Insider Trading: New Developments and How to Deal with Them

By John H. Sturc and Adam Chen

nsider trading remains a high priority in enforcement of the federal securities laws. Recently, the Securities and Exchange ICommission (SEC) and the Department of Justice (DOJ) have stepped up their investigative eff orts. In 2009, the SEC brought 37 actions; this number increased to 53 cases in 2010.1 Th e DOJ has similarly brought numerous criminal prosecutions on insider trading schemes, including bringing a case, and receiving guilty verdicts against, Raj Rajaratnam, the founder of the Galleon Management. Due to the increased focus on insider trading in the SEC’s and DOJ’s investigative eff orts, fi nancial service fi rms and other companies should re-evaluate their compliance programs for preventing insider trading activity. Companies can be liable for insider trading by employees for John H. Sturc is a partner in the Washington, the account of the fi rm and, in limited circumstances, as a “controlling DC offi ce of Gibson, Dunn & Crutcher LLP. 2 He is Co-Chair of the firm’s Securities person” of one who engages in insider trading. In addition, insider trading Enforcement Practice Group. He joined can disrupt the market for a company’s stock and interrupt prospective the fi rm’s Washington, D.C. offi ce in 1990, transactions, and government investigations are costly and distracting. where he focuses on securities and fi nancial Th is article discusses current trends in insider trading investigations, institutions enforcement matters, securities including recent changes to the DOJ’s and SEC’s enforcement focus law, internal investigations, and criminal and and methods used in investigating insider trading. It also discusses civil litigation. several ways a fi rm can change its policies and practices to better assure that its directors, offi cers and employees avoid possible liability for insider trading.

Current Trends in Insider Trading Th e accelerated activity by the SEC and the DOJ is the result of a perception that certain market participants have engaged in abuse, but the law of insider trading has not changed in the past few years: almost all insider trading cases under the securities laws are still based on either the “classical theory” of insider trading, where a person Zern-shun Adam Chen is an associate purchases or sells securities, with scienter (guilty knowledge), while in the New York office of Gibson, Dunn in possession of material, nonpublic information in breach of a duty & Crutcher. He is a member of the fi rm’s arising out of a fi duciary relationship to the issuer of the security—or Litigation Practice. the “misappropriation theory”—where a person violates securities

©2011, Gibson Dunn LLP

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • NOVEMBER–DECEMBER 2011 15 Insider Trading: New Developments and How to Deal with Them

