Tag: Insider trading

New Records in SEC Enforcement Actions

John C. Wander is a partner in the Shareholder Litigation & Enforcement practice at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication authored by Mr. Wander, Jeffrey S. JohnstonClifford Thau, and Olivia D. Howe.

In late October, the Securities and Exchange Commission announced that under the leadership of chair Mary Jo White and enforcement director Andrew Ceresney, the SEC has continued to ramp up enforcement activity. In its 2015 fiscal year, the SEC reported filing a total of 807 actions for the year—including 507 independent enforcement actions, 168 follow-on actions, and 132 actions for delinquent filings—resulting in $4.19 billion in monetary penalties and disgorgements.

Are Institutions Informed About News?

Norman Schürhoff is Professor of Finance at the Swiss Finance Institute. This post is based on an article authored by Professor Schürhoff; Terrence Hendershott, Professor of Finance at the University of California, Berkeley; and Dmitry Livdan, Associate Professor of Finance at the University of California, Berkeley.

Who is informed on the stock market? There are plenty of reasons to believe that institutional investors possess value-relevant information. Unlike retail investors, institutions often directly communicate with publicly traded firms as well as brokerage firms through their investment banking, lending, and asset management divisions. Most mutual funds and hedge funds employ buy-side analysts and enjoy better relationships with sell-side analysts. Their economies of scale allow institutions to monitor many sources of information. Last but not least, institutions employ professionals and technologies with superior information processing skills. Yet, the academic literature has struggled to identify the information channel in institutional trading. There is some evidence that institutional investors are informed, but studies examining institutional order flow around specific events provide mixed evidence.


Enforcement Discretion at the SEC

David Zaring is an Associate Professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania. This post is based on an article authored by Professor Zaring.

The Dodd Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all.

The SEC has vigorously—and, my article argues, correctly—defended its power to choose where it sues. Agencies have always enjoyed unfettered discretion to choose their enforcement targets and their policy making fora. Formal adjudication under the Administrative Procedure Act (APA), which is the process SEC ALJs offer, has been with us for decades, and has never before been thought to be unconstitutional in any way. It violates no rights, nor offends the separation of powers; if anything scholars have bemoaned the fact that it offers inefficiently large amounts of process to defendants, administered by insulated civil servants who in no way threaten the president’s control over the executive branch. Nonetheless, because defendants, advised by high profile lawyers, have raised appointments clause, due process, equal protection, and right to a jury trial claims against the agency, the article reviews the reasons why these claims will fail, and discusses the timing issues that have led the two appellate courts to address the claims to dismiss them as prematurely brought.


SCOTUS Declines Petition on Insider Trading Ruling

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

Today [October 5, 2015], the United States Supreme Court declined to hear the petition for a writ of certiorari (the “Petition”) filed by the United States Department of Justice (“DOJ”) in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), a landmark decision that dismissed indictments against two insider trading defendants. By declining to hear the Petition, the Supreme Court ensured that the Second Circuit’s decision in Newman will remain binding in the Second Circuit and influential across the country.

As we explain below, two of Newman’s holdings are particularly important: first, that the government must prove that a remote tippee knew or should have known of the personal benefit received by a tipper in exchange for disclosing nonpublic information; and second, that the benefits alleged by the government in United States v. Newman were not sufficient to support a conviction, as they were not sufficiently “consequential.”


Opportunism as a Managerial Trait

David Hirshleifer is Professor of Finance at the University of California, Irvine. This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here.)

In trading their firms’ stocks, insiders must balance the profits of informed trading before news, the scrutiny by regulators that such trading can engender, formal policy restrictions by firms of insider trading activities, and diversification and liquidity motivations for selling shares after vesting of equity-based compensation. This mixture of motivations and constraints makes it is hard to decipher the information content of insider trades, especially because different trades may be intended to exploit news arriving at short or long horizons. This noise makes it feasible, up to a point, to conceal deliberate opportunism from regulators such as the SEC.

Empirically, there are some indications that insiders do exploit private information. Past research finds that insider purchases positively predict subsequent abnormal returns. On the other hand, effects are much harder to identify for insider sales, presumably because such sales are often performed for non-informational reasons, such as to reduce risk or to consume.


