SEF Central 2024: Insider Trading 360° - Enforcement Trends, Sweeps, Key Cases and Prosecutions
The Securities Enforcement Forum Central 2024 insider trading panel from last week featured these participants:
Rebecca Fike, Partner, Vinson & Elkins
Daniel Hayes, Partner, Venable LLP
Steven Malina, Partner, Greenberg Traurig
Patrick Otlewski, Partner, King & Spalding
Jason Yonan, Chief, Securities and Commodities Fraud Section, USAO for the N.D. Ill.
The YouTube link is here.
00:00 - 00:18
Bruce Carton: Next panel, Insider Trading 360, Enforcement Trends, Sweeps, Key Cases, and Prosecutions. And I'm really pleased to welcome our moderator, Rebecca Fike, partner at Vincent and Elkins in Dallas. And Rebecca previously served as senior counsel in the Enforcement Division for nearly 10 years. Welcome, Rebecca.
00:18 - 00:19
Rebecca Fike: Thank you.
00:20 - 00:29
Bruce Carton: Dan Hayes is a partner at Venable in Chicago. He previously served for over 13 years at the SEC where he was Supervisory Trial Counsel. Dan, thanks for joining us.
00:29 - 00:30
Dan Hayes: Thank you.
0:30 – 1:07
Bruce Carton: Very pleased to welcome Steve Molina, a partner at Greenberg Charg here in Chicago, a former senior attorney in the SEC's Division of Enforcement. Thank you, Steve. And next is Patrick Otlewski, a partner of King & Spalding in Chicago. He was previously an AUSA in the Northern District of Illinois for over 7 years. And finally, we have Jason Yonan. He's chief of the Securities and Commodities Fraud Section for the U.S. Attorney's Office for the Northern District of Illinois. And he also previously served as a senior counsel in the SEC's Division of Enforcement. Jason, really pleased that you can join us. And Rebecca, turn it over to you.
01:07 - 01:37
Rebecca Fike: Great, thank you so much, Bruce. And thank you, panelists. It's nice to meet you in person. We're gonna kick this off just talking generally about insider trading enforcement. For those who were here last year, we were lucky enough to have an SEC attorney on the panel who was able to talk about how the SEC gets its cases and how it thinks about insider trading. And this year, Bruce has blessed us with someone who can give us the DOJ perspective. So I wanna turn it over to Jason, And what can you tell us about how the DOJ thinks about insider trading enforcement?
01:38 - 02:15
Jason Yonan: Insider trading is very much a priority for the department. It's very much a priority for the office that I work for. It's a priority for a number of reasons. The first is, I think, and this is just me talking here, I can't necessarily prove it, but I think it is a crime that is very much under-reported and under-prosecuted. I think there's probably insider trading surrounding every market moving announcement in the market. So it's something that we look very closely at because we're probably just getting to the tip of the iceberg in terms of finding out who's . . .
02:15 - 02:50
Jason Yonan: engaging in insider trading and making provable cases against them. It's very much different than say like a Ponzi scheme or other type of investment fraud because eventually somebody's gonna figure out in those types of cases that they've been defrauded and they're gonna contact law enforcement. Insider trading is different. The company whose information is being misappropriated in a classical scenario probably doesn't know that and probably isn't in a position to report that to law enforcement. The trader on the other side of the trade also probably doesn't know about that. So it's not the typical type of case . . .
02:50 - 03:22
Jason Yonan: where someone is coming to us and complaining that they have been defrauded. It's a fraud against the market in many ways. So that can make it a little bit more difficult to detect and makes it that much more important for us as prosecutors to look into these types of cases because they are difficult to detect and they're difficult to prove. So when we get an insider trading case that crosses our desk, we take it very seriously and we prosecute as many of them as we can. The challenge being of course as I said they're very difficult to prove.
03:24 - 03:28
Rebecca Fike: And Jason how do these cases come across your desk?
03:28 - 04:02
Jason Yonan: So historically most of our cases have come as referrals from the SEC. The SEC is generally speaking the place where a lot of this stuff funnels through. They have their own sort of market detection units. They also get a lot of referrals from FINRA. So historically, and I think now, the majority of them do come from the SEC, but we do very closely monitor SARs, Suspicious Activity Reports. I don't know if any of you represent folks in the financial sector, but sometimes the joke is like, does anybody actually read these things? And the answer is yes, . . .
04:02 - 04:38
Jason Yonan: we do read them. We pay very close attention to them, particularly in insider trading. Because again, insider trading is an area where SARs are very beneficial to us, because a financial institution or brokerage firm can report what they're seeing and then we can take it from there in terms of what the next steps are. So it is primarily referrals from the SEC, but we have opened a number of cases, particularly in the last few years, and cases that have resulted in prosecutions, criminal prosecutions, from our review of suspicious activity reports filed by financial institutions.
