the expanded disclosure requirements, please see Jones Day's White Paper, "SEC Adopts Final Rules Regarding Rule 10b5-1 Trading Plans and Related Disclosures."

United States v. Blaszczak

In December 2022, the Second Circuit issued the latest decision in United States v. Blaszczak ("Blaszczak II"),2 an insider trading prosecution first filed in 2017. The Blaszczak case was based on allegations that an employee at the Centers for Medicare & Medicaid Services ("CMS") provided a hedge fund consultant with confidential government information concerning proposed changes to Medicare and Medicaid reimbursement rates. This consultant allegedly tipped two employees at a hedge fund, which then profitably traded on the confidential government information. The government charged the CMS employee, the consultant, and the two hedge fund employees with various crimes, including insider trading under both Title 15 and Title 18 securities fraud statutes. At trial, the jury acquitted the defendants on all charges brought under Title 15 but convicted three of the defendants for insider trading under Title 18. The split verdict is likely explained by the trial judge's instructions to the jury, which required the jury to find the personal benefit test was met for the Title 15 securities fraud charges but not the Title 18 securities fraud charges. The convictions were affirmed on appeal in Blaszczak I. 3

The case returned to the Second Circuit Court of Appeals after the Supreme Court issued its decision in the "Bridgegate" case, Kelly v. United States. 4 In Kelly, the Court held that a government entity's regulatory decision (allegedly allocating traffic lanes to cause a politically motivated traffic jam) was not money or property under the wire fraud statute.5 The question before the Second Circuit in Blaszczak II was whether CMS's confidential information concerning reimbursement rates was a regulatory interest akin to Kelly, or a property interest akin to the prepublication business information in Carpenter v. United States. 6 In a 2-1 decision, the Blaszczak II panel vacated all the defendants' insider trading convictions under the Title 18 securities fraud statute, holding that, in light of Kelly, the conduct at issue was "regulatory in character" and, therefore, not a thing of value to CMS that could be converted unlawfully.7 The majority distinguished between a commercial entity's information that is its "stock in trade" and government regulatory information.8

Blaszczak II limits the government's ability to bring Title 18 fraud charges in cases involving the misappropriation of government information. Cases could still be brought under the Title 15 securities fraud statutes in such instances, but the government would be required to meet the personal benefit test. Further, as noted by Judge Walker's concurrence, Blaszczak II does not address Blaszczak I's holding that Title 18 securities fraud does not require proof that a tipper received a personal benefit.

Insider Trading Prohibition Act

From time to time, Congress has attempted to pass a federal insider trading statute, though none has been enacted. Most recently, the House of Representatives passed the Insider Trading Prohibition Act ("ITPA") in May 2021.9 The ITPA attempts to codify certain aspects of current insider trading law, while also expanding liability. Among other changes, the ITPA focuses on whether MNPI was obtained wrongfully. Specifically, the ITPA prohibits the trading of securities while a person is aware of MNPI if that person knows, or has reason to know, that the information was obtained wrongfully, such as through theft, bribery, hacking, misappropriation, or a breach of fiduciary duty for a personal benefit. The act also prohibits tippers from providing MNPI to another person if (i) the other person trades or (ii) trading was foreseeable. The ITPA explicitly states that it is not necessary that either the tipper or tippee knows how the information was obtained or whether any personal benefit was paid or promised by or to any person in the chain of communication, "so long as the person trading ... was aware, consciously avoided being aware, or recklessly disregarded that such information was wrongfully obtained, improperly used, or wrongfully communicated." In this way, the ITPA would eliminate the current judge-made requirement that a tippee know that the tipper received a personal benefit from tipping.

The 117th Congress ended in January 2023 without the Senate taking action on the ITPA. However, in January 2023, a bill was introduced in the House of Representatives that would prevent lawmakers and their spouses from holding or trading stocks while in office.10 This comes after several federal agencies have turned their attention to creating stricter ethics rules on trading by agency employees.11 These developments, in addition to the continued attention to insider trading generally and anomalies in insider trading jurisprudence, as discussed above, increase the likelihood the 118th and future Congresses will revisit legislation.


Digital Asset Insider Trading

In the absence of action by Congress, there is considerable uncertainty concerning the status of digital assets under the securities laws. In 2022, both the DOJ and the SEC brought their first two insider trading actions related to cryptocurrency and digital assets. In a nod to the lack of clarity surrounding whether these assets are securities subject to Exchange Act Section 10(b) and Rule 10b-5, the DOJ avoided the issue and charged defendants with wire fraud, money laundering, and conspiracy, none of which require the government to prove that the digital assets at issue are securities. In one of these cases, however, the SEC filed a parallel civil action and will be required to litigate whether certain digital assets listed on a digital asset marketplace are securities under the Howey test for determining whether an investment is an "investment contract."

United States v. Chastain, 22-cr-305-JMF (S.D.N.Y.): In June 2022, the U.S. Attorney's Office for the Southern District of New York ("SDNY") announced the indictment of a former project manager at a non-fungible token ("NFT") platform for what it characterized as a scheme to commit insider trading in NFTs.12 According to the indictment, the platform featured certain NFTs on its homepage, and the featured NFTs frequently rose in value as a result of this prominent placement on the platform. The defendant was allegedly responsible for selecting NFTs to feature on the homepage and used this role to his financial gain by purchasing certain NFTs prior to promoting them on the homepage and then selling them for profit after they were featured. The indictment charged one count each of wire fraud and money laundering. In October 2022, the court denied the defendant's motion to dismiss, but noted that, while SDNY referred to "insider trading" in its indictment and related public statement, the defendant was not charged with insider trading under the securities laws, and the label could be misleading. The SEC did not file an action related to this case.



2. 56 F.4th 230 (2d Cir. 2022).

3. 947 F.3d 19, 26 (2d Cir. 2019). The Court's ruling was significant because it meant that that Title 18 securities fraud was "a different— and broader—enforcement mechanism" than is available under § 10(b) and Rule 10b-5. United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019) ("Blaszczak I").

4. 140 S. Ct. 1565 (2020).

5. Id. at 1568-69.

6. 484 U.S. 19, 22-24 (1987) (pre-publication disclosure of the content of Wall Street Journal columns was money or property under the mail and wire fraud statutes).

7. 54 F.4th at 244.

8. Id. at 243.

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