laws when he misappropriates and trades on the manager for six health care related hedge funds, basis of confi dential information in a breach of a with insider trading in health care related stocks after duty of trust or confi dence owed to the source of receiving tips from a medical researcher overseeing the information.3 Instead, the principal changes a drug trial that the results would be unsuccessful.11 have been the increased intensity of eff ort and the Skowron and the affi liated hedge funds agreed to use of investigative techniques molded in other settle with the SEC by paying back $33 million in areas of criminal practice. Additionally, while disgorgement and interest. Skowron pled guilty to there continue to be major cases involving insider criminal insider trading charges in August 2011.12 trading by corporate insiders, the SEC and DOJ Th e federal government has not won all of its cases have also increased their attention on hedge funds, against hedge fund personnel. In September 2010, expert networks and “access persons” and extended a hedge fund manager and his co-defendants won insider trading cases to non-traditional securities summary judgment against the SEC’s allegations of and trading techniques. insider trading.13 Th e SEC alleged that defendant Brad Strickland, an employee of a lender, tipped his Changes in Enforcement Focus friend, defendant Peter Black, about an acquisition Hedge Funds of SunSource, Inc., a potential borrower of from the lender. Black then informed his superior, Nelson From June 2009 to November 2010, 49 hedge- Obus, who, in turn, purchased SunSource stock. fund managers and employees have been charged Th e court rejected the SEC’s allegations. Th e court in connection with insider trading. Of those, 46 noted that fi nancial institutions typically owe no have either pled guilty or been found guilty after fi duciary duties to borrowers and found that no trial. Th e most signifi cant hedge fund case has such duty arose in this case. Similarly, a district been the criminal trial of Raj Rajaratnam and the court dismissed insider trading charges in SEC v. parallel SEC civil trial, SEC v. Galleon Management.4 Berlacher.14 Th ere, the hedge fund manager emerged Raj Rajaratnam, the founder and head of Galleon victorious because the SEC failed to prove that the Management, a hedge fund that managed $3.7 alleged nonpublic information was material. billion in assets at the time of Rajaratnam’s arrest, was charged by federal prosecutors with securities Expert Networks fraud and conspiracy.5 Th e SEC also brought insider Several of the hedge fund cases arise from the activity trading charges in the parallel civil case. In a new of employees of or consultants for expert network development, the federal prosecutor’s case relied, fi rms, fi rms that attempt to connect investment in large part, on extensive wiretaps of Rajaratnam’s professionals with subject matter experts for conversations.6 On May 11, 2011, Rajaratnam was consultation on investments in companies related to convicted of all 14 counts of securities fraud and the experts’ fi elds. Th e SEC and DOJ have alleged conspiracy brought by federal prosecutors.7 that personnel at some fi rms provided information The government has also been successful in that is not merely diffi cult to obtain, but unlawfully cases against other Galleon-related defendants. disclosed nonpublic information, and the consultant- For example, Zvi Goffer, a former employee expert was hired by clients with the expectation of of Galleon, was found guilty of insider trading providing this unlawful information. through acquiring tips from attorneys at corporate Th e DOJ’s and SEC’s focus on expert networks law fi rms.8 Emanuel Goff er, Zvi Goff er’s brother, began in November 2010, when they announced and Michael Kimelman were also found guilty of criminal and civil insider trading charges against conspiracy and securities fraud,9 while the attorney French doctor Yves Benhamou.15 Benhamou served who acted as the broker between the attorney-tipper on the steering committee that oversaw clinical and the traders pled guilty to insider trading and trials of a new hepatitis drug being developed by received a three-year prison sentence.10 Arthur a pharmaceutical company. During this time, Cutillo, an attorney, was charged with providing Benhamou had a consulting relationship with hedge the inside information to Zvi Goff er. funds that invested in health care related securities, In a non-Galleon hedge-fund case, the SEC including with Dr. Joseph Skowron, discussed charged Dr. Joseph Skowron, a former portfolio above. Th e DOJ and SEC alleged that Benhamou

16 NOVEMBER–DECEMBER 2011 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY Insider Trading: New Developments and How to Deal with Them tipped Skowron of adverse test results from clinical In a case involving an accounting fi rm, the SEC trials, which allowed the hedge fund to avoid losses settled insider trading charges against former of $30 million. “Big 4” accounting fi rm partner Th omas Flanagan After the initiation of the Benhamou case, the and his son Patrick Flanagan for trading in the DOJ and SEC fi led multiple criminal and civil securities of several of the accounting fi rm’s clients.22 charges against consultants and employees of the According to the SEC complaint, Th omas Flanagan expert network firm Primary Global Research illegally traded nine times between 2005 and 2008, and their hedge fund clients. Th e DOJ and SEC alleged that James Fleischman, an employee at Primary Global, arranged for consultants to work Due to the increased focus on insider with Primary Global’s hedge fund clients with the trading in the SEC’s and DOJ’s investigative expectation that the consultants would provide inside information.16 Some of those charged, efforts, fi nancial service fi rms and other including Walter Shimoon and Dung Ching Trang companies should re-evaluate their Chu, have pled guilty.17 Others, such as Winifred Jiau, a Primary Global consultant, have been found compliance programs for preventing guilty for passing insider information to clients.18 insider trading activity. “Access Persons” Th e SEC and DOJ have begun several actions each time based on nonpublic information obtained against “access persons,” employees of service fi rms from clients. He also relayed the information to his such as accounting fi rms and law fi rms, who obtain son. Th e Flanagans agreed to pay approximately material nonpublic information about issuer clients, $1.1 million to settle the charges. for insider trading. Th ese actions include the ac- tion against Arthur Cutillo, an attorney, who was Enforcement of Requirements that Broker/Dealers found guilty of providing information on upcoming and Investment Advisers Have and Maintain transactions by fi rm clients to professional traders. Insider Trading Policies and Procedures Matthew Kluger, a corporate attorney, and Garrett Brokerage fi rms and investment advisers are required Bauer, a self-employed trader, were also charged by Section 15(f) of the Exchange Act and Section by the SEC in April 2011 with insider trading 204A of the Investment Advisers Act to establish, in advance of at least 11 merger and acquisition maintain and enforce written policies to prevent announcements involving clients of Kluger’s law the misuse of material nonpublic information by fi rm.19 Parallel criminal charges were also brought the fi rm or its associated persons. In the past year, against Kluger and Bauer. Th e SEC charges that the SEC has brought enforcement actions against Kluger accessed his law fi rm employer’s internal fi rms that fail to establish or maintain such policies document management system to fi nd nonpublic and procedures even without any allegation of an material information concerning the mergers and underlying violation. In July 2011, the SEC fi led an acquisitions of the law fi rm’s clients. Bauer then administrative action against Janney Montgomery placed trades on the confi dential information for Scott LLC, a brokerage fi rm, for failing to maintain himself and Kluger. Th e SEC alleges that Kluger and enforce such policies.23 Th e SEC’s allegations and Bauer illegally profi ted by at least $500,000 focused on monitoring trading of securities on the and $32 million, respectively.20 fi rm’s “watch list,” enforcement of restrictions on In March 2011, the SEC also charged Todd contacts between research staff and investment Treadway, a corporate attorney, with insider bankers and enforcement of policies on pre- trading.21 Th e SEC alleges that Treadway used clearance of personal trades, annual questionnaires information he obtained while advising clients on and reviews of accounts of associated persons. the employee benefi t and executive compensation Th e SEC imposed an $850,000 fi ne and Janney consequences of mergers and acquisitions to has agreed to hire an independent compliance purchase stock in two separate companies before consultant to assist the firm in undertaking their announcement of the acquisitions. remedial measures. Similarly, in November 2010,

