SEF D.C.: Insider Trading 360° – Enforcement Trends, Key Cases and Prosecutions

Here is a transcript from the insider trading panel at the excellent post-election Securities Enforcement Forum in Washington, D.C. The panelists were:

•  Bridget Moore, Partner, Baker Botts

• Jonathan Barr, Partner, BakerHostetler

• Luke Cadigan, Partner, Cooley LLP

• Stephen Crimmins, Partner, Davis Wright Tremaine

• Daniel Hawke, Partner, Arnold & Porter

You can find the video here and the full agenda here.

00:00 - 00:44

Kurt Wolfe: Welcome back for our 4:15 p.m. panel -- Insider Trading 360: Enforcement Trends, Key Cases and Prosecutions. Our moderator for this panel is Bridget Moore. Bridget is a partner at Baker Botts in D.C. She is chair of the firm's litigation department and a member of the firm's executive committee. Before joining Baker-Botts, Bridget served in the Division of Enforcement at the SEC, where she conducted investigations involving the anti-fraud provisions of the federal securities laws, proxy violations, insider trading, and various disclosure and reporting violations. Next to Bridget is Jonathan Barr, who is a partner at Baker Hostetler in D.C. John

00:44 - 01:27

Kurt Wolfe: has more than 25 years of experience in government investigations, including representing clients in numerous investigations involving insider trading allegations. In addition to experience in private practice, John is a former AUSA, DOJ Fraud Section Trial Attorney, and SEC Senior Counsel. Next to John is Luke Cadigan, who is a partner at Cooley, where he is head of business litigation for the US East Coast and partner in charge of the Boston office. Luke is a former assistant director in the enforcement division of the SEC, serving in the Boston Regional Office and in the SEC's FCPA unit. Luke also served

01:27 - 02:09

Kurt Wolfe: as SEC senior trial counsel. Next to Luke is Stephen Crimmins, who is a partner at Davis-Wright Tremaine in D.C. Steve defends enforcement matters involving the Securities and Exchange Commission and other financial regulators. Steve spent 14 years at the SEC, where he co-managed the Enforcement Division's trial unit in prosecuting jury and non-jury securities cases in federal courts around the country and administrative proceedings. And at the end is Dan Hawke, who is a partner at Arnold and Porter in DC, where he practices in the securities enforcement and litigation group. Before joining the firm, Dan spent 16 years in

02:09 - 02:24

Kurt Wolfe: the SEC's Division of Enforcement where he served as the first chief of the Division of Enforcement's Market Abuse Unit. Dan also served as director of the SEC's Philadelphia regional office for 8 years. And with that, Bridget, I'll hand it over to you.

02:25 - 03:08

Bridget Moore: Great. Thank you so much. Thanks, everybody, for joining us today. So we're obviously going to cover a lot of topics on insider trading, what the commission is focused on, and kind of the hotter topics. And so we're gonna start there. And certainly while we're still seeing the more traditional insider trading cases, one of the more popular issues that has emerged is shadow trading. So I'm going to kick it to Steve, and he's going to set the table for us on SEC v. Panuwat, remind us what that theory of liability was there, and we'll go from

03:08 - 03:49

Steve Crimmins: there. Thanks, Bridget. I think everybody in the room knows the basic facts of Panuwat. Poor Matt Panuwat got out of bed one morning, and I think it was 2015 or 16, and little did he imagine that a decade later, almost, we'd be talking about him, and probably will for a few more years, poor guy. But he worked for a company called Medivation, mid-cap biopharma company. They were being pursued by a giant Sanofi they didn't much like what they were hearing. It looked like the effort might turn hostile. They brought in J.P. Morgan, Evercore, to look for

03:49 - 04:26

Steve Crimmins: alternatives. Panuwat was a senior guy at the company. He was vice president of business development, one of the top executives in the company. And he got assigned to work on that team. He worked closely with the investment bankers. They looked at a number of options. Among their efforts, they decided to line up what would be the peer companies of Medivation. And there were about 7 or 8 of them that they just studied to be informed. One of them was a company called Incyte, another mid-cap biopharma oncology focused company. It was there. So after a couple of

04:26 - 05:10

Steve Crimmins: weeks doing that, Panuwat with a couple of other very top executives heard from their CEO happy news that another giant had come along, Pfizer, and was going to make a very sweet offer, much to Medivation's liking. Pfizer wanted to move really quickly. It was then Thursday. Pfizer wanted an agreement signed on Saturday. They wanted to announce it on Monday morning. Great news, confidential. So Matt Panuwat goes to his computer, seven minutes later, gets on his own brokerage account, and starts buying short-term, out-of-the-money call options. Okay, right away you think, oh my God. So were they in

