After the Supreme Court’s unanimous decision in Carpenter v. United States, the federal mail and wire fraud statutes became potent prosecutorial weapons against insider trading when the information-owner is the victim. This post examines how criminal liability under the federal mail and wire fraud statutes supplements traditional SEC authority to pursue insider trading. SEC Rules 14e-3 and 10b-5 cover a great deal of stock market insider trading and tipping, but certainly not all. For instance, Rule 14e-3 is confined to the tender offer context.
FINRA’s newly revised Sanction Guidelines, effective immediately, signal that the upward trend in sanctions against broker-dealers is likely to continue.
The Sanction Guidelines, which establish the range of sanctions that FINRA may impose in formal disciplinary proceedings, affect several specific types of violations, as well as the principles behind levying sanctions and the overall levels of monetary sanctions. The Guidelines are also meant to catch up to the sanctions that FINRA actually is levying; as FINRA stated, in revising the guidelines, it is seeking to “harmonize the Sanction Guidelines with the current state of the cases in this area.”… Read more
Donations play a fundamental (and increasing) role in supporting art museums and other nonprofit corporations. However, donations are often not freely given and may come at the price of certain restrictions upon the donation’s use and expropriation. This practice, termed here as “donor governance,” represents a form of corporate governance for nonprofits—the “restrictive covenants” on the donation’s use limit nonprofit managers’ ability to freely use the funding.
Donor governance manifests itself particularly strongly in the art-museum context. Many art museums suffer from recurring encounters with financial distress and self-perpetuating boards of trustees, incentivizing donors to be wary of donating without … Read more
To fully understand the modern corporation’s ownership, shape, and distribution of authority, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. Interest groups often seek to obtain via politics both … Read more
Global climate change is the most pressing environmental problem of our time. This fact has led legal scholars and policymakers to debate the relative environmental effectiveness, efficiency, and justice of different public policy instruments such as carbon taxes, cap-and-trade systems, and prescriptive regulation. Such scholarship tends to assume that the government is the key (or only) player setting and enforcing environmental standards against private firms, which are regulatory targets.
In a recent article, entitled, The New Insider Trading: Environmental Markets within the Firm, (available here) I challenge these assumptions through a close examination of British Petroleum’s (BP’s) … Read more
The SEC issued a National Exam Program risk alert summarizing OCIE’s cybersecurity examination sweep of advisers and broker-dealers on February 3, 2015 (SEC Risk Alert). On the same day, FINRA issued its report on cybersecurity practices of broker-dealers, based on its own sweep examination (FINRA Report). Neither the SEC Risk Alert nor the FINRA Report creates any new rules or legal obligations, but each provides insight into current industry practice.
Many commentators have interpreted the reported results as a sign that the industry is on top of cybersecurity issues, but OCIE specifically included cybersecurity controls among its examination priorities for … Read more
General Motors’ tardy response to ignition switch problems; Standard Chartered Bank’s wire-stripping of Iranian funds; and the News of the World’s misleading ‘lone wolf’ defence of hacking are all illustrations of the increasingly controversial role that the management of legal risk by in-house legal functions can play. Standard Chartered Bank’s in-house legal team advised on how they could ‘enforcement proof’ wire-stripping Iranian identifiers from transfers of funds into the US (and advised their organisation to clear these funds through a competitor bank) – they took a monumental risk with the commercial and reputational interests of the Bank. They apparently did … Read more
On March 29, 2015, the National Association of Insurance Commissioners (the “NAIC”) Private Equity Issues Working Group (the “PEI Working Group”) adopted a new section to be added to the NAIC’s Financial Analysis Handbook that provides a narrative guidance to state insurance regulators considering an application seeking approval to acquire control of a domestic insurance company (the “Guidance”). The Guidance draws from many of the practices that have recently been used by states such as New York and Iowa in approving the acquisition of control of domestic insurers by private equity firms, and, in the case of New York, recently … Read more
The development of self-learning and independent computers has long captured our imagination. The HAL 9000 computer, in the 1968 film, 2001: A Space Odyssey, for example, assured, “I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.” Today businesses (and governments) are increasingly relying on big data and big analytics. As the cost of storing and analyzing data drops, companies are investing in developing ‘smart’ and ‘self-learning’ machines to assist in pricing decisions, planning, trade, and logistics. With the Internet of Things, more of our daily … Read more
It is well known that the Commission needs to undertake a holistic review of our current equity market structure. In fact, the Commission has formed an advisory committee to assist that review. In furtherance of that process, the following is intended to focus on certain issues that any serious review should consider—such as the various issues that have arisen from our markets’ increasingly fragmented … Read more
Understanding why firms exist has long been a preoccupation of economists. The leading answers—the ones that have won people Nobel prizes or put them on the short list—focus on the ability of firms to get things done by asserting authority rather than relying on contracts or formal dispute resolution. To put it simply, if the boss tells you to stay late to finish a project, you don’t start a lawsuit, you just do it.