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • NOVEMBER–DECEMBER 2011 17 Insider Trading: New Developments and How to Deal with Them

the SEC settled an administrative action against that the employee obtained information on the Buckingham Research Group, a broker dealer, its investment bank’s nonpublic plans to purchase large investment adviser subsidiary, and the director of amounts of securities underlying an ETF and passed compliance for failing to create certain required that information on to his father. Th e two then policies and procedures and for failing to enforce allegedly used that information to make profi table others that had been created.24 trades. Th e proceeding is ongoing. 5. Beyond Equity Securities CFTC “Insider Trading” Authority The SEC has brought cases alleging improper Th e Commodities Futures Trading Commission trading in securities other than equities and listed (“CFTC”) is also poised to become more involved options, such as credit default swaps (CDSs), in insider trading actions. Under the Dodd-Frank exchange-traded funds (ETFs) and mutual funds Act, a new Section 6(c)(1) has been added to and through the use of new trading vehicles such the Commodities Exchange Act prohibiting any as Rule10b5-1 plans. deceptive device or contrivance in connection with In 2010, the SEC alleged insider trading in credit a swap, future or cash contract in contravention default swaps by a bond salesman and a hedge fund of CFTC rules. Under this new law, the CFTC manager.25 Th e SEC alleged that the bond salesman has promulgated Rule 180.1(a)(1)-(3), which is learned of a CDS before it was announced to the public expressly patterned on SEC Rule l0b-5. Unlike from bankers at his fi rm who were working on the deal securities markets, futures markets do not have and tipped off the hedge fund manager prior to the corporate issuers. Th us, the new rule prohibits public announcement of the swap, who subsequently trading on the basis of material nonpublic bought the swaps. During trial, defendants argued that information obtained through fraud or deceit the CDS at issue were outside the SEC’s jurisdiction or in breach of a pre-existing duty; the rule does because they were not tied to a specifi c securities issue not create a new duty to disclose. Under the and were priced based on a variety of factors including new Rule 180.1, trading on one’s own, material the strength of the overall economy and the market’s nonpublic information is permitted. However, assessment of the referenced company’s credit risk. trading on information that was inappropriately Following trial, the Southern District of New York obtained or used in breach of a duty created by the court concluded that the insider trading charges were circumstances under which it was obtained, is not. unfounded because there had been no dissemination Changing Methods in Enforcing of material non-public information. In a victory for Insider Trading Laws the SEC, however, the court held that the swaps were suffi ciently securities-based to be within the SEC’s With the SEC’s and DOJ’s increased attention on jurisdiction. Th e court reasoned that price terms of insider trading and hedge funds, the government has the CDSs were fundamentally (though not expressly) methods and approaches to fi nding and bringing based on the price, yield, and value of the company’s actions against violators. Th e SEC has created two bonds and, as such, were securities-based swaps. specialized units within its Enforcement Division With respect to mutual fund shares, the SEC has to focus on insider trading and certain fi nancial also brought an action against a mutual fund portfolio institutions: the Market Abuse Unit and Asset manager who allegedly encouraged his daughter to Management Unit. Th e Market Abuse Unit is tasked redeem fund shares when he knew the fund was to investigate insider trading, market manipulation, experiencing material distress.26 Th e SEC brought an front-running, collusive trading and abusive short administrative proceeding against the manager, and selling. Th e Asset Management Unit will focus on the administrative law judge subsequently imposed investment advisers, hedge funds, private equity sanctions and a fi ne against the manager. funds and mutual funds. Recent developments The SEC has also brought an action against have also seen an increase in cooperation and a former employee of a major investment bank coordination between the SEC and DOJ. for trading securities ETFs based on material, Th e SEC and DOJ are also making greater use nonpublic information in an administrative of investigative techniques drawn from criminal proceeding.27 In September 2011, the SEC alleged procedure. These methods include the use of