05:10 - 05:45

Steve Crimmins: Medivation? No, as everybody in the room knows, no, they were in one of the other peer companies, Incyte. He obviously thought he was okay. He was doing it in his own account. He was doing it from his office computer. He was buying a large volume. I mean, he couldn't have been more conspicuous, but you know, and now we have the case. So what happened? What happened was that obviously the deal went forward with Pfizer, it was announced. All of the peer companies, seven of them went up. Not as much of course as Medivation, which went up

05:45 - 06:25

Steve Crimmins: a gargantuan amount. But they all went up about 8% or so. And with leverage, the leverage investment, Panuwat made some money, he invested, his profits were, I think, $170,000. So, so far, so good because he didn't buy Medivation, He bought one of the other companies. No, he got sued by the SEC, as everybody in the room knows. His counsel, a very good counsel at Skadden, moved to dismiss the judge in San Francisco, Judge Orrick, said no, I'm not gonna dismiss it. They stated a claim. Discovery proceeded, moved for summary judgment. No fact issues are present.

06:25 - 07:04

Steve Crimmins: You're gonna go to trial. They go to trial, and this is jury verdict in the SEC's favor this year in April. Yikes. So Panuwat’s counsel does the usual, they move for a new trial, and new trial or alternatively, judgment is a matter of law. Judge Orrick decided it just 2 months ago in September, and he denied it. There will be an appeal, and these are really the 2 issues I think for us to think about at this point in the lengthy lifespan of the Panuwat case, which is definitive of insider trading. It will be a major

07:05 - 07:46

Steve Crimmins: turning point in insider trading law in United States law, and it will go up on appeal. And one has to do with the scope of the misappropriation doctrine. It had to be charged, obviously, as misappropriation. Panuwat did not buy Medivation stock, which would be a classical theory case as an insider. He bought another company's stock, so he was under the misappropriation document misappropriating the information to trade another company's stock. But what was different was it exploded the concept of scope, which is packaged as materiality under the securities laws when you talk about a misappropriation case. Okay,

07:46 - 08:23

Steve Crimmins: was the information taken from the source of the information? Was it taken to invest in something where that information would be material to what you invested in? Was that going to be material to insight? Well, the SEC's take on it originally was, well, yeah, because there was a limited group of peer companies. There were only 7 or 8 of them. And he knew, he had obviously inside information. He knew FISA was going to make an offering, price point, all kinds of that stuff. But it was a limited set of targets, not targets, but a limited set

08:23 - 09:07

Steve Crimmins: of companies to invest in. That was stretching it pretty far. But as the litigation proceeded, both under the SEC's arguments, and certainly what the judge decided two months ago in September, it got exploded beyond belief. It's, well, if you misappropriate information from a source where you owe a duty, your employer, and you use it to trade any securities at all, totally on cabin, you've got a problem. And that's taking misappropriation to a whole new level. You'll recall misappropriation originated in the 80s and the early 90s. We had this problem that in a takeover situation, if you

09:07 - 09:43

Steve Crimmins: work for the target, you have the classical theory nice and crisp and clear. But what happens if your company, your employer, is the acquirer and you buy the other company? You have to have a misappropriation doctrine to cover that. And we sort of sweated during the late 80s and the early 90s whether the Supreme Court would buy it, get Beale's court started to buy it. The Supreme Court, of course, bought it in O'Hagan in 1997. But it was just for the other company in an acquisition. It was very cabin. And, okay, maybe you could stretch it

09:43 - 10:13

Steve Crimmins: to 7 or 8, but to stretch it that you take information and use it to buy everything. We heard in an earlier panel today, what do you do if you work in the asset management area where you're always looking at companies and seeing how action in one company will affect another? What do you do if you work for an economics firm and you get information, macroeconomic information, and you use it to make a purchase, what do you do if you work for a political consulting company and you get some information and you use it to make

10:13 - 10:46

Steve Crimmins: a targeted purchase? I mean, you can think of all kinds of crazy examples. What do you do if you invest in this sector? Warren Buffett, Peter Lynch, a lot of other greats said, why would you know? And a lot of executives I think do buy in the sector where they work, just the sector, because they're very familiar with how the sector's doing. What about them? They always have information about their own companies, and they buy into the sector. Are they gonna be stuck? This is not the misappropriation doctrine that the Supreme Court endorsed in 1997. It's

