Tag: Insider trading


So You’re Thinking of Joining a Public Company Board

David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell, Lipton, Rosen & Katz. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal.

Candidates for directorships on public company boards have much to consider. Potential exposure to legal liability, public criticism, and reputational harm, a complex tangle of applicable regulations and requirements, and a very significant time commitment are facts of life for public company directors in the modern era. The extent to which individuals can effectively manage the risks of directorship often depends on company-specific factors and can be increased through diligence and thoughtful preparation on the part of the director and the company.

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White Collar and Regulatory Enforcement: What to Expect In 2016

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum.

One way in which we expect the white-collar/regulatory enforcement regime in 2016 to continue last year’s pattern is that the government’s appetite for extracting enormous fines and penalties from settling companies will likely continue unabated. However, as we discuss below, the manner in which well-advised companies facing criminal or serious regulatory investigations will seek to mitigate such fines and sanctions will likely change in some important respects in 2016. The reason for this expected change is that U.S. Deputy Attorney General Sally Yates announced late in 2015 that DOJ was formalizing a requirement that, in order to get “any” cooperation credit, companies must come forward with all available evidence identifying individuals responsible for the underlying misconduct subject to investigation.

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Scope of Insider-Trading “Tippee” Liability

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese and George T. Conway III.

In an insider-trading case that will be closely watched until it is decided before the end of June, the U.S. Supreme Court granted certiorari yesterday to decide critical open questions about what is required to establish insider trading by a remote “tippee”—specifically, what kind of personal benefit must a “tipper” receive, and what knowledge of that benefit must the “tippee” have, for a conviction or sanction to stand.

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2015 FINRA Enforcement Actions

Jonathan 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.

Over the past several years, the Financial Industry Regulatory Authority (“FINRA”), the self-regulatory organization responsible for regulating every brokerage firm and broker doing business with the U.S. public, brought between 1,300 and 1,600 disciplinary actions each year. In 2014, the most recent year for which full-year statistics are available, it ordered $134 million in fines and $32.2 million in restitution. During the same period, it barred or suspended nearly 1,200 individuals, and expelled or suspended 23 firms. It also referred over 700 fraud cases to other federal or state agencies for potential prosecution. FINRA orders also often trigger automatic “statutory disqualifications” under Section 3(a)(39) of the Securities Exchange Act and Article III, Section 4 of FINRA’s By-Laws. Absent relief, these disqualifications prohibit persons from associating with a broker-dealer or prohibit firms from acting as broker-dealers.

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SEC Enforcement Actions Against Broker-Dealers

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 its 2015 Financial Report, the SEC repeated its view that one of the two principal purposes of the Securities Act of 1933 and the Securities Exchange Act of 1934 is to ensure that “people who sell and trade securities—brokers, dealers and exchanges—must treat investors fairly and honestly, putting investors’ interests first.” Broker-dealers have been and remain a critical focus of the Commission’s enforcement program. In the first 11 months of 2015, the SEC brought enforcement actions against broker-dealers in approximately two dozen distinct areas, with sanctions ranging from less than $100,000 to nearly $180 million.

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Private Control Premium and Option Exercises

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Wei Jiang, Professor of Finance at Columbia Business School.

In our paper, Out-of-the-Money CEOs: Private Control Premium and Option Exercises, forthcoming in the Review of Financial Studies, we examine the effects of proxy contests on CEOs’ option exercise policies. When faced with a challenge to insider control, we find that CEOs value company shares significantly more than the market due to the potentially decisive role their attendant voting rights could play in ex ante close proxy contests. By demonstrating that the strategic exercise of vested options is a potentially effective defensive tactic, we provide further support for the role of aggressive shareholder activism in market-based corporate governance.

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The First Insider Trader in Commodities

Andrew Verstein is Assistant Professor of Law at Wake Forest University. This post draws upon an article forthcoming in the Virginia Law Review

The Second Circuit’s decision in United States v. Newman has led many commentators to predict fewer insider trading enforcement actions, a prediction quickly validated by Preet Bharara, United States Attorney for Manhattan, who has both unwound guilty pleas and dropped active prosecutions. For Newman’s critics and defenders alike, it is obvious that insider trading prosecution in the stock market is now in a period of stumbling retreat.

Yet the stock market is not the only financial market, and the trajectory of insider trading law looks very different if other asset classes are considered. Commodities markets are the world’s largest and oldest markets, and Wednesday marked the very first time an individual was sanctioned for insider trading in commodities.

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Does the Presence of Short Sellers Affect Insider Selling?

Massimo Massa is Professor of Finance at INSEAD. This post is based on an article authored by Professor Massa; Wenlan Qian, Assistant Profess of Finance at National University of Singapore; Weibiao Xu of the Department of Finance at National University of Singapore; and Hong Zhang, Associate Professor of Finance at Tsingua University.

A large body of literature shows that insiders trade on private information. Less attention, however, has been devoted to how the trading activity of other types of “informed” investors affects insiders’ trading activity. In our study, we address this issue by exploring how the presence of a particular type of informed investors—i.e., the short sellers—could alter insiders’ incentives to trade on their private (negative) information.

We know that short sellers are able to identify overvalued stocks. In addition, short sellers intermediate a considerable amount of trade. Collectively, these characteristics make short sellers an important class of “informed” investors whose trading activity may directly and significantly affect insiders.

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Insider Trading and Tender Offers

Christopher E. Austin and Victor Lewkow are partners focusing on public and private merger and acquisition transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

Valeant’s hostile bid for Allergan was one of 2014’s most discussed takeover battles. The situation, which ultimately resulted in the acquisition of Allergan by Actavis plc, included a novel structure that involved a “partnership” between Valeant and the investment fund Pershing Square. In particular, a Pershing Square-controlled entity having a small minority interest owned by Valeant, acquired shares and options to acquire shares constituting more than nine percent of Allergan’s common stock. Such purchases were made by Pershing Square with Valeant’s consent and with full knowledge of Valeant’s intentions to announce a proposal to acquire Allergan. Pershing Square and Valeant then filed a Schedule 13D and Pershing Square then supported Valeant’s proposed acquisition. Ultimately Pershing Square made a very substantial profit on its investment when Allergan was sold to Actavis.

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Insider Trading and Innovation

Ross Levine is Professor of Finance at the University of California, Berkeley. This post is based on an article authored by Professor Levine; Chen Lin, Professor of Finance at the University of Hong Kong; and Lai Wei of the School of Economics and Finance at the University of Hong Kong.

In our paper, Insider Trading and Innovation, which was recently made publicly available on SSRN, we investigate the impact of restricting insider trading on the rate of technological innovation. Our research is motivated by two literatures: the finance and growth literature stresses that financial markets shape economic growth and the rate of technological innovation, and the law and finance literature emphasizes that legal systems that protect minority shareholders enhance financial markets. What these literatures have not yet addressed is whether legal systems that protect outside investors from corporate insiders influence a crucial source of economic growth—technological innovation. In our research, we bridge this gap. We examine whether restrictions on insider trading—trading by corporate officials, major shareholders, or others based on material non-public information—influences technological innovation.

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