18 NOVEMBER–DECEMBER 2011 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY Insider Trading: New Developments and How to Deal with Them wiretaps, search warrants, increased leniency to when the head of a technology research fi rm sent an cooperators and administrative proceedings. e-mail to his clients’ hedge funds about being visited by FBI agents whom he said wanted him to record Wiretaps conversations with his clients to gather information Much of the federal government’s success against about insider trading.31 In 2010, the government used insider trading in the Galleon cases has been the result search warrants on three hedge fund offi ces to gather of evidence gleaned from court-ordered wiretaps. evidence for its insider trading cases.32 Here too, the Th e Rajaratnam case was the fi rst insider trading to SEC’s ability to use search warrant evidence is limited rely extensively on wiretaps by federal prosecutors. because the evidence is obtained by authority that is Prosecutors used over 90 hours of telephone only given to prosecutors in criminal cases. conversations to build its case.28 Th e DOJ has started using wiretaps to build other insider trading cases. In Leniency to Cooperators United States v. Goff er, prosecutors used wiretaps to Th e DOJ and SEC are using promises of leniency gather evidence against several individuals who gained in their criminal and civil actions to encourage inside information from an associate at a law fi rm on defendants’ cooperation. For example, in the upcoming deals involving the fi rm’s clients.29 Rajaratnam case federal prosecutors entered into Wiretap evidence presents complex issues in plea agreements with several key witnesses for parallel criminal and civil investigations, specifi cally their testimony against other defendants. Similarly, in whether the SEC can gain access to the use in United States v. Murdoch and United States v. of such wiretaps for a civil proceeding through Gansman, the cooperating defendant received six a defendant’s acquisition of those wiretaps from months of home detention for testifying against a criminal proceeding. Because of the extensive the co-defendant even though the cooperating statutory protections over electronic interception, the defendant’s profi ts were for more than $390,000. In SEC is not entitled to obtain wiretap evidence from contrast, the co-defendant who went to trial made the Department of Justice. But it may obtain the no profi ts, but was sentenced to one year in prison. evidence through civil discovery. Th is issue arose in Historically, the SEC had not extended off ers of the Galleon cases as the defendants obtained wiretap leniency to encourage witnesses to cooperate in its evidence from prosecutors in their discovery in the investigations. To encourage tips and cooperation, the criminal case. Th e SEC, in its civil action, then sought SEC announced a new cooperation initiative in 2010.33 discovery of that evidence from defendants, not the Under this initiative, the SEC would treat cooperators DOJ.30 In initially hearing the issue, the district more favorably when imposing penalties or bringing court ordered the production of the wiretaps from enforcement actions. Th is initiative calls for the SEC the defendant. Upon appeal to the Second Circuit, to use more deferred-prosecution and non-prosecution the circuit court held that a district court may order agreements, cooperation agreements and increased production of the wiretap evidence from defendants use of proff er agreements. In December 2010, the but that production is not universally permitted. In SEC entered into the fi rst non-prosecution agreement deciding whether production is appropriate, a district under the initiative. 34 Th e non-prosecution agreement court must balance the SEC’s interest in obtaining (NPA) was entered into with Carter’s, Inc., a children’s discovery against the defendants’ privacy interest. clothing company, and related to alleged wrongdoing by a former executive vice president of the company Search Warrants alleged to have engaged in fi nancial fraud by making Search warrants diff er from the traditionally used SEC material misstatements in Carter’s publicly reported or grand jury subpoena in that to obtain the warrant, fi nancial statements. Under the NPA, the SEC agreed the government must provide evidence showing not to bring any enforcement action or proceeding probable cause that a crime has been committed against Carter’s in connection with its investigation and that evidence will be found in the location to of this issue, in exchange for Carter’s “full, truthful be searched. Since search warrants will publicize and continuing cooperation” in the investigation and the government’s investigation, prosecutors will use any related enforcement litigation or proceeding for search warrants when they are ready to publicize the an indefi nite period of time. Th e NPA reserves to the investigation or if the “cat is out of the bag,” such as SEC the right to bring an enforcement action based