10:46 - 11:19

Steve Crimmins: not the misappropriation doctrine as it was understood during the 2000s and I would suggest that 2010s and beyond. This is new. This is different. This is totally uncapped and people don't know what to do, especially individual investors who don't have lawyers at their elbow and have to figure this stuff out. How are they supposed to do it? This is fair notice, obviously due process. So I think it's aching for guidance from the appeals courts and it's aching for the Supreme Court to revisit O'Hagan and this is a great vehicle for it. I'm sure Skadden will at

11:19 - 11:49

Steve Crimmins: least have some interest and talk to their client about taking it up to the Ninth Circuit and hopefully the Supremes will take it beyond on that point. I think the other thing to think about and then I'll stop talking is, do you really have a breach here? Did he really misappropriate information? Well, for the first minute I was talking, it sure sounded that way. But think about it for a second. And we only found out, we really got into the plumbing of the case, the judge's order in September, we found out all kinds of stuff we

11:49 - 12:34

Steve Crimmins: didn't know previously. For example, the CEO of Medivation was standing by to testify at trial that Panuwat's purchase of insight in no way violated Medivation's insider trading policy and that Medivation had no problem with it at all. Likewise, the vice president of finance was standing by to testify at trial exactly the same only as recounted in the opinion, he was gonna add a couple of adverbs to it like absolutely not a problem. And a few other things, he seemed more enthusiastic about it. The judge excluded it. How could it be excluded? I mean, it's certainly if

12:34 - 13:05

Steve Crimmins: the CEO and the Vice President of Finance didn't think it was a problem, how is Panuwat supposed to think it was a problem? Didn't that go to scienter? That's the obvious part of it. But then when we look at misappropriation as a doctrine, we all know with classical that if you do relevant disclosure to the market, then you can actually trade, although that's usually impossible to do so you have to abstain from trading. We also know that in the misappropriation cases, you make disclosure to the source of your information and say, I'm about to trade on

13:05 - 13:37

Steve Crimmins: this information. Have you got a problem with it? Well, he didn't formally take the step and go to knock on the door of the CEO's office. But the CEO said, my answer would have been yes. It was of course permitted. The Vice President of Finance would have said, absolutely so, they're the ones who effectively, CEO is the one who gave me the information. How could that be a breach of duty? And I think that again gets into, wholly beyond the scienter argument that Panuwat has, it gets into the guts of what is misappropriation, the duty element

13:37 - 14:15

Steve Crimmins: of misappropriation. That's a separate and distinct appeal point that I think the Supreme Court, certainly the Ninth Circuit, and I would hope the Supreme Court beyond that has to figure out. In terms of setting the table, I'm way overdue on my time, but one last point I'll leave you with, which is on remedy. That was kind of curious. SEC did not ask for disgorgement. They filed the case fairly early on in 19, in 2021. And having filed it then, it was close on the heels of Liu. Liu, as we all know, with this court, really caused

14:15 - 14:51

Steve Crimmins: a lot of confusion, probably good, if you're on the defense side, a lot of good confusion on equitable principles and how they all play out. Shortly after that, Congress got into the act with something with the great name the National Defense Appropriations Act in January 2021, which had this slap to the tail end of it, where they added discourse provisions to the Exchange Act, which we now know as an amendment to 21D3 and creation of 21D7. So there was all this stuff stewing as to whether there was harm to investors, whether the money could be refunded

14:51 - 15:33

Steve Crimmins: to investors. So in that stew, the SEC did not bother, did not, chose not to ask for disgorgement. They, of course, got a 10b injunction from the judge. But the other things get interesting, penalty and O&D bar. The judge said, this situation is a very serious violation, very serious, and as a result, the penalty should be a three-time penalty. And recall insider trading, the penalty calculation is a little different as a result of the Insider Trader Sanctions Act of ’84, which amended 21, was it Cap-A, Cap-A, of the Exchange Act to provide for tiering of one-time

15:33 - 16:10

Steve Crimmins: penalty, which you usually get, two-time penalty if they're really angry with you, and a three-time penalty which you never see. Well the judge hit poor Panuwat with a three-time penalty. All these mitigating circumstances, a three-time penalty, profits were 107,000. He got hit with a penalty of 320,000 or so. Very serious. Then the other thing, the other and last point to make is the other element of relief the SEC asked for, not unusual, was an O&D bar. So he reverted happily to the Patel standard, SCC v. Patel of the Second Circuit, you remember in 1995,

16:11 - 16:43

Steve Crimmins: which set out a framework, it's kind of like the framework for injunctions, but the judge adhered closely to that and it's good to see that still being followed by the way of discipline. And he said, well, he said, it's not an egregious case and he didn't want to, to his credit, I didn't want to, I don't want to ruin Panuwat's career. Panuwat is an officer of a public company today, as reported in the opinion. Didn't name it, of course. So he said it's very serious, so a three-time penalty, but not egregious, so no war with DeBart.

