Baker Hostetler’s national leader of the Securities Litigation & Regulatory Enforcement practice, Marc D. Powers, with the assistance of associate Nicholas Rose and Summer Associate Serine Consolino, authored an article that appeared in Vol. 44 No. 2 of The Review of Securities & Commodities Regulation on January 19, 2011. Mr. Powers has represented clients in insider trading and Regulation FD proceedings, including the Martha Stewart civil and criminal cases.
According to the author, the SEC has engaged in high-profile attempts over the past two years to increase prosecutions and convictions for insider trading—with mixed results. The article discusses two broad areas where the SEC has pursued an expanded enforcement agenda: its push for new legal bases for liability for insider trading and its efforts to deploy new technologies to uncover insider trading schemes. These SEC trends are highlighted by the Fifth Circuit decision on September 21, 2010, in the SEC v. Mark Cuban case, the Second Circuit decision in SEC v. Dorozhko and in the actions taken by the SEC and the U.S. Attorney’s Office in the Galleon case.
In the SEC action against Mark Cuban, the entrepreneur billionaire, a misappropriation theory based on his use of information about a PIPE he learned about from the CEO of a public company, was dismissed by the U.S. District Court due to a conservative reading of Section 10(b). However, the Fifth Circuit vacated the ruling and remanded for further proceedings. The author suggests that if the Cuban case reaches appellate review again, it could redefine important aspects of the misappropriation theory and Rule 10b 5-2.
The author also cites the SEC v. Dorozhko case, contending that it is another significant break from conventional application of insider trading law. The Second Circuit there held that trading on information acquired from computer hacking was actionable, even when no fiduciary duty by the hacker existed, as deception. The author believes that more enforcement actions involving deception theories will likely continue as the SEC expands the technology it uses to deter insider trading.
The article details another big advancement in the SEC’s strategy to track insider trading involving greater specialization and expertise, and improved technology tools to track and analyze trading. According to the author, this was a game changer in the blockbuster Galleon case in October 2009, which resulted in criminal charges against Raj Rajaratnam, billionaire founder of Galleon Management and two dozen other defendants. This was the first time wire taps were used and the SEC collaborated with the FBI and the U.S. Attorney’s office for the Southern District of New York on the case. The author believes that while the SEC does not have wiretaps in its arsenal, it has adopted techniques used in criminal prosecutor’s offices and that the defense bar has taken notice. The cop is back on the beat.
VIEW FULL ARTICLE