Category Archives: Insider Trading

An Insider Trader’s View on the Compliance Needed to Stop Insider Trading

by Tom Hardin

“It is one of the biggest mysteries on Wall Street: Who is Tipper X, the secret witness at the center of the biggest insider-trading case in a generation? The answer is Thomas Hardin — a young investment analyst who, the authorities claim, traded on inside information and may now lead prosecutors to other crucial players…” – New York Times, January 12, 2010

In 2007, while working at a small hedge fund as a 29-year-old technology stock analyst, I received material nonpublic information (MNPI) from another investor on four occasions; three tips regarding upcoming corporate M&A deals and one tip with information about a company’s quarterly earnings announcement. I placed four trades in those shares (in my mind “small” trades). I did not hesitate to make the trades as trading on MNPI seemed rampant within the technology and healthcare stock analyst communities at the time. One well-regarded tech stock focused hedge fund had several of their largest 2006 winning positions as targets of corporate takeovers. Ultimately, my faulty rationalizations led to a career ending, life-altering situation. In July 2008, I was approached by FBI agents on the street outside my apartment and given the chance to help them build larger cases. I became known as “Tipper X” and was credited with helping the FBI build over 20 of the 80+ cases in Operation Perfect Hedge, a Wall Street house cleaning campaign that morphed into the largest insider trading investigation of a generation. Continue reading

Securities Fraud Class Action Suits following Cyber Breaches: The Trickle Before the Wave

by Michael S. Flynn, Avi Gesser, Joseph A. Hall, Edmund Polubinski III, Neal A. Potischman, Brian S. Weinstein, Peter Starr and Jessica L. Turner


Large-scale data breaches can give rise to a host of legal problems for the breached entity, ranging from consumer class action litigation to congressional inquiries and state attorneys general investigations.  Increasingly, issuers are also facing the specter of federal securities fraud litigation.[1]

The existence of securities fraud litigation following a cyber breach is, to some extent, not surprising.  Lawyer-driven securities litigation often follows stock price declines, even declines that are ostensibly unrelated to any prior public disclosure by an issuer.  Until recently, significant declines in stock price following disclosures of cyber breaches were rare.  But that is changing.  The recent securities fraud class actions brought against Yahoo! and Equifax demonstrate this point; in both of those cases, significant stock price declines followed the disclosure of the breach.  Similar cases can be expected whenever stock price declines follow cyber breach disclosures.  Continue reading

The Enforcement Outcomes of the Australian Securities and Investments Commission

By Ian Ramsay and Miranda Webster

The following post provides an overview of the key findings from our research on the enforcement outcomes of the Australian Securities and Investments Commission (ASIC) for the five-year period from 1 July 2011 to 30 June 2016. The full journal article can be accessed here.

ASIC is Australia’s corporate, markets, financial services and consumer credit regulator. This government organization regulates Australian companies, financial markets, financial services organisations and professionals who deal and advise in investments, superannuation, insurance, deposit taking and credit. ASIC dedicates a significant amount of resources (around 70%) to surveillance and enforcement activity, reflecting its view that enforcement is an important part of its regulatory role. Continue reading

Insider Trading, a Vague Law With Heavy Consequences

by Walt Pavlo

Since Congress has not specifically defined insider trading, courts have interpreted the Securities Exchange Act’s prohibition against manipulative or deceptive means to determine whether a violation has occurred. The imprecision of securities law has led many people to weigh in on what constitutes a criminal act.  Recently, Antonia Apps wrote over 2,000 words on the Second Circuit’s recent insider trading decision, United States v. Martoma, 869 F.3d 58 (2d Cir. 2017), and Greg Morvillo wrote two posts to clarify his thoughts on that case. Can you imagine a crime that is so difficult to define that it continues to spark debate with each new decision from a court? Continue reading

Other People’s Money: SEC Disgorgement After Kokesh

by Daniel R. Walfish

Should individuals sued by the Securities and Exchange Commission (SEC) have to give up, or “disgorge,” corporate gains resulting from a fraud, or just their own direct gains? In an August 29 summary order, SEC v. Metter,[1] the Second Circuit avoided wrestling with this question, but it may be one of the next major battles in the wake of the Supreme Court’s June 5, 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635. Kokesh held that the disgorgement remedy in SEC enforcement actions is a “penalty” for purposes of the five-year limitations period for the “enforcement of any civil fine, penalty, or forfeiture.” 28 U.S.C. § 2462. Many have assumed, on the basis of a footnote in Kokesh, that courts will soon be considering whether they have authority to order disgorgement at all in SEC enforcement actions. That issue certainly lurks, but I suspect that courts first will revisit the proper scope of the remedy, including whether a court may force a defendant to “disgorge” ill-gotten gains that the defendant did not personally receive but that went to third parties, such as individuals and entities associated with the defendant. Continue reading