16:44 - 17:24

Steve Crimmins: So again, I think Judge Orrick's trying to get it right to his credit. Probably, I'm sure, a very decent person. But confusion over how you apply remedies in SEC cases and in setter trading in particular. So a lot of unusual stuff in the case. That's this installment and colleagues will talk about it in a second, but it's going up. It's going to the Ninth Circuit. It's going beyond. It's very fundamental to what a misappropriation case is arisen in this wild and evolving area that we know is insider trading law. Consequences, I'll throw it out to

17:24 - 17:45

Steve Crimmins: my colleagues here on the panel. What does this mean for people who want to get engaged in sector trading? What does this mean for public companies that are trying to do and revise their insider trading policies? What does this mean for people trying to do good trading programs for their employees and show that they're doing the right thing? I don't know. Who wants to pick it up?

17:45 - 17:51

Dan Hawke: Can I just ask you to address the principal and agency argument that was addressed in the Panuwat opinion?

17:52 - 18:07

Steve Crimmins: Yeah. It had to do with basically the agency part of it was what your duty was, whether it had to do basically with...

18:08 - 18:09

Dan Hawke: The employment relationship.

18:09 - 18:47

Steve Crimmins: Yeah, no, it had to do with the policy. And he said, and it was kind of an interesting argument, that's a good point to make, that he said you can have a duty imposed on you by agreement under the insider trading policy, and that's by contract, that's by agreement, that's the legal duty. But he said, look, he said we don't really have to wring our hands about that because if you're entrusted, his word, and the right word to use, entrusted with confidential information, as Dan says, it's an agency concept, an agency understanding of the law, and it's

18:47 - 19:34

Steve Crimmins: an agency principle, but still to create a duty. So duty for purposes of insider trading and misappropriation in particular, as Dan points out, can be created expressly by agreement, by contract, and also can be created under agency principles. Again, making it, I would suggest, further mushy. Insider traders are individuals, they're retail investors, most of them are pretty unsophisticated. Panuwat, again, I'll say, was using his office computer and using his own accounts, buying a conspicuous amount of options days before the announcement with precise timing. I mean he wasn't trying to hide anything. He thought he, I'm sure,

19:34 - 20:11

Steve Crimmins: thought he was okay. He was acting in the spur of the moment, we would say imprudently. We would say he should have thought, obviously, but we're lawyers. He wasn't a lawyer. So again, it's a mush and it needs to get straightened out. Insider trading law started out with some very, very basic core principles about fairness and justice and duty, duty to your investors and stuff like that from Matter of Cady Roberts in 1961 that kicked it all off through Texas Gulf Sulphur, the next case in 1968, and then suddenly when we actually started getting insider

20:11 - 20:50

Steve Crimmins: trading cases in the 80s, real insiders, well the 70s too, 70s and 80s. I mean it was all about respecting your duty to your shareholders, respecting your duty as maybe a senior officer, director, whatever you were. Now, it's got to be sport fishing. It's fun for us to speak about. We love speaking about it. It's great to talk about when you teach a law school class or have a program like this. But gosh, you know, for lawyers who counsel clients, it's interesting, it's wonderful. But what about those individuals like Matt Panuwat 10 years ago or almost

20:50 - 20:57

Steve Crimmins: 10 years ago? So anyway, that's part of the mush. Anyway, Dan raises a good question. What do we do about this?

20:57 - 21:36

Jonathan Barr: I thought one thing that was really interesting was The SEC's position on this, and this was from the director and their litigating position was, there is nothing novel about this case. This is just a normal insider trading case. It meets the elements, nothing novel. And Panuwat was like, what are you talking about? This is completely novel. I had no idea that I could be prosecuted for insider trading, for trading in the stock of another company where, in his mind at least, the information had nothing to do with the other company the other company wasn't involved in

21:36 - 22:12

Jonathan Barr: the transaction it wasn't a competitor to his company and so he wanted to make part of his defense look from a scienter basis I never intended to violate the law because I had no idea this was insider trading. And the Commission was able to persuade the judge that it was not indeed a novel insider trading case. And the judge limited Panuwat and didn't allow him to make those arguments in his defense. And I suspect that's why these people that he had lined up to say, hey, it wouldn't be a problem.