04:38 - 04:59
Rebecca Fike: Yeah, at least when I was at the SEC, we most definitely read SARs, and we hated that they were in all caps in the narrative portion. One last question for you, Jason, before I go to our other panelists. We often hear, especially I think with the SEC sometimes, that there are maybe certain minimum requirements they're looking for in terms of dollars lost or dollars made. Is there anything like that at the DOJ?
04:59 - 05:34
Jason Yonan: So generally speaking, we don't prosecute every case that comes across our desk. We have guidelines in terms of the seriousness of the conduct, the dollar amount involved. But when it comes to insider trading, we will prosecute just about any case we can prove. We do think this is an area where general deterrence matters. We do think this is an area where there are more people out in the market doing this than are being prosecuted. So we take a very broader view in terms of, all right the dollar amount may not be particularly high here, but this . . .
05:34 - 06:06
Jason Yonan: is an egregious crime. We have to show that we're going to be active in this space. And prosecuting cases big and prosecuting cases small sends the message, I think, that maybe there's someone sitting at their desk thinking about engaging in insider trading, and maybe there's some part of themselves thinking, well, the government prosecuted this $30,000 case or this $60,000 case. So we do take a very strong view that we should prosecute any case that hits our desk that we can prove beyond a reasonable doubt.
06:07 - 06:24
Rebecca Fike: Thank you. And Patrick, I know I promised I wouldn't give years that each people served in their various government roles, but you were at the DOJ prior to this. Have you seen any differences in the way DOJ approaches insider trading or different priorities among DOJ offices?
06:24 - 07:04
Patrick Otlewski: Sure. Jason and I had the pleasure of working together at the office here in Chicago for a number of years and I agree with everything Jason said. From my perspective and I've been in private practice now for a little over five years, there have been three significant changes we've seen. The first is the increased reliance on data analytics. SEC, DOJ, others, other agencies are really diving deep into the data, really mining that data to look for turbulence, to look for issues, to look for anomalies in trading activity, and try to build cases around them. I think . . .
07:04 - 07:43
Patrick Otlewski: the other issue is the increase in remote work. The significant uptick in remote work due to COVID just increased the opportunities for our clients to have to face the possibility of insider trading. Either because of tippee type activity, you know, a person at home is leaving their computer open, a boyfriend, girlfriend, or other person comes through the house, happens to see that computer, goes on to it. All of those risks increase significantly as a result of the pandemic and have continued to manifest over time because remote work is now a thing. And I think the third . . .
07:43 - 08:23
Patrick Otlewski: issue that we've seen is just the increased activity and proof that prosecutors like Jason have available to them through electronic communications. When I was a prosecutor, the tip of the iceberg was WhatsApp and people using WhatsApp to communicate. Now there are manifold types of electronic communications channels that people aren't thinking about. Create the paper trail, the communications trail to prove what Jason is setting out to prove. The intent to defraud. The intent, the actual possession of MNPI. There are just so many more avenues available for the government to go in and grab that data, whether it's . . .
08:23 - 09:04
Patrick Otlewski: in from our client companies themselves, right? They can go in and get Teams messages, get access to on-channel communications, because that is now an increased focus as well, as you've heard. And then also on the personal side, people's ability to go and use Telegram and the other types of apps that might be resident om their devices, DOJ, FBI, and other agencies have just gotten so much more sophisticated at cracking into those communications channels and being able to build cases around them. So all of those three things have really increased the pressure, the scrutiny on corporate clients in how they're addressing insider trading.
09:04 - 09:33
Rebecca Fike: Exactly. It's funny. For a while there, it was emails that had the kind of juicy facts when you're looking at things. And then people learned to use the phone. And now with messaging, I think we've almost gone back to where we have a record now so often of people doing things they shouldn't do because I think most people now don't want to talk on the phone. And so are back to using messaging. Dan, the SEC also is obviously very focused on insider trading and you were recently a regional trial counsel. What can you tell us about . . .
09:33 - 09:38
Rebecca Fike: the SEC's approach to insider trading and how does it differ or not from the DOJ?
09:39 - 10:18
Dan Hayes: Well, I agree. Again, I agree with everything that Jason said about it. I mean, I think one of the things that the SEC always thought, thinks about is the fact that it is occurring on a widespread basis, more widespread and more than anybody could catch and possibly know about. So it's important for the SEC from their perspective to bring these cases, they're willing to bring tougher cases in the sense that their burden of proof is much lower than Jason's. Basically just a coin flip, just a little better than a coin flip to prove liability in insider trading context.
10:19 - 10:57
Dan Hayes: And they're willing to bring those cases and lose them. And I think Ben Hanauer was up here earlier on a panel and said the insider trading cases are the toughest, they're the toughest to prove, they're the toughest to win for the SEC, but they're going to continue to bring them because they need the market to know, they need people to know that they're out there looking and that if you engage in insider trading, we are going to investigate you, try you, and hopefully you'll be found liable. I think from their perspective, it's, you know, it's, they . . .
