White Collar Crime

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With a recent poll showing that 76 percent of voters think members of Congress have an “unfair advantage” in stock trades, I argued in my last post that Congress should adopt a broad rule against trading in individual stocks by sitting cogresspersons (and perhaps their spouses, children, and staff). I argued that such a move would go a long way toward restoring the perception that members of Congress are public servants, as opposed to the current perception shared by many voters that they are public parasites. In addition to restoring public confidence in the legislative branch, I argued adopting such a prophylactic against insider trading would also help improve public confidence in the integrity of our securities markets—a goal Congress has touted repeatedly for almost a century.

I have since posted a short paper on SSRN, Time for a Broad Prophylactic against Congressional Insider Trading, that develops these arguments. Part I offers a brief summary of the current state of insider trading laws, with a special focus on their application to Congress. Part II surveys some of the proposed insider trading reform bills under consideration. Part III argues that, given congresspersons’ unique role vis-à-vis securities markets, a broad prophylactic…

In 2011, Peter Schweizer published a book, Throw Them All Out, in which he exposed some questionable means by which (according to one study) politicians manage to increase their personal wealth 50% faster than the average American.

According to Schweizer, trading on material nonpublic information appears to be a popular method among congresspersons for achieving outsized returns on their investments. He cites one study finding:

  • The average American investor underperforms the market.
  • The average corporate insider, trading his own company’s stock, beats the market by 7% a year.
  • The average senator beats the market by 12% a year.

Schweitzer’s book was followed by a feature story on the CBS News show, 60 Minutes, highlighting some dubious stock trades by leaders of both political parties. These stories got the public’s attention and spurred Congress to act—adopting the Stop Trading on Congressional Knowledge (STOCK) Act in April of 2012.

The STOCK Act made explicit what many already understood as implicit—that congressional trading based on material nonpublic information acquired by virtue of their position as a public servant was a breach of their fiduciary duties and would therefore violate Section 10b of the Securities Exchange Act of 1934. The Act…

image from people.wayne.edu

I have been remiss in writing to honor the life and legacy of one of our colleagues (and one of my friends), Peter J. Henning.  Peter, a Professor at Wayne State University Law School until his untimely passing, died earlier this month after wrestling with a long-term, debilitating illness.  Our mutual friend, Stetson Law Professor Ellen Podgor, published a post in his memory back on the 18th on the White Collar Crime Prof Blog.  In the post, she reflected on their long-term friendship and initial co-editorship on the White Collar Crime Prof Blog.  She began by saying: “Peter Henning was an incredible writer, scholar, and teacher. Most of all to me – he was a good friend.”  I could have started this post the same way . . . .  Ellen also linked to the announcement posted by Wayne State Law.

Peter was one among a number of colleagues whom I believe understood me and my work well.  He valued my practice experience and encouraged my use of it in research and writing.  While our work intersected most in the insider trading realm, he motivated and supported my scholarship and teaching more broadly.  He enjoyed our discussion groups…

It is an exciting time for insider trading law. BLPB coblogger Joan MacLeod Heminway and I will be moderating a discussion group, New Challenges for Insider Trading Compliance,  at the upcoming Southeastern Law Schools (SEALS) Annual Conference (July 27-August 3, 2022). The conference is scheduled to be held in person in Sandestin, Florida. Here’s the description for our discussion group:

Insider trading law in the United States is in a state of flux and uncertainty. In May of 2021, the House of Representatives passed the Insider Trading Prohibition Act. If this bill becomes law, it will impose an entirely new statutory regime for civil and criminal enforcement. Moreover, Securities and Exchange Commission (SEC) Chairman Gary Gensler recently directed the staff to present recommendations to “freshen up” and tighten the operative provisions in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. In response, in August of 2021, the SEC’s Investor Advisory Committee proposed extensive new restrictions on the use of 10b5-1(c) trading plans as an affirmative defense for insider trading. Meanwhile, prosecutors and regulators continue to employ novel theories of liability in insider trading enforcement actions. Criminal enforcement actions under 18 U.S.C. § 1348 and civil enforcement…

Can “hypermaterial” public information about a stock render the company’s (once material) nonpublic internal data immaterial? Consider the following scenario involving social-media-driven trading in a meme stock:

XYZ Corporation’s stock price had been falling over the last month (from a high of $12 down to $10), due to a short-sale attack by a small group of hedge funds. In the past week, a group of individuals in a social media chatroom have attempted a now well-publicized short squeeze, motivated by a desire to punish what they view as predatory behavior by the hedge funds. As a result, the stock price has been driven up to $300, significantly above where the stock was trading before the short-sale attack. The company’s nonpublic data (earnings, etc.) that will be reported next week reflects the “true” price of the company’s shares should be $8. With knowledge of the above public and nonpblic information, XYZ and some of its insiders issue/sell XYZ shares.

Has XYZ and its insiders committed insider trading in violation of the antifraud provisions of Section 10(b) of the Securities Exchange Act?

Insider trading liability arises under the classical theory when the issuer, its employee, or an affiliate seeks to benefit from…

Insider trading reform has been a consistent theme in my last few posts (see, e.g., here, here, here, and here). In keeping with this theme, I’d like to highlight a new article, How Creepy Concepts Undermine Effective Insider Trading Reform, which was posted just yesterday by Professor Kevin R. Douglas (Michigan State College of Law). Professor Douglas is an important new voice in the areas of securities regulation, corporate finance, and business law more generally. Here’s the abstract:

Lawmakers are building momentum towards codifying our insider trading laws to clarify which kind of trading is illegal. In May 2021, the US House of Representatives passed the Insider Trading Prohibition Act for the second time in two years. In January 2020, a Securities and Exchange Commission sponsored task force on insider trading released a report containing proposed legislation. Both the House Bill and the task force proposal would prohibit trading while in possession of “wrongfully obtained” information and prohibit trades that involve a “wrongful use” of information. This article explains why the concept of “wrongful” trading is too ambiguous to improve insider trading law and explores the requirements of effective legislative reform.

For decades, scholars have…

I’m so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here’s the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren’t the only ethical traps, of course, but there’s only so many things you can talk about in a 45-minute slot. 

All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.

Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing…

The Securities and Exchange Commission’s (SEC) Chairman, Gary Gensler, recently directed the staff to present recommendations to “freshen up” and tighten some provisions in Exchange Act Rule 10b5-1. In response, the SEC’s Investor Advisory Committee proposed new restrictions on the use of 10b5-1(c) trading plans as an affirmative defense against insider trading liability. The proposed changes are designed to address concerns that “some plans are used to engage in opportunistic trading behavior that contravenes the intent behind the rule,” and they are consistent with recommendations outlined in the  Promoting Transparent Standards for Corporate Insiders Act that passed the House of Representatives in April 2021.

But any proposed restrictions to trading plans must be considered in light of the broader context of Rule 10b5-1, and the motivation behind the affirmative defense’s adoption.

The courts have interpreted Section 10b of the Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis” of material nonpublic information. This element of intent for insider trading liability can be difficult for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade can often claim that they did…

I suggested in my last two posts (here and here) that as Congress and the SEC contemplate reforms to our current insider trading regime, it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” With this in mind, I developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).

In the previous post, I offered a scenario that would result in liability under equal-access and parity-of-information regimes, but not under the fiduciary-fraud and laissez-faire models. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.

In today’s…

As Congress and the SEC continue to contemplate reforms to the U.S. insider-trading enforcement regime, I suggested in my last post that it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” To this end, I have developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).

In the last post, I offered a scenario that would result in liability under a parity-of-information regime, but not under the other three. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.

In this post, I offer the following scenario to…