22:12 - 22:45

Steve Crimmins: He was allowed to say that he had, he, Panuwat, he was allowed to testify that he, Panuwat, had never heard of the SEC ever doing a case like this, but he was not allowed, and his lawyers in argument were not allowed to say, this is a new theory, it has never been done before, which of course was true. But he was only allowed to say, I, Panuwat, have never heard of people being . . . before. And also, I think what was he allowed to be, the vice president of finance was allowed to say that he saw

22:45 - 23:05

Steve Crimmins: nothing improper about one of his employees trading in biopharma stocks generally, but then he was cut off. He was not allowed to say, we had no problem with his providing Incyte, and nor was the CEO allowed to do it. I was a hybrid, but I think it's going to get reversed.

23:05 - 23:43

Jonathan Barr: I think what really crushed him a couple things, and what made the judge unsympathetic to his arguments were, one, he traded with the information within seven minutes of receiving the information. He bought out of the money call options, and he bought like, I think, half of his salary, an amount of half of his salary in these out of the money call options. And I think when you see facts like that, they seem to suggest so strongly a belief that this is really material to this investment. I think that really hurt him. And then when he testified,

23:45 - 24:02

Jonathan Barr: he testified that he wouldn't, that the fact of that information coming wouldn't have changed the timing of his trades. And I don't think the jury believed that they were only out a little over two hours and they convicted him.

24:03 - 24:23

Steve Crimmins: So I mean I think while good advocacy on one side of the fence of the other can persuade a jury and depends on who you get on the jury obviously too, but why should the individual like Panuwat, who obviously wasn't trying to hide his trade, why should he have to figure this out? Why should he get surprised by this? So I think that's what

24:23 - 24:35

Jonathan Barr: I would say. I would say this, the SEC will argue every time. We've been defending these cases forever. People use their own cell phones, people use their own computers. I mean, that happens all the time.

24:35 - 25:17

Dan Hawke: What's interesting to me is how, when you talk about sector trading, you talk about industry trading, it raises questions about sort of materiality. Do stocks really move in tandem or in sympathy with one another? And what are the, I've seen an interesting article written by Professor Verrett, at George Mason, that talks about market connection and establishing market connection between the company that you trade in versus the company that's subject to the news, and whether or not there is a correlation or a variance between how the stock moves in sympathy with the underlying news.

25:17 - 25:21

Jonathan Barr: What does that do to a company that's gotta put together a restricted trading list?

25:22 - 26:00

Dan Hawke: Well, I actually think that one of the things that I see quite a bit is insider trading policies that are ambiguous, well, twofold, ambiguous as to whether or not they create a duty. So the first question I usually ask when I'm looking at a policy is, does the policy establish a duty of confidentiality? Even if there are other confidentiality provisions that the company relies on to impose that duty on employees? Is there a duty in the policy? And then does it address trading in other securities, trading outside of the securities that are involving the company, or

26:00 - 26:54

Dan Hawke: its partners or targets? And so to me, part of it is educating clients about how sector trading works and what happens when you trade, that you can trade in a stock that will potentially benefit from the news affecting another stock. But you can imagine all the potential arguments that come into play as to both scienter and materiality, breach of duty, and the foreseeability of, can anyone say that, there's even a question in connection with material information, is how much is the stock gonna move? It's one thing to ask that about the company that is the subject of the news, it's another thing to ask that about a company that's maybe not the subject of the news, but just happens to be in the same sector.

26:55 - 27:38

Bridget Moore: I think that's a great segue. You know, this idea of this appeal will be very interesting, certainly, but this concept is out there, and companies, officers, directors are gonna have to deal with it. And the conversation around what do your policies and procedures look like, how to best protect the officers, directors, the company. And we've recently seen, and I'm gonna kick it over to Luke, a sweep out of the asset management group in the Boston office of the SEC that is titled MNPI, in the matter of certain MNPI policies and procedures that at least seems to

27:39 - 27:46

Bridget Moore: suggest that the SEC is trying to get their arms around what policies may look like in this area. Can you give us a little more background on what you know on that.

27:46 - 28:25

Luke Cadigan: Yeah, I think this is a sweep that really hasn't gotten a lot of attention but it's again as you mentioned sweep out of the Asset Management Unit in Boston and we start our clients in it are registered investment advisors with a sector focus in the case of our clients the life sciences space but and it's focused on policies and procedures to prevent the misuse of MMPI under 204A. And perhaps that's not surprising. And the exam, this work went out a couple of weeks ago highlighting deficiencies, particularly with respect to alternative data, value-add, investors, expert networks, et

28:25 - 29:10

Luke Cadigan: cetera. And for those who were here this morning, the asset management panel talked about the SoundPoint and Marathon cases, which talked about how you deal with information from investors' committees. But that was not the focus of this week. And the staff in Boston has been transparent about its focus and said very directly that it is interested in how firms, particularly sector-focused firms, and given their sector focus, handle what it calls adjacent MNPI. In other words, MNPI that affects other companies in the same sector. And it's looking for in particular information gained through NDAs, through PIPEs,

