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Cady Bar the Door

Insight & Commentary on SEC Enforcement Actions and White Collar Crime

Two Thoughts about the (Second) Smallest Insider Trading Case in All of Captivity

Posted in Insider Trading

I shouldn’t write this post, because the SEC surely wants me to write at least part of it.  I mean, they don’t care about what I write; I can promise you that.  But they want somebody to cover it because of the message they hope to send to people out there who are thinking about doing just a little bit of insider trading.  And the message is, don’t do it, or you’ll end up like this guy.  It seems like piling on to use his name, so I won’t.


But here’s what allegedly happened.  Person A’s spouse worked at GSI Commerce, an e-commerce company whose stock traded on the NASDAQ until it was acquired by eBay in 2011.  Spouse told “A” about the impending acquisition, in late January of that year.  “A” knew the information was material and nonpublic, but on February 21, allegedly told Person “B” in confidence about the eBay deal for GSI. Critically for purposes of holding this insider trading case together, “A” and “B” had “a long-standing relationship of trust and confidence built on years of sharing personal and professional confidences about their lives which they understood were to be maintained confidentially.”  You may not think about your personal relationships in these terms, but believe me when I say it matters that the preceding sentence says what it does.

“B” then allegedly told her good friend “C” about the acquisition – and that she learned about it from “A” – at some point before March 15th, when “C” bought 100 shares of GSI.  As the order alleges, “B” “intentionally tipped that information to [“C”] and obtained a personal benefit.”   On March 28th, eBay and GSI announced the merger, and GSI’s share price jumped more than 50% from the prior day’s close.  “C” then “allowed his GSI shares to convert to cash at the close of the deal on June 21, 2011 for a profit of $1,083.”

Two Thoughts  

I have two main thoughts here.  First – oh, man, that is not a lot of money.  Believe me, I would like to have $1,083, and I will take yours right now.  But I wouldn’t risk a career or even a job for $1,083 and you shouldn’t either.  Stay in school.  Don’t do drugs.  Don’t insider trade if you can help it.  I sometimes warn clients that the SEC will occasionally bring a dinky insider trading case just to show there’s no floor or de minimis level it thinks is okay.  And to look at this case, there’s not a lot of room to go down.  I’ve never heard of a lower disgorgement figure, and am prepared to declare this case the smallest one ever.  Please write if you’ve seen one that’s dinkier.

Second, the Commission sort of blows past the personal benefit issue here.  “A” and “B” supposedly had a relationship of such trust and confidence that misuse of the eBay information by “B” could be characterized as a misappropriation by “B”.  The order doesn’t have to get into whether “A” merely tipped “B” and therefore had to have received a personal benefit for “A” to be liable for illegal tipping.  The order does characterize the second transfer of information – from “B” to “good friend” “C” – as a tip and not a misappropriation by “C”.  So there does have to be a personal benefit being kicked back to “B”.  And the order assures us that there is one.  It says so right there in Paragraph 12, that “B” “obtained a personal benefit.”  But what was it?  The order doesn’t say.  Would it have been enough to get past the standard set in United States v. Newman in the Second Circuit?  We don’t know.  And because the Commission brought this case as a settled administrative proceeding, we’re not going to know.  It is unreviewable.  At a time when the personal benefit issue is currently on review before the Supreme Court, I’m not sure it’s a good look for the SEC to be ducking it entirely by filing a settled case in an administrative forum.  But here we are.

P.S. “B” isn’t charged in this case, but got hers in another case filed on Tuesday.

UPDATE: Bruce Carton writes in Compliance Week to point out that this case is in fact not the dinkiest one in history, but maybe the second dinkiest.  This one, for $922.14 in 2003, was even smaller!

Rob Cohen Discusses SEC’s Analysis and Detection Center

Posted in Insider Trading

One other interesting thing coming out of last Friday’s enforcement discussion at SEC Speaks (there weren’t many): Market Abuse Unit co-chief Rob Cohen’s mention of the SEC’s Analysis and Detection Center.

