The SEC doesn’t need any help in identifying suspected insiders. Already this year, it has pressed charges in three high-profile insider trading actions, one of them involving no less a company than Apple. Getting such cases across the finish line, however, is a challenge that has bedeviled the SEC and federal prosecutors alike for decades. And on that front, the Commission could be getting some long-awaited assistance from a bill making its way through the House of Representatives.
The SEC started 2019 with an insider trading action against a lawyer for Apple, which may not have required the most advanced data analysis to sniff out. According to the charges, a former associate general counsel dumped virtually all of his Apple stock—about $10 million of it—over a four-day period in the summer of 2015. Shortly after his massive trade, a negative earnings announcement came out that sent the stock tumbling 4% and would have put a $345,000 dent in the lawyer’s holdings. The ultimate irony of the case: the lawyer’s responsibilities at Apple included ensuring compliance with the company’s insider trading policies.
Not to pile on the lawyers out there, but (oh, what the heck) the SEC’s two other high-profile cases also involve members of the bar. In April, the SEC asserted charges against an associate general counsel for Sea World, who the SEC says traded ahead of a positive earnings report that popped the stock by 17%. Most recently, the SEC pegged a friend of the general counsel at Cintas, who, while staying as an overnight guest at the GC’s house, found papers alluding to a pending merger—and turned that info into $250,000.
As any student of insider trading law knows, these cases are easier to bring than they are to win. The challenges for the SEC and federal prosecutors begin with the fact that there is no law specifically prohibiting insider trading. Historically, they have been charged under the “10b-5” rule that prohibits securities fraud. But of course, when you draw out the Venn diagram, the circle of behavior considered “fraudulent” is considerably smaller than the entire universe of insider trading. As Columbia Law School professor Jack Coffee put it: “If you get the information unlawfully, improperly, unethically, criminally, but without using fraud, the SEC is powerless.” Consider: did the overnight guest of the Cintas GC commit any act of fraud?
This legal landscape created problems for Preet Bharara, the former U.S. attorney in Manhattan, whose campaign against insider trading suffered a famous legal setback in a case called Newman (abrogated by Salman).
Now, Rep. Jim Himes (D-CT) is backing a bill that would relieve enforcers from the challenge of fitting the square peg of insider trading into the round hole of “fraud.” Himes’s bill would address insider trading directly, prohibiting the “wrongful” use of insider information. That covers much more territory than fraud and would make insider trading prosecutions much easier. (In fact, the objection to the bill—from the Chamber of Commerce—is that it covers too much ground.) Himes’s bill also explicitly undoes the result in the Newman case.
This is the kind of legislation that enforcers have been waiting for since the 1980s, when former SEC general counsel Harvey Pitt and others pushed a bill similar to Himes’s. If it suffers the same ill fate as that attempt, there is a backup to the Himes bill. An all-star group of insider trading authorities, which includes Bharara, Prof. Coffee, and federal Judge Jed Rakoff, are currently sitting on a task force contemplating how Congress or the SEC might legislate their way out of the current mess they face in insider trading cases. And if that group can’t find an answer, it’s quite possible that no one can.