29:11 - 29:48

Luke Cadigan: through board seats, through creditor committees. And they're trying to understand what the firms are doing about setting up protections to make sure that they are preventing shadow trading. So while Steve mentioned the various issues with Panuwat, it's clear the firm is not only building on Panuwat with respect to insider trading, but it's taking it even further and claiming that companies have a duty under 204A to be preventing shadow trading. And you know, I think that we've seen some of this and many of you may have been involved in some of these investigations, but on the company

29:48 - 30:18

Luke Cadigan: side, I know that a few years back we were getting investigations where it was clear the staff was focused on whether a particular VC firm in the life science space was using the information it gained through its access as an investor to trade on other companies in the life science space. I never saw anything that came of that, but you could tell that was where the SEC was particularly interested in. And so now you have this sweep and frankly it, I mean again, I don't think it's got a lot of attention, but it's going to really

30:18 - 30:43

Luke Cadigan: cause us to have to really, as Dan had said, educate our clients, particularly the regulated clients, the investment advisors, on what they're doing to ensure that the information they gain for NDAs, PIPE supports, etc., creditors committees, what they're doing to make sure that they're not using that information to trade on other securities in the same sector.

30:43 - 31:06

Steve Crimmins: And Luke, is there any kind of paradigm or model? I mean, as we were speaking about with Panuwat, it's such a mushy articulation and extension of the misappropriation doctrine. And now it's being rolled out exponentially, potentially, to advisors in sweep-like fashion. So to deal with that,

31:06 - 31:06

Luke Cadigan: I mean,

31:06 - 31:32

Steve Crimmins: training, of course, and alerting clients, too, is one thing. But as you say, there has to be something put in place by way of policies and procedures. How do you manage and cordon and ride herd over something that's inherently that mushy? I mean, people are beginning to ask the question, but are we going to see answers soon? Or what are...

31:32 - 31:34

Luke Cadigan: No, I mean, I don't think so. I mean, indeed, I mean, I gotta tell you.

31:34 - 31:34

Steve Crimmins: Is there an answer?

31:34 - 32:01

Luke Cadigan: I mean, I think the thing that really shocked me by this is you would think that there would have been a risk alert, some sort of guidance or something that came before this. And it doesn't seem like there are a lot of firms that are in this sweep. I mean, sometimes you throw out a broad sweep and you find the most egregious actors and you make that the basis for that. But yeah, I mean, in particular, it's gonna get very mushy. And again, to the point that you and Dan raised, John may raise, how are

32:01 - 32:12

Luke Cadigan: you really going to know the impact of the information you gain on a particular company on others in that same sector unless you restrict all the other securities in that sector?

32:12 - 32:18

Jonathan Barr: I love it. For a non-novel case, for a case that's not novel, we now have a new term, adjacent MNPI.

32:18 - 32:23

Luke Cadigan: Yes. I'm glad you hadn't heard that either. I hadn't been aware of that one either.

32:23 - 32:39

Jonathan Barr: I mean, it is a challenge for regulated entities that are required to create and design and create policies to reasonably protect material nonpublic information. Because now they have to, now we have to deal with adjacent MNPI.

32:40 - 33:00

Steve Crimmins: And it's not just raising a question or an examination issue. This is an enforcement sweep. So we know that the staff is really, really unhappy. We got that part, but we'd like to know an answer or a suggestion from them, as Luke, as you say, some sort of guidance or alert or something as to what they expect.

33:00 - 33:22

Luke Cadigan: Yeah, well, the big thing here is the concern that, you know, others raised today and again was sort of answered with SoundPoint and Marathon is whether staff is going to, you know, pursue these cases even though there hasn't been any apparent insider trading and clearly they have been. And you wonder whether or not the new administration, you know, is gonna have the same feeling on these types of things where there hasn't actually been a violation.

33:24 - 33:50

Bridget Moore: Yeah, I wanted to kick that question to Dan, so thanks for raising it. We've kind of seen this movie before in terms of sweeps going out and then settlements that go to not an underlying violation but a control violation. It seems like the panel thinks that we'll start potentially to see those cases here. What do you think, Dan?