First, though, a brief rundown on how the SEC has traditionally started insider trading cases.  In short, they tend to come from outside reports (whistleblowers or Suspicious Activity Reports)  or FINRA or other self-regulatory organizations such as the Chicago Board Options Exchange.  Historically, these are the places with their fingers on the electronic pulse of the securities markets.  Maybe that’s too melodramatic.  These are the places with all the data.  There.  That’s better.  When, say, a corporate merger, FDA drug approval, or patent approval happens, FINRA can look at the trading in that issuer for several weeks before the event and see who was trading before the news was made public.  If something seems amiss, after a brief investigation a referral is sent to the SEC.  The SEC can certainly get this data on its own, but the process is extremely cumbersome.  FINRA’s data, and the CBOE’s for options cases, is much better.

Enter the Analysis and Detection Center.  I have a friend whose job requires him to think about insider trading for, oh, probably more than half of every day.  When the SEC filed its first case referring to the Analysis and Detection Center, he emailed me asking something like, “There is one?”  We both wondered what it was.  So did Bruce Carton.  It turns out the SEC is using it, whatever it is, to generate its own insider trading cases, without relying on FINRA or CBOE or any ol’ whistleblower.

And, Cohen said last Friday, the Market Abuse Unit has filed five insider trading cases generated from the Center over the last year.  This is noteworthy.  Here is one of the cases, and here is another one.  Lexis doesn’t tell me about the other two.  But what I want to know is, what data do they have?  Where are they getting it?  How are they using it?  Would they have been able to do these cases without the Center?  Is the Center a place or just software?  I want it to be a room with a thermometer-like meter in the corner that lights up in a different color at the top, for the craziest insider trading schemes or the most money at stake.  I also want a snoozing SEC staff attorney to be startled awake while spilling coffee when the “thermometer” hits Defcon 1.  But because SEC Speaks is uniquely designed not to answer questions like these, we don’t know what it looks like.  Ugh.  Maybe Cohen will show up at Securities Enforcement Forum 2016 and we’ll find out.

SEC Enforcement Lays out Approach to Cybersecurity Cases

Posted in Cybersecurity

If you’ve ever attended the annual SEC Speaks conference, you know that the official program is an intensely uninteresting collection of short speeches by SEC officials who don’t have a lot of incentives to say groundbreaking things.  But occasionally there are exceptions.  I think Deputy Enforcement Director Stephanie Avakian’s discussion of cybersecurity cases on Friday was one of those.

Avakian broke those cases down into three categories.

  1. Failures of registered entities to safeguard information. She cited the T. Jones Capital Equities Management case from September of last year (covered here) as an example of those.
  2. Electronic thefts of material nonpublic information, and illicit securities trading following the thefts. Avakian cited the Dubovoy case filed in the District of New Jersey last August and updated on Thursday as an example of these.
  3. Cyber-related disclosure failures by public companies. The SEC hasn’t brought any cases in this category yet, and much of Avakian’s discussion focused on why that is the case and how the SEC might get to the point of bringing one.

Assuringly for companies that are investing resources in cybersecurity and trying to do the right things for its customers and shareholders, Avakian said, “A company that has been a victim of an intrusion is just that: a victim.”  She also said in several different ways that the Division understands that when attacks happen, critical facts can change and develop very quickly.  These developing facts can make any necessary disclosures a moving target.  Along these lines, the Enforcement Division will appreciate the difficulty of the circumstances, Avakian says.  She added that the SEC is not looking to second guess well-thought decisions in this area.

With all of that said, the Enforcement Division very much wants companies that are victims of cyber attacks to involve appropriate law enforcement authorities as quickly as they reasonably can.  It will also examine (1) whether companies have policies and procedures that are reasonably designed to protect customer information; and (2) whether companies with potential liability have self-reported issues to the Division.  Regarding the second factor, the SEC’s Seaboard Report from 2001 continues to include the guideposts the Division will consider.