10:57 - 11:36
Dan Hayes: don't, there's not going to be wiretaps in most of their cases. There's not going to be a cooperator, so it's very circumstantial cases. And from an organization's perspective, that stuff might not work in a regular securities fraud type case, but for the insider trading cases, they're willing to move forward on it. When I was there, we always kinda, one, everybody loved the insider trading cases. Most of the trial counsel wanted insider trading cases. They were the cat and mouse game associated with it. They were fun. So unlike maybe some of the market manipulation pump and dump . . .
11:36 - 12:11
Dan Hayes: cases, the insider trading cases were things that people signed up for. So it's definitely something to, that they're interested in. And as far as the amount, Jason said they really don't have an amount at DOJ, nor did the SEC. I mean, I charge a case involving somebody with $19,000 in profits just because, I mean, one, because you have to do it to get the message out that you're going to do it. Two, the facts were pretty egregious. I mean, the circumstantial evidence around it, lying on the FINRA form, stories didn't match up with other people. . . .
12:13 – 13:02
Dan Hayes: There were other facts associated with it, but you kind of felt like you almost had to bring them. And I will say just anecdotally wrapping up, after I'd been at the SEC for a few years, probably one of the most frequent questions I would get from people, friends, colleagues, family, would be, so if someone does X, Y, and Z, is that insider trading? But what if it was only, what if you're just gonna, the profit's gonna be like 15 grand? You wouldn't charge that, would you? And it was always asking for a friend, you know? But . . . the answer was yes, they probably would. You certainly couldn't say they wouldn't. And so it's top of mind always, pretty much in every office within the SEC.
13:03 - 13:12
Rebecca Fike: And Steve, rounding this out with you, what are you seeing on the defense side, kind of in this space? Anything clients are particularly concerned about or that you think they should be thinking about?
13:12 - 13:27
Steve Malina: Yeah, I do want to pick up on one of Dan's comments. Insider trading was my favorite subject matter when I was at the SEC right up until a key witness who was the tipper had a heart attack crossing Jackson Street from the Union League club to the Dirksen building and I had to close my investigation.
13:27 - 13:28
Dan Hayes: I had nothing to do with that.
13:29 - 14:08
Steve Malina: So we're going to talk about what's new in a little bit and what's really of concern and should be of concern to risk people, compliance people, legal, whether that's insider trading in 10b-5(1) plans, which we're gonna talk about, or insider trading based on trading in other companies, who would have thunk someone could get in trouble for doing that? That's on the minds of people, that's what's new. But if you step back a little bit to when I started doing this, Insider trading is just a gift that will never stop giving. It just won't stop. When I . . .
14:08 - 14:39
Steve Malina: started at the SEC, there were some very high profile insider trading cases at that time. That resulted in the Insider Trading Sanctions Act getting passed. Now the money's going to be real, not just giving back your profits and getting an injunction, but you're going to get whacked with a multiple of a penalty. And it still goes on. And it's because, you know, whether it's professional traders, institutional traders, or just retail investors, they're always looking for an edge. And if they think they find, one, they're going to trade on it and they're going to do it without . . .
14:39 - 15:17
Steve Malina: thinking about the ramifications, or frankly, ignorant of the ramifications, you know, which begs the question about what's new and the new theories that the SEC is using to prosecute claims. So that's on my mind and on my client's mind when I'm talking to people in risk compliance or law about driving that message home that no matter what's in the news now, there's, you know, it could be crypto, the financial markets are constantly innovating, there's always something that's capturing the news. This old stalwart is not going away. And to hear Jason talk or the folks from the . . .
15:17 - 15:37
Steve Malina: DOJ or the SEC, they're making it clear that it's still top of the agenda. As defense counsel, when I'm talking to C-suite people or the GC, I'm trying to drive that point home that you can't take your eye off the ball on this, one, because it's just never going to stop.
15:37 - 16:05
Rebecca Fike: Well, I think it's one of those that anyone with a brokerage account can do. And it doesn't feel like you're harming anyone, which I think is also a big part of it. It feels like, yeah, you're getting an edge, but it's not, you know, you don't feel like you're doing a Ponzi scheme and you're really harming people. So I think there's just that need, that motive and opportunity. So turning to specific examples, we get to talk about everyone's favorite case, Panuwat, which I believe is now on my outline for the third year in a row on this panel.
16:05 - 16:33
Rebecca Fike: And I know everyone in, I'm sure, this room knows well what it is. But I was speaking to a group of corporate directors last week, and I said, Panuwat, and not a single person nodded. And I realized that there is a world outside of our own that people are not following these things quite so closely. And so, as I'm sure all of you know, we've now reached the jury verdict phase. Panuwat was convicted of insider trading from the jury, and that's a case where he bought stock in a competitor of his company before his company announced . . .