33:52 - 34:36

Dan Hawke: So, I think that when you look at off-channel comms, and there's a lot of misunderstanding in terms of why the SEC cares so much about off-channel communications. And it's in the insider trading space that those communications are especially important, right? Because if somebody's using their cell phone to tip or to trade or to coordinate a meeting or information flow, you know, then the argument is that the only way, if it's a regulated entity, like a broker dealer or an advisor, the only way the SEC can get that information is to go to the individual directly. You

34:36 - 35:20

Dan Hawke: know, between off-channel comms, record keeping, and then the, whether it's 15(g) controls for broker dealer or 204A controls for an advisor, you have a situation where there's a heavy enforcement focus on controls and record keeping and process. That it's not, and it all ties back to the Division's ability to investigate these cases. The thing that concerns me, and when you talk about the Marathon case or the SoundPoint case or the OEP case and even going back to Aries back in 2020, is you have cases where there was no underlying trading violation, but a conclusion that the

35:20 - 36:14

Dan Hawke: controls were deficient. And it's that disconnect between the conclusion that controls are inadequate versus whether or not there was an actual underlying violation that those inadequate controls yielded. I think it's a hard argument to say in the absence of a violation, your controls are subjectively or objectively deficient. We believe that the absence of, and in these cases, the way that the Division is looking at, particularly in investment advisors, it seems to be less so with broker dealers, but more in the advisor space, that the Division is imposing these settlements on controls violations alone. And I think

36:14 - 36:49

Dan Hawke: 15 years ago at the Commission, if you came up to the Commission and you only had a controls violation and you had no underlying trading violation, that that would be a case that would be tough to get through. Because there's, in the absence of an actual trading violation, it raises the question, so what was deficient? If there hasn't been a violation, what's deficient? And it's really the staff saying, well, we don't think your controls are up to snuff, or we don't think that they're reasonably designed, taking into account the nature of your business. So my view

36:49 - 37:16

Dan Hawke: is that when you look at these sweeps, whether it's MNPI or off-channel comms or whether it be the compliance rule or whatever rule it is that they're sweeping, that those cases have risk to them now that didn't exist historically where there was no underlying violation.

37:19 - 37:39

Bridget Moore: It kind of begs the question of, it's almost a resource issue in terms of identifying actual cases to bring. How does, I'll throw this out to anybody on the panel, how do you all think the SEC will go about identifying actual substantive violations of insider trading with respect to this sector kind of?

37:40 - 38:21

Dan Hawke: So, Bridget, so what we haven't talked about is how the SEC's data analytics have enabled it to leap ahead of where it's been in terms of analyzing trading in particular security. So they have the ability through the techniques that they use to, and This is one of the things that was started, when we started specialization back in 2009, 2010, one of the issues in insider trading was how to specialize in it, what is it, what are the tools that we need to be able to do this better? And one of those tools was this Artemis program

38:21 - 38:56

Dan Hawke: that we developed that enables you to look at sector trading very easily, very simply. They can organize, they can sort data in a way that enables them to see the same traders in front of the same securities, whether it's the security that is the subject of the news or whether it's the security that may move in tandem or in sympathy with that security. They have the ability, technologically, to identify that trading very easily. It's no longer the case that they have to hunt and peck through brokerage statements and then go blue sheet and then take the

38:56 - 39:02

Dan Hawke: blue sheets and then go look and see who traded. It's much more automated and much more analytical now.

39:02 - 39:07

Steve Crimmins: Dan, will that get magnified with the consolidated audit? For sure.

39:09 - 39:53

Dan Hawke: And the CAT basically will allow the Division of Enforcement to recreate a particular person's brokerage account statement. It effectively allows the regulators to gather enough information to show, to effectively reconstitute an account and see what's in it. And just by virtue of the day-to-day, day in and day out trading that is available through the CAT. So yes, but the issue with the CAT is, the SEC has, and it's a different subject entirely, we could spend a whole panel on it, but the SEC did a really good job of requiring the industry to spend all this money

39:53 - 40:34

Dan Hawke: and adopt this reporting requirement, this near real-time reporting requirement, but didn't really make the same level of investment in its own analytical capabilities to know what to do with that data once it gets to the front door of the SEC. So my old group, the Market Abuse Unit, was tasked with developing the framework in which trading cases would be investigated in new and novel ways. And one of those ways was to anticipate when we get the CAT, what kind of analytical abilities will that give us to identify suspicious trading?

40:34 - 41:04

Steve Crimmins: So it'll basically look for market developments, then look for things parallel to it and for this kind of shadow trading related stuff, look for other market movements that are sympathetic to it, I guess, in time and reaction time and reaction volume, and then it'll look for anomalies in trading within those particular issuers, or within seconds and within parameters, spit it out for an analyst to take a look at.

41:04 - 41:09

Dan Hawke: Correct, and they become enforcement leads that then can be exploited. Okay.