While no cases have yet been brought against public companies in this third category, Avakian can imagine circumstances in which the Commission does file a case to penalize inadequate cybersecurity disclosures.  I can, too.  Be careful out there.

Martin Shkreli, Criminal Forfeiture, and the Wu-Tang Clan

Posted in Asset Forfeiture

The S&P Schadenfreude Index hit an all-time high yesterday when Martin Shkreli was arrested and indicted for securities fraud related to a hedge fund he used to run.  The SEC sued him, too.  Here’s how the Justice Department describes part of his alleged scheme:

Between September 2009 and January 2011, Shkreli and his co-conspirators falsely represented to potential investors, among other things, that: (i) MSMB Capital was a transparent investment vehicle for sophisticated investors with monthly liquidity; (ii) Shkreli would only receive a one percent management fee per year based on net assets of the partnership; (iii) Shkreli was entitled to receive twenty percent of the limited partners’ net profits for the year; and (iv) MSMB Capital had retained independent certified public accountants as auditors who would issue an audit report on the annual financial statements. Shkreli also failed to disclose to investors that he had lost all the money he managed in Elea Capital, his prior hedge fund, and that Lehman Brothers had a $2.3 million default judgment against him. Finally, Shkreli lied to his biggest investor telling him that MSMB Capital had $35 million in assets under management, when in fact MSMB Capital had less than $700 in its bank and brokerage accounts. Based on these and other false representations, Shkreli and his co-conspirators induced approximately $3 million in investments from eight investors.

Daraprim Price-Spike

You’ll remember, of course, that Shkreli is the enterprising child who entered public consciousness in September after executing a splendiferous price-raising plan with an immune system drug known as Daraprim.  As Bloomberg says, Shkreli’s company, Turing Pharmaceuticals AG, bought the drug, moved it to a closed distribution system, and instantly rasied the price over 5,000%.  Shkreli’s plan united Hillary Clinton, Donald Trump, and Bernie Sanders in their condemnation.

Once upon a Time in Shaolin

Meanwhile, earlier this year the Wu-Tang Clan published its seventh album, Once upon a Time in Shaolin.  I didn’t say “released” because they really didn’t release it.  They created a single copy, not to be further exploited commercially for 88 years, and auctioned it for what turned out to be $2 million.  The high bidder gloriously turned out to be Martin Shkreli.  Wu-Tang leader RZA was sad about that, saying, “The sale of Once Upon a Time in Shaolin was agreed upon in May, well before Martin Shkreli’s business practices came to light. We decided to give a significant portion of the proceeds to charity.”  That, in turn, saddened Shkreli, who said, among other things, “If I hand you $2 million, f***ing show me some respect. At least have the decency to say nothing or ‘no comment.’ ”

Will the album be forfeited?

So what happens to the album now?  Lots of other people wondered the same thing yesterday.  Did FBI agents seize it in their arrest of Shkreli on Thursday morning?  The FBI apparently heard enough of these questions that it felt compelled to release this tweet on Thursday afternoon:

So the question is answered for now.  But Shkreli’s indictment does include a criminal forfeiture allegation.  Under 18 U.S.C. § 981, the government is seeking forfeiture of any property derived from proceeds traceable to Shkreli’s alleged offenses.  Now, many of the allegations relate to years-old conduct.  Maybe the proceeds of this conduct have been sent overseas, or have diminished in value, or commingled with other property such that the proceeds can’t be separated again.  In that case, the government can seek “substitute property” under 21 U.S.C. § 853(p).  All of which is to say: the album is in play!  If Shkreli is convicted, Once upon a Time in Shaolin might be subject to a criminal forfeiture order and handed over to the government.  And what then?  Will the contractual constraints that applied to Shkreli run to the government?  Will President Obama get to keep it in the White House?  Will the Attorney General get a turn with it?  We live in a glorious age.  Shimmy shimmy yah.