16:33 - 16:56
Rebecca Fike: it was going to be acquired by a much larger company on the theory that any competitor in the same space as stock was going to go up. It was correct. The stock did go up, and we've been talking about Panuwat for about three years since. So Dan, I wanted to start with you. How do you think the SEC views what's been termed this shadow trading theory? And my question is, is this really new?
16:57 - 17:36
Dan Hayes: Yeah, I mean, how do they view it? I think they view it just as the enforcement director, Gurbir Grewal, said after the jury verdict, which is this is basically insider training, plain and simple. And really, I honestly believe that. I mean, I think that from their perspective, you've got an individual who has been given material non-public information, he's got a duty to keep it confidential, not use it for personal gain, and then in violation of that duty, he goes on and uses it. Now, it's different in the sense that we all understand typical, you know, classical sense. . . .
17:37 - 18:16
Dan Hayes: He would, we've all understood insider trading. Well, he traded in his own company stock, but here he took it and tried to monetize it using his knowledge kind of in the industry and trading in a competitor's kind of stock and did so successfully. And I think from the SEC's perspective, that's plain and simple, insider trading. Doesn't matter which company stock that he was trading in, as long as the information, the material non-public information he had was market moving as to that company's stock. And so I think it seems new. I mean I certainly wasn't aware of . . .
18:16 - 18:50
Dan Hayes: any, I didn't work on this case when I was there, although I was there when it was charged, and I didn't see any of these types of cases while I was there. But shadow trading is a theory that's kind of been out there, and I think they were just looking for the right case to pursue it. And when they're trying to at least, the perception is they're pushing the boundaries of insider trading law here, they're looking for cases with good favorable facts to do that where you kind of feel like when you hear the facts, this . . .
18:50 - 19:24
Dan Hayes: is the right outcome, and this one had it all. I mean, he really had, there were three different duties of confidentiality that he had basically is the company's policy, which was really broad, his employment agreement and his common law duties, and the court said all of those were sufficient. He got the info, he traded out of the money call options, I think seven minutes after he got the information. It just looked bad. And so for them, that was kind of the perfect case for them to bring out and kind of push this theory.
19:25 - 19:53
Rebecca Fike: One thing that's been talked about, especially before we had the jury verdict, is that one of the reasons the SEC's complaint survived in motion to dismiss, at least per the court, is that the Panuwat’s company's insider trading policy defined insider trading as trading in securities of the company, of a competitor, a supplier, or any other publicly traded company. Do you think this case would have been brought if the insider trading policy of Panuwat's company had not been so broad?
19:53 - 20:35
Dan Hayes: I do. Yeah, I mean I do. I mean I think his own employment agreement says, you know, you can't use material non-public information that you get from the company for your personal benefit. So when I was there, I've actually made the argument in cases, insider trading cases, that an employee's common law duties to his employer prevent the employee from misusing for his own personal benefit without the company's consent material non-public information. So just on those two bases the court said both of which would have been sufficient alone I think they would have brought it either way even though his company's policy was actually much broader than what you would typically see.
20:36 - 20:42
Rebecca Fike: And Jason, kicking to you, how does the DOJ think about the shadow trading or similar fact patterns?
20:43 - 21:10
Jason Yonan: So, look, the shadow trading is a simple case. I'm not probably in the right form to be talking, giving you my personal thoughts on shadow trading the criminal side. But I will say, I just repeat what I had said before, we want to do insider trading cases. We're not shy about doing insider trading cases. We think there is a real benefit to doing criminal insider trading cases. So if the right case and the right circumstance is presented, yes, we would of course consider it.
21:11 - 21:21
Rebecca Fike: And Steve, what about you with kind of your history of both being at the SEC prosecuting insider trading cases and being on the defense side, do you see the Panuwat case as something new?
21:23 – 22:25
Steve Malina: Yeah, it's a little new, but to echo Dan's comment, it really isn't. On the one hand, you spoke about the director's comments after the verdict was rendered. Beforehand, there was some reporting that he said, look, we're gonna try this. If it doesn't work, I don't know if we'll bring it again. This was not a slam dunk for the SEC to be sure. And I read that the judge, in denying his motion for a new trial, said that he didn't even know that the SEC would or even could prosecute him for this when he engaged in the training. So that part of it, yeah, there's some newness about this. But really, this is insider trading pure and simple. He used information, he gleaned from his employment for his own personal benefit. It's just extending the misappropriation theory further than it was used before, but it's based on the same framework that the SEC has used to prosecute insider trading for decades.
22:26 - 22:43
Rebecca Fike: And Patrick, at least I've found in private practice that a good part of my job is talking to clients before the SEC is ever involved or before there's an actual case or investigation. It's a lot of how do we avoid SEC risk. Is there anything in this area you find you're talking to clients about?
