Tag: Section 16

While Feds Increase Insider Trading Enforcement, Other Feds Increase Insider Trading Activity, Part 2

In this previous post, I discussed the federal government’s newly aggressive enforcement of insider trading laws while federal government employees seemed to be providing tips to investors about pending government decisions that impact share prices of health care companies.  In the corporate world, this is known as “tipping” material non-public information and has severe consequences.  In the government world, “Congress and the executive branch — along with the reporters and lobbyists who track them — are accustomed to a relatively unfettered exchange of information, compared with the more regulated environment on Wall Street.”

This reminded me that in April 2013, Congress passed a bill striking down a key provision of the federal law prohibiting insider trading by members of Congress and their staff and high-level executive branch employees.  It is amazing that this was not the law until 2012.  However, the STOCK Act provided that securities transactions would be reported within 45 days and filed electronically so people could actually see it.

Congress voted to kill the broad disclosure provisions without hearings or public notice due to laughable national security and personal safety concerns.  According to a report on the matter:

“Virtually all the cybersecurity, national security, and law enforcement experts interviewed during this study noted that making this information available in this fashion fundamentally transforms the ability (and the likelihood) of others — individuals, organizations, nation-states — to exploit that information for criminal, intelligence, and other purposes.”

In addition, several groups representing the interests of federal employees have criticized the law.

Let us not forget that directors, officers and holders of 10% or more of a public company must disclose transactions in that company’s stock:

  1. Publicly on EDGAR, and
  2. Within 2 business days of the transaction.

I guess those people don’t have the same security concerns as federal employees.

60 Minutes confronts John Boehner generally about insider trading rules for federal employees (at 2:08) and Nancy Pelosi specifically about her participation in the Visa IPO (at 3:00 and Pelosi’s hilarious response at 3:15).

 

 

Recent Case Shows How Little The SEC Appreciates The Beauty* Of A Reverse Merger

*Beauty Is in the eye of the stock promoter.
SEC v. Sierra Brokerage, et al.

Many of the arguments in the case are procedural, but the basis of the case involves Tsai, who created shell companies for reverse mergers.  As part of the process, Tsai would distribute the shares to his buddies to spread out the holdings in order to qualify for OTC trading.  Tsai also had stock powers from these people that allowed him to redistribute the shares in the reverse merger.

Tsai’s ability to reclaim the shares at a reduced price constituted “control” over the shareholders in addition to his control over the company and made them all “affiliates.”  According to the SEC and the court, this made him an underwriter and Rule 144 unavailable.  Thus, the distribution was a violation of the registration requirements of the 33 Act.

But wait, there’s more.  His failure to report the shares he controlled via the stock powers was a violation of Section 13(d) and Section 16(a) of the 34 Act (requirements to file Schedule 13Ds and Forms 3, 4 and 5).

If you want to draw broader lessons:

  • Spreading out securities holdings without an effective registration violates the 33 Act
  • The ability to repurchase shares demonstrates control
  • The ability to repurchase shares constitutes beneficial ownership and pecuniary interest for purposes of the Williams Act and Section 16 disclosure and short swing profit rules
  • The SEC still does not like reverse mergers

Can you “profit” from sale of securities you don’t own, can’t vote or can’t sell?

You would think that the answer would be, “No, of course not. What kind of idiot would believe such a thing?”

And the U.S. Court of Appeals for the 2nd Circuit would agree with you.

This case deals with additional fallout from the recent Goldman Sachs insider trading scandal, in this case involving short swing trading under Section 16 of the 34 Act.  Interesting already, right?

The plaintiffs in the case argued that because the defendant, an insider of Goldman Sachs, provided insider trading tips for money to a fund manager about Goldman Sachs while owning a stake in the fund that was trading in Goldman Sachs.  Get it?

The court did, and said:

  1. Getting paid for insider tips is not the same as realizing profits for purpose of Section 16.
  2. Knowing and intending for the tips to be used for insider trading is not the same as controlling the investment decisions over the shares of the fund.
  3. A pecuniary benefit from another person’s trading is not the same as a pecuniary interest for Section 16 purposes as business dealings do not establish beneficial ownership.