Martoma: The Second Circuit’s Unnecessary Mess

by Gregory Morvillo

In a previous post I noted that United States v. Martoma can be read as an attempt to eliminate the personal benefit standard.  By holding “that an insider or tipper personally benefits from a disclosure of inside information whenever the information was disclosed ‘with the expectation that [the recipient] would trade on it,’ Salman, 137 S. Ct. at 428, and the disclosure ‘resemble[s] trading by the insider followed by a gift of the profits to the recipient,’ id. at 427 (quoting Dirks, 463 U.S. at 664), whether or not there was a ‘meaningfully close personal relationship’ between the tipper and tippee” the Second Circuit potentially changed the face of insider trading.  The aforementioned can be said to cover all intentional transmission of material nonpublic information because what is a gift other than giving something of value to another person.  Thus, the Second Circuit has effectively replaced personal benefit with the tipper’s expectation that a recipient will trade.  This is a huge change to the insider trading landscape.  If true, it arguably reads fraud out of law that sounds in fraud. Continue reading

U.S. v. Martoma: The End of the Newman Personal Benefit Test

by Antonia M. Apps

Less than three years after the U.S. Court of Appeals for the Second Circuit instituted a new test for the personal benefit element of insider trading violations in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), the Court of Appeals in United States v. Martoma , No. 14-3599 (2d Cir. Aug. 23, 2017), expressly overruled the remaining vestiges of that test, which had already been narrowed by the Supreme Court in Salman v. United States, 137 S. Ct. 420 (2016).  The recent cases all addressed the Supreme Court’s seminal decision in Dirks v. SEC, 463 U.S. 646 (1983), which held that liability for insider trading under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder requires the insider disclosing material nonpublic information to have received or expected a personal benefit in exchange for disclosing the information.  Dirks provided a broad definition of personal benefit, holding that it could be satisfied by (among other things) “a gift of confidential information to a trading relative or friend.”  463 U.S. at 664.  In a 2-to-1 decision, the Court of Appeals in Martoma held that Newman’s gloss of a “meaningfully close personal relationship” as part of the personal benefit test was “no longer good law.”  Slip Op. at 24.  Instead, the majority ruled, liability requires the government to prove that the tipper expected the tippee would trade on the information and the tip “resembled trading by the insider followed by a gift of the profits” to the tippee.  Id. at 26. Continue reading

Martoma: Taking the Personal out of Personal Benefit

by Gregory Morvillo

Since the Second Circuit came out with its decision in United States v. Martoma I have been asked many questions about it.  I am sorry to say that the answer to pretty much all of them is:  “I don’t know.”  I hate that answer, by the way, but it is what it is.

People have asked:  Why did the Second Circuit do this?  Did the panel mean to go as far as it seems they went?  Does this mean there is no such thing as personal benefit?  Was Newman really just a personal shot at the over reach of former US Attorney Preet Bharara?  Will the Second Circuit take this en banc?  Will SCOTUS hear another insider trading case so soon after United States v. Salman?  Answer:  I don’t know. Continue reading

The Extent and Intensity of Insider Trading Enforcement – an International Comparison

by Lev Bromberg, George Gilligan, and Ian Ramsay

Insider trading, a form of misconduct criminalized in many countries, was again in the headlines recently with the U.S. Federal Bureau of Investigation’s “Operation Perfect Hedge”, an investigation relating to hedge funds which uncovered interweaving webs of trading networks spanning several industries. Indeed, the operation at one point provided the U.S. authorities with a perfect record of 85 convictions for insider traders. The convictions of those involved – including Galleon founder Raj Rajaratnam and former S.A.C Capital Advisors portfolio manager Mathew Martoma – resulted in record prison sentences and monetary fines for insider trading. But how do these significant insider trading penalties compare with those imposed in other countries?

Our recent article, The Extent and Intensity of Insider Trading Enforcement – an International Comparison, presents the results of a detailed comparative empirical study of sanctions imposed for insider trading in Australia, Canada (Ontario), Hong Kong, Singapore, the United Kingdom, and the United States over a seven year period to 2015. Continue reading

Does Shareholder Litigation Deter Insider Trading?

by C.S. Agnes Cheng, Henry He Huang, and Yinghua Li

Our research explores whether shareholder securities litigation can deter informed insider trades for both defendant firms and their peers. Corporate insiders have an information advantage over other market participants and can exploit this advantage by engaging in informed insider trades to obtain private benefits. These trades undermine the confidence of outsider shareholders in the fairness of the equity markets and reduce their participation. Consequently, regulators and investors have made it a top priority to constrain informed insider trades. However, in light of high litigation costs, it is important to question whether securities litigation can in fact constrain informed insider trades.

In a recent paper, we examine whether the level of informed insider trades decreases after the filing of Section 10b-5 federal private securities class actions, and whether this decrease is contingent on the merits and rigorousness of the litigation. Continue reading