22:43 - 23:25
Patrick Otlewski: I do. I think The big issue we're seeing is historically insider trading cases are built around fiduciary duties. Did you have a fiduciary duty to hold this information in confidence? I think it's arguable that some of the duties that Panuwat had were contractual duties, employment agreement, his violation of the insider trading policy. Those are potentially could be viewed as contractual relationships that he had with his employer. And so the question now is number 1, what will the Supreme Court do, right? This case is not done. It's in front of the Ninth Circuit. It's gonna go through, . . .
23:25 - 24:08
Patrick Otlewski: I expect it's gonna go the full distance, and we may see something like O'Hagan happen here. I view it as as serious as that. So the question is now for companies, especially because we have these new disclosure obligations coming up in 2025, what do we do with our policies? Do we write into our policies something to the effect of trading on material nonpublic information both in our company, potentially M&A targets, other parties with which the company has contractual arrangements. Those have always been fairly easy topics that companies can answer, but now the questions are how broad . . .
24:08 - 24:48
Patrick Otlewski: do we go? And especially on the public company side when you have institutional investors who have dropped representatives onto your board of directors, just think about how far that can go and the potential risks that can attend to that. If you have someone on that board who now because of that board position has MMPI, What can they do? What can that institutional investor do to whom they're employed because of that person's access to that company's MMPI, which may potentially implicate others in that industry? So there are a number of different risks that we're helping our clients . . .
24:48 - 25:10
Patrick Otlewski: navigate in that space because it isn't so easy as well, we should have this because we expect others in our industry will. It is very much a hard conversation of what does our risk profile look like? What do we expect of our board members, others in our executive space, and how can we manage this in a way that it doesn't become unwieldy?
25:11 - 25:34
Rebecca Fike: I love when it looks like we really put enormous number of hours of planning into this outline, and we practiced it and everything else because that segues perfectly into my next question, which is speaking to you, Dan and Steve, from the private practice side, how do you think companies should respond in light of Panuwat? Is it better to have a broader insider trading definition, better to be narrower? Does it actually matter?
25:35 - 26:09
Dan Hayes: Yeah, I mean, I think that the default should be it should be broad. I mean, the default should be you can't misuse our material non-public information that we provide to you so you can do your job here. Patrick raises some great points. And there's going to be nuances depending on the type of company you have. But at the end of the day, for the various reasons we talked about in Panuwat, most of the time, a lot of the time, it may not make a difference. So that you may have a broad company, you may have a . . .
26:09 – 27:24
Dan Hayes: company policy on the one hand that says, you know, here's what the company policy is, but you may have an employment agreement that says something maybe slightly different. And the SEC has argued, and I think will continue to argue, that there are common law fiduciary duties that exist between the agent and the employee. And so I think you're just better off as a default, thinking to yourself, we really ought to tell our employees that to stay away from this area. If you get material non-public information from the company, do not try to monetize it. I don't care whether it's in our company's stock or some other company's stock, because the company that gets embroiled in a insider trading investigation, and I've been involved in a number of them, and the company is in it from beginning to end, and the amount of time and energy and money that the company has to spend defending executives, paying for their lawyers, producing documents, meeting with the SEC. It's a huge, huge distraction, both time and expense, and to the extent that they can encourage as much as possible their employees to stay away from trying to monetize the material, not public information, I think that's a good thing.
27:24 - 27:37
Rebecca Fike: Do you think that there's some risk that that's adding additional obligation of the company now to police a policy that broadly, especially where I feel like the SEC is bringing more and more cases on kind of procedures, policies, and controls?
27:37 - 28:14
Steve Malina: Yeah, I mean, I agree if I had to pick between a broad policy and a narrow policy, I'm gonna pick broad and let the company know that there are some risks associated with it. You could be capturing behavior that's not intended to be captured, could cause confusion amongst your employees, your C-suite folks about what they can do and what they can't, but broader is better because of everything you've heard from the government today about how they are focusing in on this. And if you're at the company, even if they're investigating your CEO, they're gonna look at . . .
28:14 - 28:45
Steve Malina: the company too, they're gonna look at the policies that you had in place and you wanna make it clear to the government that we have a policy in place that is intended to combat insider trading. And it's broad because creative people come up with new ways to do it every day and we can't anticipate everything. And the narrower your policy is, the less likely you are to capture it. But also, I mean, thinking beyond that, you terminate your CEO or your CFO for violating that policy. You wanna be able to be in a position to say, . . .
28:45 - 29:12
Steve Malina: yeah, no, it clearly violated our policy. It was broad enough to capture that. Or if you're in a conversation with the government about potential control person liability, or if it's a regulated entity, and you're looking at a failure to supervise situation, say it's a broker dealer and you're dealing with FINRA, you want to be able to say that we had reasonable policies and procedures in place to combat this kind of behavior.