41:09 - 41:40

Bridget Moore: So in our last couple minutes, we're gonna shift to another interesting topic in this area, which is the 10b-5(1) plans. And I'm gonna kick it to John to discuss with us. So we saw the interest of the DOJ in this area, so when I asked John to kind of give us some takeaways from that but also do you think that this the shadow trading and this this expanded scope of potential liability? Will filter into 10b-5(1) plans? I mean, how do you see all that playing out?

41:40 - 42:17

Jonathan Barr: Well, so just the recent case on the 10b-5(1) plans, it was a criminal case against Peizer, who was former co-founder, executive chairman, and chairman of the board of Ontrak. In his role, he found out that there were real concerns that they were gonna lose one of their big customers, Cigna, and he found out there was going to be a May 18th meeting where Cigna was going to give them some news as to whether they intended to continue or not and so unfortunately for him he decided well now is the time to set up a 10b-5(1) plan

42:17 - 42:43

Jonathan Barr: And so he goes to the first broker to set up the plan, and the broker said, yeah, we can do this for you, but you're going to have to have a 30-day, we're going to require a 30-day waiting period. Well, this was early May when he's trying to set the plan up. The meeting is on the 18th. So he says, well, I think I'm gonna use a different broker. He goes to a different broker, he sets up a 10b-5(1) plan. That broker warns him, you really should do a 30-day cooling off period. He chooses not

42:43 - 43:22

Jonathan Barr: to follow that advice and then chooses to blow through and sell a very large number of securities. The meeting on the 18th happens, he learns that Cigna has basically said, yeah, we're going to end in a year. Within the year we're going to end. And he keeps his plan, keeps on selling right along. And then he hears further information about, well, we've got another meeting set up with Cigna and it looks like we might have some trouble keeping them. He sets up yet another 10b-5(1) plan and sells even more of it. And so all in, I

43:22 - 44:12

Jonathan Barr: think he sold about $12.5 million. And he was criminally prosecuted, of course, and convicted. And it's interesting because DOJ did say that they found the case through data analytics. And so there's a tie-in with all of this in terms of data analytics and trying to find these cases. And the SEC has always been, we all know the SEC's always been hunting, and DOJ hunting for instances where 10b-5(1) plans have been abused to commit insider trade. And so, we've seen sweeps, 10b-5(1) sweeps, where they're trying to identify those instances. And so I do think that they will,

44:13 - 44:45

Jonathan Barr: you know, continue to try to find instances where people are using 10b-5(1)  plans inappropriately. I mean, in this instance, the big takeaway is, look, if you have material nonpublic information, a 10b-5(1) plan is not going to help you in the least. In fact, it might be very helpful evidence for DOJ to show that you're trying to insulate what is otherwise an illegal scheme with a 10b-5(1) plan.

44:45 - 44:56

Bridget Moore: Correct me if I'm wrong, but isn't it the case that that 30-day, the rule hadn't been put in place yet, but it was evidence of him appreciating the materiality of the information?

44:56 - 45:34

Jonathan Barr: Yeah, so the new rule puts in place waiting periods, And that rule wasn't in place yet, but a lot of brokerage firms and a lot of regulatory attorneys in the industry were advising executives, have a 30-day cooling off plan before your trading starts. It was a, and you know, it had been pretty well talked about within the industry that that was a best practice. And the fact that he basically chose to shop brokers because of that, because he was facing this looming deadline of May 18th really was a bad fact

45:34 - 45:55

Bridget Moore: for him. Yeah, absolutely. Last question. Do you see, and anybody on the panel, certainly John, see the use of 10b-5(1) plans being expanded if this theory of sector liability continues that officers and directors could protect themselves with an expanded plan?

45:56 - 46:03

Jonathan Barr: You mean an expanded plan to sell stock and securities that aren't the security of your company? That's an interesting question. I don't know, what do you think?

46:03 - 46:04

Bridget Moore: Within the sector.

46:05 - 46:24

Dan Hawke: We think policies are gonna be expanded. The insider trading policies will be expanded to include those, whether 10b-5(1) plans. I mean, I'm not sure that the way that 10b-5(1) is written, that it would necessarily encompass those securities, but I don't see any reason why it couldn't.

46:26 - 46:48

Jonathan Barr: It was part of 10b-5(1) was really to deal with people that are associated with the company that want to sell their shares. It's not, it doesn't quite fit, but you could certainly see some bright person saying, hey, let's reform the regulations so that we get some protection for sales in sector-based companies, I suppose.

46:50 - 46:53

Bridget Moore: Well, we'll leave it at that. Thank you so much.

46:53 - 46:57

Kurt Wolfe: Thank you, Bridget. Thank you to our Insider Trading 360 panel.