Category Archives: Insider Trading

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

Proactive Insider Trading Compliance Procedures After Salman

by Michael C. Neus

In light of the recent unanimous Supreme Court decision in Salman v. United States, savvy investors can assume that the Securities and Exchange Commission, as well as the Department of Justice, will continue to seek out cases of insider trading.  Much has been written about whether or not Salman dramatically changed the jurisprudence existing prior to the Second Circuit’s opinion in United States v. Newman.  Whether or not the landscape has changed in the wake of the Salman decision, how can in-house counsel and compliance officers manage and avoid potential insider trading issues? Continue reading

US v. Newman – Not Quite Dead Yet

by Gregory Morvillo

In 1857 a United States newspaper announced Mark Twain’s death and printed his obituary.  When Twain learned of his passing, legend has it he quipped “Reports of my death have been greatly exaggerated.”  Twain’s supposed quote applies with equal force to the reports floating around the legal community that United States v. Newman met an untimely demise this week.  In both cases, contrary to what some people thought, Twain and Newman at the time of their reported deaths remained very much alive.

Last week the Supreme Court handed down a unanimous opinion in United States v. Salman.  It was a highly anticipated opinion by those of us who follow the evolution of insider trading law … and yes I recognize that following insider trading law is, at the least, a little bit geeky.  Nevertheless, many observers eagerly awaited the Supreme Court’s ruling.  As it turned out, the ruling was kind of a dud. Continue reading

A New Model for SEC Enforcement: Producing Bold and Unrelenting Results

by Chair Mary Jo White


Good morning and thank you, Dean [Trevor] Morrison for that very kind introduction. It is a pleasure to be here today and I want to thank the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business for co-sponsoring this program. These programs provide important forums for sophisticated dialogue on critical white collar enforcement issues, which have an increased prominence post-financial crisis. I am honored to join your list of distinguished speakers.

Consistent with the core missions of these programs, I will talk to you today primarily about the SEC’s enforcement program, but also more broadly, about how best to punish and deter white-collar wrongdoing.As you know, the SEC is the primary regulator and enforcer of the federal securities laws. How we go about our job is thus critical to the protection of investors and the integrity of our capital markets. After nearly four years as Chair of the SEC, following almost nine years as U.S. Attorney for the Southern District of New York, where the criminal prosecution of white collar wrongdoing was – and still is – a major priority, this seemed like the right time to speak here about this important topic. And, as you might guess, after spending much of my career in law enforcement, I have strong views about the importance of strong enforcement in the white collar space and what it takes to achieve that. Continue reading

Let’s Get Ready to Rumble! Definition of Personal Benefit is SCOTUS Main Event 

by Greg Morvillo

Michael Buffer has been a ring announcer at boxing and wrestling matches for over 30 years.  During the early part of this century, he made a certain phrase very, very popular with sports enthusiasts.  Before any major boxing or wrestling event he stood in the center of the ring, wearing a tuxedo and bow tie, and bellowed his catch-phrase to the delight of the crowd.  Because I doubt very much Chief Justice Roberts will start the October 5, 2016 argument in a similar fashion, even though it would be most fitting, I will borrow Mr. Buffer’s saying for this blog post.  What constitutes personal benefit in insider trading cases is the title fight on Wednesday’s slate of SCOTUS bouts.  Ladies and gentlemen … “Let’s get ready to rumble!” Continue reading