On September 21, 2016, the Securities & Exchange Commission filed a complaint alleging Leon G. Cooperman, the billionaire hedge fund manager of Omega Advisors, “generated significant illegal profits” due to insider trading. The trading arose when Cooperman purchased additional securities in Atlas Pipeline Partners, a company in the Omega Advisor portfolio, after receiving information that Atlas intended to sell a large portion of its assets. When Atlas announced the sale, its stock price jumped 31%. The SEC alleges that Cooperman agreed to keep the information confidential, and that by trading on it, he violated insider trading laws.
The Theory of the SEC’s Case Against Leon Cooperman
Justices to Rule on Meaning of ‘Personal Benefit’ in Insider Trading
On October 5, 2016, the Supreme Court heard its first insider trading case in over 20 years. The case is Salman v. United States, and involves the insider trading conviction of Bassam Salman in 2013. Salman was convicted of placing profitable stock trades after receiving confidential information from his future brother-in-law, who was a part of Citigroup’s health care investment banking group.
In The Peak Of A Hedge Fund Asset Crisis, The Supreme Court Might Have Just “Broke The Camel’s Back” For Investor Confidence In Hedge Funds
The Supreme Court rejected the petition for certiorari in United States v. Newman last month—a case about insider trading. In so doing it reaffirmed the Second Circuit Court of Appeals’ decision, which held that liability for insider trading requires proof of (1) that the discloser received a personal benefit, and (2) that the person receiving the information (“tippee”) knew about that benefit. This position not only troubles prosecutors in current insider trading cases and investigations, but is also likely to intensify the current hedge fund asset crisis by calling the credibility of the whole system into question among investors.
In a jury trial in the Southern District of New York, federal prosecutors presented evidence that Todd Newman and Anthony Chiasson (among others) were involved in insider trading. Pursuant to the evidence, it was found that these hedge fund managers received financial information from insiders about Dell and NVIDIA before that information was made available to the public—allowing them to earn millions of dollars in trades during the 2008 fiscal year. Accordingly, they were convicted in 2013 for conspiracy to commit insider trading.
The White Collar Defense Dilemma: To Testify or Not?
The question of whether or not a defendant should take the stand remains a rightfully contested issue for legal professionals in the practice of white collar criminal defense. With no clear empirical evidence to suggest an advantage from this nuanced decision, lawyers are racked with the quandary of predicting how their client(s) would handle the high stakes of cross examination and direct jury exposure in legal matters that turn mostly on a defendant’s perceived credibility and motives at the time of the alleged crime.
Back in late October, a federal court in the Southern District of New York heard oral testimony from Anthony Allen, former head of global liquidity and finance at Rabobank and lead defendant in the first US criminal trial of traders involved in the London interbank offered rate (Libor) interest rate scandal. The prosecution questioned Allen regarding a number of communications made between him and traders in the bank. In one instance, Allen had responded in a message to a trader, “No worries mate, glad to help.” Allen contended that the response was simply a dismissal to the trader that he was not going to comply with the request, which Allen testified as “not right.”
Administrative Judge Raises S.E.C’s Burden to Convict Insider Trader
In a pivotal 1983 ruling, the Supreme Court held that to find a breach of duty to stockholders resulting in “insider trading,” a party must prove that a personal gain, either material or immaterial, resulted from confidential information provided by a trading relative or “friend.” The Court, however, left ambiguous the term, “friend” for over three decades, causing much confusion. Did the Court intend to mean a close friend? A friend with whom you occasionally converse? A Facebook friend?
Recently, Judge Patil provided some context, although controversial, to this central term in a S.E.C. administrative decision, by dismissing insider trading charges against Joseph Ruggieri, a former securities trader at Wells Fargo. At issue in the case was the question of how close a non-familial relationship must be to qualify as “meaningfully close.” Ruggieri mentored Gregory Bolan, a Wells Fargo analyst, and allegedly profited approximately $117,000 from tips received from Bolan. In order to have succeeded, the Department of Justice needed to prove that benefits Bolan received from the mentorship and feedback was substantial enough to qualify their relationship as meaningfully close. The Department of Justice argued that mere friendship was enough to establish the benefit. In his decision, however, judge Patil disagreed, holding that the benefit received by the mentorship was insufficient.
Insider Trading: Is the Benefit to the Tipper Tangible?
In December of 2014, a federal appeals court in Manhattan reversed the convictions of two hedge fund managers for insider trading in United States v. Newman. The court held the evidence was insufficient to sustain a guilty verdict for two reasons. First, the Government provided insufficient evidence of any personal benefit received by the alleged insiders, meaning there was not enough evidence to “establish the tipper liability from which defendants’ purported tippee liability would derive.” Second, the Government did not provide any evidence that “the defendants knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.” (more…)
Congress Reacts to Insider Trading Case with Two Proposed Bills
As previously discussed on this blog, in U.S. v. Newman the U.S. Court of Appeals for the Second Circuit made it more difficult to prosecute future cases of insider trading involving tippers. To establish a tippee’s liability, prosecutors are now required to prove not only the tippee’s knowledge of the tipper’s breach of the duty of confidentiality, but also the tippee’s knowledge of a personal benefit to the tipper. The court also held that the benefit should be of “some consequence,” and that mere friendship or a familial relationship alone are insufficient to establish a benefit to the tipper.
Hedge Fund Accuses U.S. of Misconduct
In November 2010, the FBI executed a search warrant related to insider trading allegations at David Ganek’s Level Global hedge fund offices. Although Mr. Ganek was never charged with a crime, clients fearful of being linked to misconduct quickly withdrew funds, and the fund was promptly closed.
Insider Trading Requirements: Second Circuit Case could have Major Consequences for Prosecutors
In the context of insider trading cases involving tippers, the personal benefit test is most controversial. To hold a tippee liable, prosecutors are required to prove the tippee’s knowledge of the personal benefit of the tipper when revealing the tip. On December 10, 2014, the United States Court of Appeals for the Second Circuit heightened the benefit requirement, which could have a major impact on insider trading cases to come.
Four Accused of Insider Trading in Silicon Valley Settle Case
The Securities and Exchange Commission has accused Christian B. Keller, an in-house financial specialist, and three others of running of an insider-trading scheme that turned out nearly $750,000 in illegal profits.