29:13 - 29:40
Rebecca Fike: I think that's a good point as far as it's almost an affirmative defense position for the company itself separate from the person who might have done the actual trading. Do you think that adds to any of our private practitioners any obligation of a public company to you know, I know when I was at the SEC you had to submit your brokerage records once a year and you had to do things like that, I mean do you think, just kind of your average public company who's not maybe in the financial services business, at some point is that gonna become common practice there?
29:43 - 29:44
Patrick Otlewski: I'm sorry, sorry.
29:44 - 29:54
Rebecca Fike: An employee having to show the company when they trade or what their trading records are. If the company's policy says you can't use the information to trade in any publicly traded stock.
29:54 - 29:55
Dan Hayes: Like pre-clearance.
29:55 - 30:21
Steve Malina: Yeah, a lot of companies have pre-clearance already. And again, that's just being proactive. And the issue is, or an issue I suppose, is if you're seeking top talent and you're creating all of these regulatory hurdles for this person, is that going to impact your ability to recruit? But pre-clearance is a great way to prevent this kind of stuff from happening.
30:22 - 30:46
Rebecca Fike: And then you could have the potential backstop, which I mean, I've gotten questions from public company clients of, well, do we also need to, every year, get the annual trading records and make sure people have been pre-clearing. And I don't know that your average public company actually needs to do that yet, but I understand why they're asking when they're looking at companies now having a fairly broad definition of insider trading and companies being held responsible for not policing their own policies.
30:46 - 30:57
Steve Malina: That's heavy-handed. And I don't know that you need to do that. And again, I would be worried about keeping and lowering top talent to the firm.
30:57 - 30:57
Patrick Otlewski: Agree.
30:59 - 31:02
Rebecca Fike: Patrick's squinting over there. The bright lights.
31:02 - 32:08
Patrick Otlewski: No, I think, you know, to me, the tension is the size of the company. We still have risk related to this decision, right? Where will it go and will it be espoused? And so if you do say, okay, Panuwat happened, we're gonna course correct, add this broader definition and if the Supreme Court goes the opposite way, do you then peel it back? What would you do then, right? And so that's why I think there's absolutely nuance depending on the company, but also some companies' ability to do all of those movements, to manage the preclearance, to manage the process, if they're smaller, can be difficult, especially if they're a new company in an emerging area and they're trying to move quickly, these compliance programs don't build themselves overnight. And so being able to have that infrastructure in place is a challenge. And adding that additional component of everyone else in your industry, that's a big Pac-Man bite to take.
32:08 - 32:39
Rebecca Fike: No, I think that's exactly right. I think it'll be interesting, because while all of this is going on, the SEC has adopted new rules about to go into effect where companies have to publicly file their insider trading policies both for kind of employees and for the company if there is one, which means for the first time I think you're going to be able to see to the extent companies are changing their policies in response to case law and decisions, which I'm sure will open up new potential avenues for our regulators, both civil and criminal. So turning . . .
32:39 - 33:12
Rebecca Fike: to 10b-5(1) plans, as I'm sure most people know, the SEC's adopted amendments in that area also in 2022. There's still the affirmative defense, of course, if you are trading on MNPI, if you already had a 10b-5(1) plan in place, that can be a defense to insider trading. However, the SEC has brought a few insider trading cases lately, and recently so has the DOJ, where the trading occurred pursuant to a 10b-5(1) plan but was found to be insider trading anyway. Dan, can you explain how that fact pattern can happen?
33:12 - 33:49
Dan Hayes: Yeah, I mean, so it's not enough to just have a 10b-5(1) trading plan, you have to have entered into the plan in good faith and carry it out in good faith. So that's kind of the hook there is it's not, you can't have material non-public information and then realize, hey, I can't trade on this right now, but maybe if I enter into a 10b-5(1) plan tonight, I can trade on it tomorrow. And that's kind of the situation, that Cheetah Mobile case was one of them, is not exactly like that. But the defendants had material non-public information.
33:49 - 34:23
Dan Hayes: They subsequently entered into a 10b-5(1) plan and then traded pursuant to that plan. They used the plan basically to get around the insider trading loss. And so This brings us back to the kind of the age old insider trading complaint that people have about the SEC in Congress. Well, I don't think there's right laws that clearly define what is insider trading and what it's not. And then we'll all know what we can do and what we can't do. And here you have a situation where they said, okay, we're gonna write a rule that's specific about when . . .
34:23 – 35:14
Dan Hayes: you can trade, if you're an executive on your company's stock, pursue it to this plan, if you put it in place. And if you write rules that are that specific, people are going to figure out ways to get around them. And that's what these gentlemen did in the Cheetah Mobile case and some other cases. And so, you know, the insider trading is kind of court-made law. And you know, I think there's pros and cons. And I think right now people within the government just kind of feel like, well, maybe it's best to just keep it that way. It's a little murky. But if we write something specific, clever people are gonna figure out their ways around it and we're just gonna have to amend those, keep amending those rules over and over again, which is what they did recently with the 10b-5(1) plan.