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • NOVEMBER–DECEMBER 2011 19 Insider Trading: New Developments and How to Deal with Them

on the underlying conduct if Carter’s violates the NPA the due process constitutionality of the administrative regardless of whether the claim is barred by any statute proceeding, alleging that the proceeding’s more lenient of limitations. procedures, more lenient evidentiary standards and the Th e SEC has also adopted a new whistleblower deference aff orded to any award from any appellate program, which rewards whistleblowers who review would deprive Gupta of his constitutional provide high-quality tips that lead to successful rights. On July 11, the court presiding over Gupta’s enforcement actions. Implemented under the new suit ruled that he could proceed with his equal Dodd-Frank Act, the program rewards whistleblowers protection claim against the Commission based on who voluntarily provide the SEC with original the apparent discrepancy between the Commission’s information that leads to a successful enforcement decision to seek relief in federal civil actions as to all action in which sanctions of more than $1 million other defendants in the Galleon related cases.37 As are imposed. Th e program augments a pre-existing a result, the SEC has dismissed the administrative bounty provision for insider trading which the SEC proceeding against Gupta.38 used to pay $1 million to a whistleblower in SEC v. The SEC has also brought an administrative Samberg & Pequot Capital.35 (Prior to Samberg, only proceeding and secured a judgment against a fi ve people had received whistleblower payments; the portfolio manager of municipal bond funds for biggest payment was $55,220.) Th e SEC has created engaging in insider trading by tipping family a new whistleblower page on its website and has made members to redeem shares in funds he managed.39 clear its intention to use the program vigorously. Another administrative proceeding was also recently fi led against a employee for trading Administrative Proceedings on ETF securities based on information the Th e Dodd-Frank Act grants the SEC authority to employee gained from Goldman.40 Th e SEC alleges impose monetary penalties beyond SEC-registered that the employee then passed the information on entities and associated persons to any person or entity to his father and the two then illegally bought and in administrative cease-and-desist proceedings.36 An sold shares of the securities. administrative proceeding is sometimes viewed as a more favorable venue for the Enforcement Division What Companies Should Consider Now: because it aff ords the respondent no discovery, other Preventing and Detecting Insider Trading than access to the staff ’s investigative fi le, and ensures a bench trial before the SEC’s administrative law Public companies, broker-dealers and investment judges and an appeal to the Commission rather than advisers alike have to take note of how they a jury trial in an Article III court. can prevent insider trading committed by their As noted earlier, the SEC has previously used directors, offi cers or employees so that they can administrative proceedings for insider trading avoid the adverse consequences of insider trading cases concerning associated persons of broker/ and government investigations. Moreover, as the dealers and investment advisers. In March 2011, Janney and Buckingham cases highlight, establishing the SEC brought an administrative action against comprehensive and enforceable policies and , formerly a director of Goldman Sachs procedures is itself a requirement of the securities and Proctor & Gamble, alleging that he disclosed laws for broker dealers and investment advisers. material nonpublic information to Raj Rajaratnam Compliance Measures for Public Companies regarding ’s impending $5 billion investment in Goldman Sachs and other nonpublic Insider trading typically aff ects public companies fi nancial results of Goldman Sachs and Proctor & when a director, offi cer or employee or persons to Gamble. In response, Gupta denied the charges and whom they disclose the information buy or sell fi led a complaint in federal court against the SEC. shares of the company (or another company with Gupta challenged the legality of the administrative which it does business) based on material nonpublic proceedings fi led against him, including the retroactive information they obtained because of their work for application of the Dodd-Frank Act—the alleged the company. Below are a few ways companies can insider trading occurred 1½ years before enactment deter this from happening and promote compliance of the Dodd-Frank Act. Gupta has also challenged with securities laws:

