Is SEC Rewriting Insider Trading Law?

As we and others have noted lately, the Securities and Exchange Commission and the Justice Department have taken a new and aggressive attitude towards insider trading. Both in high-profile prosecutions like that of the leaders and employees of the Galleon Group LLC hedge fund, and in more routine civil enforcement actions, it looks to a lot of people as if the SEC and the DOJ are pushing the envelope in terms of what is illegal under federal securities laws.

The title of an upcoming continuing legal education program is one of the best indications that there’s quite a debate out there about the SEC’s stance. The title is, “Is the DOJ and SEC War on Insider Trading Rewriting the Rules?” This 90-minute session, sponsored by the American Bar Association’s Criminal Justice Section, will take place in New York on September 23.

“Together the Manhattan U.S. Attorney and the SEC seem to be rewriting not just the manner in which insider trading cases are being investigated and prosecuted, but the very definition of insider trading,” the marketing materials for the event say. “The implications for everyone are significant. For traders, analysts, and other market professionals, the question is how to fulfill their duties to clients to adequately research trades while not crossing what seems to be a shifting line. For companies enforcing compliance programs, there are serious questions about what inside information is and how to effectively enforce their compliance programs.”

One of the co-moderators of the event, Thomas Gorman of Dorsey & Whitney, described an example of this possible overreaching in a July 2011 blog post. He discussed SEC v. Doyle, Civil Action No. 11-cv-4964 (S.D.N.Y. July 20, 2011), in which one Robert Doyle was sued civilly by the agency and agreed to disgorge trading profits of more than $88,000 from trading in Tyco stock and to pay a civil penalty of more than $44,000. Doyle was accused of insider trading after he learned about Tyco’s upcoming acquisition of Brink’s Home Security in advance.

All that the “inside information” in this case amounted to was that Doyle learned about a banker’s travel plans and inferred that the banker might be traveling to work on the merger, and that the banker visited Doyle’s home and inadvertently left there a copy of a presentation to Tyco’s management about the proposed purchase. The SEC never stated that Doyle was entrusted with inside information, that he had pledged to keep anything confidential, or that he had a particular relationship of trust with the banker.

According to Gorman, “Doyle more than pushes the edge of what constitutes insider trading, it appears to rewrite the law.”

That should be a terrific CLE program – with Gorman, other private attorneys, and high-ranking lawyers from both the SEC and the U.S. Attorney’s Office for the Southern District of New York exchanging views on whether the SEC and the DOJ are overreaching in cases like this one.

From our perspective, we completely agree that corporate general counsels and compliance departments, in companies of all sizes, need to be aware that the traditional definitions of insider trading may not apply any more and that now more than ever, it is important both to be and to appear to be on the safe side of the line.

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