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Reproduced with permission from White Collar Crime Report, 8 WCR 96, 02/08/2013. Copyright Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
2013 by The
INSIDER TRADING
BY JASON
DE
BRETTEVILLE
ith all the rhetoric surrounding recent insider trading enforcement actions, it is easy to forget that not all trades on the basis of material, nonpublic information are inherently wrongful, much less illegal. In fact, some regulators and much of the general public appear to have a common but misguided understanding that an investors use of nonpublic information is, or at least should be, unlawful because it is somehow unfair to other market participants. This misapprehension is understandable given that insider trading law has evolved into what has been aptly described as a jerry-rigged and confusing system of common law duty rules, twisted fraud doctrines, and unprincipled A shareholder at Stradling Yocca Carlson & Rauth PC, Jason de Bretteville is a complex business and securities litigator who represents companies, nancial institutions, and senior executives in major criminal and civil enforcement proceedings brought by the Securities and Exchange Commission, the Department of Justice, the Commodity Futures Trading Commission, the Ofce of the Comptroller of the Currency, and the Ofce of Foreign Assets Control.
exceptions.1 Nonetheless, this view is questionable as a matter of economic policy, conflicts with the legitimate research and due diligence activities of sophisticated investors, and is plainly inconsistent with the law.
Recent enforcement actions have targeted not only direct tippees but also individuals who are separated from the tippers initial disclosure by as much as four or ve degrees.
Notably, the Securities and Exchange Commissions explanatory webpage begins by stating that, although insider trading is a term that most investors associate with illegal conduct, that term actually includes both legal and illegal conduct.2 This is true, in part, because there is no universal duty among all market participants to forgo trading based on nonpublic information. Distinguishing between lawful and unlawful trading, however, has become increasingly difficult, particularly
1 Kathleen Coles, The Dilemma of the Remote Tippee, 41 GONZ. L. REV. 181, 236 (2006). 2 http://www.sec.gov/answers/insider.htm.
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2 with respect to indirect recipients of inside information, or remote tippees. This difficulty has profound implications for the use of expert networks, and the collection and use of information by investors more generally.
Again, it is not unlawful for insiders to provide information to analysts. In some instances, corporate insiders may be acting at the direction of (and for the benet of) the issuer when making such disclosures.
Recent enforcement actions have targeted not only direct tippees but also individuals who are separated from the tippers initial disclosure by as much as four or five degrees. Cases against these remote tippees can be challenging because the more remote a tippee is from the initial disclosure, the more likely it is that the tippee lacks knowledge of any breach of duty, much less any personal benefit given to the tipper in exchange for the original disclosure. While a direct tippee may readily be shown to have knowledge that a tipper breached his duty for personal gain, problems of proof often arise in establishing that a remote tippee knows that the original tip was the result of a breach by an insider motivated by personal benefit.
See Dirks v. SEC, 463 U.S. 646, 660 (1983). State Teachers Ret. Bd. v. Fluor Corp., 592 F. Supp. 592, 595 (S.D.N.Y. 1984) (emphasis added).
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3 these cases, the jurors were advised that the tippee defendants could be found guilty of insider trading only if they knew that the information had been obtained from an insider in exchange for, or in anticipation of, a personal benefit. This distinction is essential to distinguishing the good-faith gathering of information about publicly traded companies from illegal trading by knowing participants in an underlying breach, and it should not be overlooked. lines are drawn by regulators or the courts, it will be critically important to ensure that compliance policies and practices effectively address the origins of information used in making investment decisions. Investors who use an expert network firm or similar research enterprises should examine the compliance policy of that firm and obtain at least a basic understanding of how the firm has implemented and enforced that policy. If the firm collects information from experts who are current or former insiders, the investor shouldat a minimumtake steps to confirm that the information was provided without violating any current or ongoing obligations of confidentiality. It may not be enough to assume that a reputable firm has resolved these potential issues prior to retention, and conducting basic, documented due diligence with respect to each engagement is essential.
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