Regulating Trading Practices

Andreas M. Fleckner is a Senior Research Fellow at the Max Planck Institute for Comparative and International Private Law in Hamburg. This post is based on a chapter prepared for The Oxford Handbook of Financial Regulation (forthcoming).

High-frequency trading, dark pools, front-running, phantom orders, short selling—the way securities are traded ranks high among today’s regulatory challenges. Thanks to a steady stream of news reports, investor complaints, and public investigations, it has become commonplace to call for the government to intervene and impose order. The regulation of trading practices, one of the oldest roots of securities law and still a regulatory mystery to many people, is suddenly the talk of the town.

From a historical and empirical perspective, however, many of the recent developments look less dramatic than some observers believe. This is the essence of Regulating Trading Practices, my chapter for the new Oxford Handbook of Financial Regulation. The chapter explains how today’s regulatory regime evolved, identifies the key rationale for governments to intervene, and analyzes the rules, regulators, and techniques of the world’s leading jurisdictions. My central argument is that governments should focus on the price formation process and ensure that it is purely market-driven. Local regulators and self-regulatory organizations will take care of the rest.


Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs

Robert Parrino is Professor of Finance at the University of Texas at Austin. This post is based on an article by Professor Parrino; Eliezer Fich, Associate Professor of Finance at Drexel University; and Anh Tran, Senior Lecturer in Finance at City University London. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here), Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In October 2000, the SEC enacted Rule 10b5-1 which enables managers to reduce their exposure to allegations of trading on material non-public information by announcing pre-planned stock sales up to two years in advance. In our paper, Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs, which was recently made publicly available on SSRN, we examine the impact of Rule 10b5-1 on the gains that CEOs earn when they sell large blocks of stock.


How United States v. Newman Changes The Law

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

In unsuccessfully seeking rehearing in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh’g denied, Nos. 13-1837, 13-1917 (2d Cir. Apr. 3, 2015), the Government acknowledged that the Second Circuit’s recent decision in Newman “will dramatically limit the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading,” and “arguably represents one of the most significant developments in insider trading law in a generation.” As we discuss below, Newman is a well-deserved generational setback for the Government. It reflects the Second Circuit’s reasonable reaction to Government overreach, and it establishes brighter lines to cabin prosecutorial and SEC discretion in bringing future criminal and civil insider trading actions.


More Corporate Actions, More Insider Trading?

The following post comes to us from Patrick Augustin of the Finance Area at McGill University; Jianfeng Hu of the Finance Area at Singapore Management University; and Menachem Brenner and Marti Subrahmanyam, both of the Finance Department at New York University.

According to Preet Bharara, the U.S. Attorney of the Southern District of New York, insider trading is “rampant” in U.S. securities markets, and his actions in the past few years indicate concrete action by his office to combat such activity. In a similar vein, the Securities and Exchange Commission (SEC) has stepped up efforts to chase down high profile insider traders, and has made it its key priority in pursuing errant behavior. Academic studies, including our own, have previously documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies.


The Governance Effect of the Media’s News Dissemination Role

The following post comes to us from Lili Dai of the College of Business and Economics at Australian National University; Jerry Parwada and Bohui Zhang, both of the Finance Area at UNSW Australia.

That the media plays a role in corporate governance is well known. What is less clear is how the governance effect of the media works. Existing evidence supports the notion that the media disciplines managers by creating content that exposes governance problems. In our paper, The Governance Effect of the Media’s News Dissemination Role: Evidence from Insider Trading, forthcoming in the Journal of Accounting Research, we use evidence from a large sample of insider trading filings to investigate whether the media’s news dissemination role directly affects governance.

The SEC requires insiders to report their trading activities on Form 4 filings, which are typically disseminated through the media. This setting provides us with a useful opportunity to examine the effect of the media’s dissemination role on corporate governance, and specifically in restricting insiders’ trading profits. Since news dissemination increases the breadth of coverage and the attention of investors through repetition, we conjecture that the media reduces the profitability of insiders’ future transactions by disseminating regulatory releases of prior insider trading activities. We call this view, which forms our main hypothesis, disciplining via dissemination.


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