20 NOVEMBER–DECEMBER 2011 • PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY Insider Trading: New Developments and How to Deal with Them

Education and training. Directors, offi cers and the time of the repurchase program. Th us, such employees need to understand their responsibil- programs should be monitored and pre-cleared. ities and obligations in order to avoid violating Compliance Measures for Brokerage Firms securities laws. An eff ective, ongoing, education and Investment Advisers and training program is central to this goal. Keep sensitive information on a need-to-know Insider trading prevention and detection compli- basis. Certain corporation actions or transac- ance measures must meet several sets of rules. Rules tions, such as mergers and acquisitions or the 204A-1 and 17j-1 promulgated under the Investment release of quarterly earnings, carry a greater risk Advisers Act of 1940 requires fi rms to establish a of insider trading on this information. Keeping Code of Ethics and outline parameters on employee information on a need-to-know basis minimizes personal trading and reporting. NASD Rule 3010 the risk of misuse of the information and limits requires that member fi rms establish and maintain possible suspects if misappropriation does oc- compliance policies and procedures. NASD Rule cur. For instance, confi ning the information 3050 and NYSE Rule 407 require the disclosure of of a company’s forthcoming earnings to a core outside accounts. NASD Rule 3060 establishes rules team minimizes the risk that someone from the regarding gifts and entertainment. And NASD Rule company will trade on that information. 3030 requires the disclosure of all outside business Secure sensitive information. We live in an era of in- activities. In the “front lines” of securities trading, formation portability and fl exibility at work. Several broker-dealers and investment advisers face unique recent insider trading cases arise out of situations in challenges in ensuring compliance with securities which information on personal computers left off laws. While educating employees on what constitutes site has been accessed and used to trade. a securities law violation is certainly imperative, other Establish and maintain “quiet periods” and pre- compliance measures should be considered. Here are clearance processes. Insider trading investigations several areas that merit renewed attention in today’s typically begin with broad sweeps of trading enforcement environment: activity in advance of disclosures of material Be mindful of broker-dealer obligations under events. Many companies therefore have “quiet” Exchange Act § 15(g) and investment adviser periods between, for example, the close of an ac- obligations under IA Act § 204A. counting period and an earnings release during Establish, maintain and enforce written poli- which transactions are not permitted in order cies and procedures. As seen in the Janney and to avoid even the appearance of insider trad- Buckingham actions, ineff ective or unenforced ing. Many companies supplement that policy policies and procedures can be sanctioned. by requiring pre-clearance of transactions by Identify sources of possible material, nonpublic senior personnel so as to better assure compli- information, develop watch/restricted lists, in- ance outside of quiet periods. formation barriers and other measures. Outside Encourage offi cers and directors to consider Rule directorships, investment banking, and possibly l0b5-1 plans. SEC Rule 10b5-1 provides an af- other activities of a multiservice fi rm create fi rmative defense to an insider trading charge if potential confl icts and sources of material non- the trade was made pursuant to a contract or a public information that should be identifi ed written plan that “[does] not permit the person and monitored. to exercise any subsequent infl uence over how, Require disclosure of employee trading and ac- when, or whether to eff ect purchases or sales”41 counts and analyze them for potential issues. Th ese plans can allow offi cers and directors to Use pre-clearance and holding periods when buy or sell their company’s shares without fear warranted. of potential insider trading violations. Establish trading surveillance inside and outside Monitor company share repurchase programs to the fi rm. assure compliance. Like individuals, corporations Conduct regular employee training and obtain which repurchase their own equity securities certifi cations of compliance. can be subject to 10b-5 liability if they are in Investigate and resolve instances of potentially possession of material nonpublic information at suspicious activity.