35:15 - 35:33
Rebecca Fike: And Patrick, on the DOJ side, they recently brought the Peizer case, the insider trading case against a CEO and chairman of the board of a publicly traded health care company who used a 10b-5(1) claim. What can you tell us about that case and what it tells us about the DOJ's view as far as looking at these 10b-5(1) cases.
35:34 - 36:08
Patrick Otlewski: Sure. Folks here are probably used to the disclaimer that folks like Jason and representatives in the SEC typically give. I'm going to give a similar one. King and Spalding represented Terren Peizer in that case out in the Central District of California. I wasn't on the trial team, so the views that I'm about to express are my views personally and not the views of the trial team that handled that case, because I'm sure you'd get some live lawyer comments from them. The case itself is interesting because so much of what happened in Peizer, it was pre-amendment to
36:08 - 36:48
Patrick Otlewski: the 10b-5(1) rules, just couldn't happen now. So for instance, one of the key issues in Peizer was that when the executive chairman went out and obtained these warrants, he talked to a broker about whether he needed a cooling off period. The broker recommended that he have a 30-day cooling off period. Peizer said thanks for that advice, but no thanks. We're going to trade sooner. Obviously nowadays that could never happen, right? We have much more stringent rules in place. But that was one of the key facts there. You get advice, even though there isn't a hard and . . .
36:48 - 37:27
Patrick Otlewski: fast rule, right, that there was nothing keeping him from trading when he did under the law, he went into, he zigged when his broker told him to zag. And so it's those pieces, those tiny, what I'll call breadcrumbs, that can help DOJ make these cases. Because, Jason mentioned it, these cases are really difficult to make, but there are pieces along the path to the trades that can matter. So for instance, in Peyser's case, he started making his trades in the stock and his 10b-5(1) plan was set up just days before he started doing this, right? It . . .
37:27 - 38:00
Patrick Otlewski: was his first time he'd ever had a plan in place. He disregarded, as the department called it at trial, the advice from his broker about a cooling off period. He went out and set up a second plan shortly after, after he allegedly had additional MNPI. All of these little breadcrumbs started to make the case for DOJ easier and easier. Still a very tough case. Many good arguments that they're going to the judge is going to have to sort out and that could go up to the Ninth Circuit. But that start to give the view to the . . .
38:00 - 38:37
Patrick Otlewski: jury that this is a gentleman, had MNPI, set up this trading plan to give him the false, to give others the false impression of the charade that he was doing this lawfully. And those can be very tough headwinds for an executive to come and combat, especially in the criminal case, because going up there and testifying in that trial is not something that anyone wants to do, but it's often because you don't have the insider, you don't have someone else explaining what the CEO, the executive chairman was thinking, that there's a dearth of evidence. And the government . . .
38:37 - 39:12
Patrick Otlewski: can take advantage of that dearth of evidence and it almost starts to feel like the jury's thinking to themselves the only person who knows what he did and didn't do was Peizer. We didn't hear from Peizer. And even though they're going to get the instruction, can't hold the defendant's refusal to testify against him, can't, can't, can't, can't believe that one juror back there in that room wasn't asking, gosh, if only Peyser had come up there and said why he did this trade, when he did it, that would have made our life a lot easier. And that's . . .
39:12 - 39:46
Patrick Otlewski: the challenge, because we all know certain of those personalities that are either executive chairman or CEOs or the like can make those kind of that kind of testimony very challenging to present to a jury or can open up fertile cross-examination so that is the challenge do I think that that same case could have been made if that fact pattern had occurred today? No, because of so many of the different changes that occurred, but it shows the risks in taking a case like that, both for the department but also for the defense that has to figure out how to navigate that minefield.
39:48 - 39:56
Rebecca Fike: Great, and Steve, what do you think our clients, or particularly I think our corporate partners in private practice should know about the limits of 10b-5(1) plans when advising their clients?
39:57 - 40:31
Steve Malina: I think there's just a huge misunderstanding out there at the C-suite level and even below at about 10b-5(1) plans, and hopefully this case is going to course correct it. And that is, it's a get out of jail free card. If I enter into this plan, the trades are going to be entered automatically. I'm not picking up the telephone and calling my broker to put in trades, so it's OK. And that's the literal takeaway of this case, is it's not OK. And people are going to go to jail. This is really traditional insider trading under the
40:31 - 41:16
Steve Malina: wrapper of a 10b5-1 plan. Another juicy fact was this guy was also openly expressing his anxiety about the tenuous nature of their largest customer, which was like 50% of their revenue, So there were a ton of breadcrumbs around this. But the point to be driven home to people is you can still get nailed for insider trading, trading under a 10b-5(1) plan. And to the point that Dan raised, your representations that you're running into this in good faith and that you're not in possession of MNPI when you do it are important. And you can't take those representations . . .