PRACTICAL COMPLIANCE & RISK MANAGEMENT FOR THE SECURITIES INDUSTRY • NOVEMBER–DECEMBER 2011 21 Insider Trading: New Developments and How to Deal with Them

Conclusion DOJ can help companies and their personnel comply with the law. While no system is foolproof, Insider trading will likely remain an important insider trading policies and procedures will help a area for the government in 2012 and beyond. fi rm prevent violations, protect its franchise, and Understanding issues of concern to the SEC and assist its personnel.

ENDNOTES

1 SEC, SEC Enforcement Actions: Insider Trading 08-15/ex-frontpoint-manager-skowron-pleads- 2011). Cases, www.sec.gov/spotlight/ insidertrading/ guilty-in-insider-case.html. 29 See SEC v. Cutillo, Civil Action No. 09-09208 cases.shtml. 13 SEC v. Obus, 2010 WL 3703846 (S.D.N.Y. Sept. (LAK) (S.D.N.Y. Nov. 5, 2009). 2 See, Section 21A(a)(1) of the Securities Exchange 20, 2010). 30 SEC v. Galleon, No. 10-462-cv (2d Cir. Sep. 29, Act of 1934, 15 U.S.C. §78u-1(a)(1). 14 Final Judgment, SEC v. Berlacher, No. 07-3800 2010). 3 For more discussion on the legal theories behind (E.D. Pa. Sept. 13, 2010). 31 Susan Pulliam, et al., “U.S. in Vast Insider Trading an insider trading violation, see Linda Chatman 15 SEC v. Benhamou, No. 10-CV-8266 (S.D.N.Y. fi led Probe,” (Nov. 20, 2010). Thomsen, SEC Dir. of Enforcement, Remarks Nov. 2, 2010). 32 Peter Lattman and Azam Ahmed, “FBI Agents Before the Australian Securities and Invest- 16 Peter Lattman, “Latest Trial Set to Begin in Raid 3 Hedge Fund Offi ces,” The New York Times ments Commission 2008 Summer School: U.S. Insider Trading Inquiry,” New York Times, Aug. (Nov. 22, 2010), available at http://dealbook. Experience of Insider Trading Enforcement (Feb. 30, 2011, available at http://dealbook.nytimes. nytimes.com/2010/11/22/f-b-i-agents-raid- 19, 2008), available at http://sec.gov/news/ com/2011/08/30/latest-trial-set-to-begin-in- 2-hedge-funds-offi ces/. speech/2008/ spch0219081ct.htm. insider-trading-inquiry/. 33 Press Release No. 2010-6 (Jan. 13, 2010), 4 See Amended Complaint, SEC v. Galleon Mgmt., 17 United States v. Dung Ching Trang Chu, No. available at http://www.sec.gov/news/ LP, 2009 WL 3664677 (S.D.N.Y Nov. 5, 2009) 1:10mj2625, (S.D.N.Y. filed Nov. 23, 2010); press/2010/2010-6.htm; 17 C.F.R. § 202.12. (No. 098811, JSR); see also Litigation Rel. No. United States v. Shimoon, No. 1:10mj2823, 34 SEC Press Release 2010-252 (Dec. 20, 2010), 21,284 (Nov. 5, 2009), available at www.sec. (S.D.N.Y. fi led Dec. 15, 2010). available at http://www.sec.gov/news/ gov/litigation/litreleases/2009/ lr21284.htm. 18 See Ex-Primary Global Offi cial Pleads Guilty press/2010/2010-252.htm. 5 Susan Pulliam and Gregory Zuckerman, “Galleon in Insider Case, New York Times (June 7, 35 Zachary Goldfarb, “SEC Now Freer to Hike Clients Abandon Ship,” The Wall Street Journal 2011), available at http://dealbook.nytimes. Whistleblower Awards,” The Washington Post (Oct. 20, 2009). com/2011/06/07/ex-primary-global-official- (July 27, 2010). 6 Peter Henning, “Don’t Fight the Wiretaps,” New pleads-guilty-in-insider-case/. 36 Dodd-Frank Wall Street Reform and Consumer York Times (June 21, 2011), available at http:// 19 SEC v. Matthew H. Kluger and Garrett D. Bauer, Protection Act § 929P, Pub. L. No. 111-203, 124 dealbook.nytimes.com/2011/06/21/dont-fi ght- Case No. 11-cv-1936 (D.N.J. Apr. 6, 2011). Stat. 1376 (2010). the-wiretaps/. 20 See David Voreacos, Kenneth Robinson Admits 37 See Peter Lattman, “Rakoff Allows Gupta’s Law- 7 Peter Lattman & Azam Ahmed, “Galleon’s Ra- to 17-Year Insider-Trading Scheme, Bloomberg suit Against S.E.C. to Proceed,” New York Times jaratnam Found Guilty,” New York Times (May (Apr. 11, 2011). (July 11, 2011), available at http://dealbook. 11, 2011), available at http://dealbook.nytimes. 21 SEC v. Todd Leslie Treadway, Civil Action No. 11- nytimes.com/2011/07/11/rakoff-allows-guptas- com/2011/05/11/rajaratnam-found-guilty/ cv-1534 (S.D.N.Y. Mar. 7, 2011). lawsuit-against-s-e-c-to-proceed/. 8 “Zvi Goffer Found Guilty in Insider Trading Case,” 22 SEC v. Flanagan, No. 10-CV-4885 (N.D. Ill. fi led 38 Peter Lattman, “S.E.C. Drops Proceeding New York Times (June 13, 2011), available at http:// Aug. 4, 2010). Against Rajat Gupta,” New York Times (Aug. dealbook.nytimes.com/2011/06/13/zvi-goffer- 23 SEC Press Release No. 2011-144 (July 11, 4, 2011), available at http://dealbook.ny- found-guilty-in-insider-trading-case/. 2011), available at http://www.sec.gov/news/ times.com/2011/09/19/new-buffett-man- 9 Id. press/2011/2011-144.htm. ager-gets-higher-taxes-and-less-pay-by- 10 Patricia Hurtado, Lawyer Tied to Galleon Insider 24 In the Matter of Buckingham Research Group, et choice/?src=dlbksb. Trading Case Gets 36-Month Prison Sentence, al., Administrative Proceeding No. 3-14125 (Nov. 39 In the Matter of David W. Baldt, Admin. Proc. Bloomberg.com, Aug. 19, 2011. 17, 2010). File No. 3-13887, Initial Decision Release No. 11 SEC v. Skowron III, et al., No. 10-cv-8266 (S.D.N.Y. 25 SEC v. Rorech, 720 F. Supp. 2d 367 (S.D.N.Y. 2010). 418 (SEC May 20, 2011), available at www. fi led Nov. 2, 2010, amended Apr. 13, 2011); Litig. 26 Baldt, SEC Administrative Proceeding, Initial sec.gov/litigation/aljdec/2011/id418rgm. Release No. 21291 (Apr. 13, 2011), http://www. Decision (April 21, 2011). pdf; see also http://www.sec.gov/ litigation/ sec.gov/litigation/litreleases/2011/lr21928.htm. 27 SEC Press Release No. 2011-188 (Sept. 21, aljdec/2011/33-9210.pdf. 12 Bob Van Voris & David McLaughlin, “Ex-Front- 2011), available at http://www.sec.gov/news/ 40 SEC Press Release No. 2011-188 (Sept. 21, Point Manager Skowron Pleads Guilty in Insider press/2011/2011-188.htm. 2011), available at http://www.sec.gov/news/ Case,” Bloomberg.com (Sept. 22, 2011) available 28 Susan Pulliam and Chad Bray, “Jury Hears Gal- press/2011/2011-188.htm at http://www.businessweek.com/news/2011- leon Wiretaps,” The Wall Street Journal (Mar. 11, 41 17 C.F.R. § 240.10b5-1(c)(1)(i)(B)(3).

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