41:17 - 41:52
Steve Malina: lightly, You can't just check off boxes that your CCO gives you. And you need to think about this and make sure that the timing of this is not suspect. In the case, I think the CCO and the CFO signed off on the plan. They need to be careful too. They need to be thinking about where the company is in its earning cycle, what information has been bounced around at board meetings and at other senior executive level meetings. What is this person who's about to enter into this plan know when they do it? And I think up . . .
41:52 - 42:06
Steve Malina: until this case, and to your point that they didn't even know, up until this case, people didn't think that they could get in trouble for entering into a plan that's just gonna automatically provide for securities transactions and that's dead wrong.
42:06 - 42:26
Rebecca Fike: That's right. And kind of in closing in our last little segment here, just sort of bringing, kind of pulling back on insider trading and talking about policies and procedures more generally. Dan, does it feel like the SEC is bringing more cases that allege a failure in controls or procedures, but don't actually allege fraud or harm?
42:26 - 43:05
Dan Hayes: Yeah, I mean it definitely does. I mean we see a lot of cases where, I just didn't know, I haven't done a study, but it seems like there are a lot more cases where there are books and records violations, internal accounting controls violations without some kind of accompanying fraud charge. And I don't know exactly why of my theories. The cynic in me says they're good for hits. You get more cases, you jack up the numbers, the enforcement actions. But I do think it's probably more than that. I mean, I think a lot of those rules, I . . .
43:05 - 43:42
Dan Hayes: think the SEC thinks are important and people need to follow them and need to know about them. And they get kind of overshadowed when fraud charges are brought alongside them. They're kind of thrown in at the end and nobody pays attention. And I think the division is telling people, is messaging, wait a second, we do have these rules out here and you need to pay attention to them and we're going to charge you based on those. I think too, when they want to expand their jurisdiction, they use settled cases to do it. And if they want . . .
43:42 - 44:22
Dan Hayes: to expand what internal accounting controls means and apply that to cyber security, you know, things, cases and other areas, you know, it's easy to get a company to settle to some kind of internal controls case without a fraud charge. They want to pay the fine, make it go away and move on, and the SEC can use that to kind of broaden the boundaries of the rule for the next case. And so I think there is a lot of that going on in some of these. We've seen it. I think with the whistleblower rule, we're seeing it. . . .
44:23 - 44:57
Dan Hayes: I think the off, well, the cyber, the internal accounting controls, cyber security with Solar Winds maybe has clamped down on that. So I think that's all part of it. And I think they're highlighting the cooperation. I mean, I think Gurbir Grewal has done a great job of messaging the benefits of cooperation. The cooperation program pretty much existed when I was there the entire time, for the most part, that I was there. But nobody ever understood it. It was very rarely used and I think he is using these opportunities to kind of show that there are real benefits to it.
44:58 - 45:11
Rebecca Fike: And Jason, coming back to you, sort of where we started, I mean given that the higher standard I know that criminal cases have to meet, does DOJ have any avenue or appetite for these more technical violation cases?
45:12 - 45:50
Jason Yonan: By its nature criminal cases don't lend themselves to technical violations. When you're talking about fraud charges, you're talking about someone acting knowingly and with the intention of fraud. There are provisions of the securities laws that have a criminal aspect to them, but they require willfulness. They require, and willfulness depends a little bit on the case, but it's generally knowledge that what you're doing is wrong or knowledge of what you're doing is illegal. So those standards don't really lend themselves to technical violation, and probably for good reason, because we're talking about criminality. We want it to be prosecuting people who are doing actions knowingly and intentionally.
45:52 - 45:59
Rebecca Fike: Thank you, all right, we have 30 seconds left. Patrick or Steve, any final thoughts on our no fraud, no problem topic?
45:59 - 46:42
Steve Malina: Yeah, look, if I'm talking with the folks at the SEC, I much prefer to have a conversation where I don't have to talk them out of a fraud charge. Those are easier and technically, usually much less expensive cases to take care of. But look, I think part of this is the government being proactive, trying to get ahead of violations by saying what's your structure? Do you have the structure in place, the policies, the procedures and controls to get in front of conduct that you're later gonna have to come and talk to me about? And I think that's a good thing. I think it's a good thing. The hits comment I do take to heart because they're easy cases and they're easier to resolve. So they do make the statistics look a little bit better. But if I'm gonna be a little nonskeptical of the government, as I try to be known again.
46:43 - 46:47
Rebecca Fike: Right, well for those big SEC bonuses that we all used to do. They are done per case.
46:47 - 46:50
Steve Malina: Yeah, yeah. I think it's the government trying to be proactive and get in front of it.
46:50 - 46:53
Rebecca Fike: I think that's right. Thank you everyone.