A recent decision from the United States District Court for the Southern District of New York allowing a U.S. Securities and Exchange Commission (SEC) civil enforcement action to proceed against two former stockbrokers for alleged insider trading violations sheds additional light on application of the 2nd Circuit’s decision in United States v. Newman, No. 13-1837-cr(L) (2d Cir. Dec. 10, 2014). In the new decision, SEC v. Payton, No. 14 Civ. 4644 (S.D.N.Y. Apr. 6, 2015), Judge Jed S. Rakoff upheld the SEC’s allegations that traders Daryl Payton and Benjamin Durant III of Euro Pacific Capital improperly traded software … Read more
To listen to the Chamber of Commerce, one would think that class actions are the most significant scourge on business ever conjured up by man. In brief after brief to the Supreme Court, the Chamber of Commerce and other business amici tell the same story: Meritless class actions, filed by rapacious plaintiffs’ attorneys, are so devastatingly expensive to defend against, and threaten such financial ruin if plaintiffs prevail, that corporate defendants cannot help but accept “blackmail settlements” that harm both businesses’ bottom lines and society at large.
The Supreme Court appears to have premised several recent civil procedure decisions—including Twombly, … Read more
Roughly four and a half years after its first attempt, the U.S. Department of Labor today again proposed to redefine the term “fiduciary” as it applies in the investment advice context. The DOL withdrew the 2010 Proposed Rule following blistering criticism from the regulated community and Congress. Since the withdrawal, however, heated debate among stakeholders has continued. Earlier this year, President Obama publicly expressed his support for the 2015 Proposed Rule. Further complicating matters, SEC Chairman Mary Jo White recently committed the SEC to proposing a fiduciary standard for brokers who recommend financial products to clients—regardless of whether the clients … Read more
Despite millions of dollars spent on enhancements, cybersecurity remains the area of risk management with the largest gap between threat and preparedness. As the frequency and sophistication of cyber attacks have increased significantly in recent years, counter measures have failed to keep pace.
This gap is especially important for financial institutions, which by our estimate are over 30% more likely to be targeted by cyber crime. While the biggest banks have been dealing with cyber threats for years, they and their smaller peers are largely responding to threats reactively. More specifically, banks continue to address past issues rather than responding … Read more
Let me begin by thanking the organizers for inviting me to participate in this important dialogue on the role of finance in society. The financial sector is vital to the economy. A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth. But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues.
Unfortunately, in the years preceding the financial crisis, all too many firms took on risks they could neither measure nor manage. Leverage, interconnectedness, and maturity and … Read more
The negotiation of the “deal protection” package in a public company M&A transaction almost always involves the inevitable discussion as to the amount and percentage of the break-up fee. In general, the Delaware courts have upheld break-up fees within a range of 3% to 4% of equity value as reasonable and not preclusive. Delaware courts also have accepted somewhat higher break-up fees in certain deals (e.g., 4.3% in In re Topps Company Shareholder Litigation, and 4.4% in In re Answers Corporation Shareholder Litigation), depending on the circumstances.
Despite the contentious negotiations surrounding break-up fees and other deal protection … Read more
Over the last few decades, how stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded electronically on up to sixty competing venues where a computer matches incoming orders. A majority of quotes are now posted by high-frequency traders (HFTs), making them the market makers that are the preponderant source of liquidity in the new market.
This new stock market has spawned a bewildering number of controversies. From the quoting practices of HFTs, to the rise of so-called dark … Read more
The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) recently issued its final policy statement (the “Policy Statement”) enabling consumers to post on the CFPB’s web-based public consumer complaint database (the “Database”) complaints about consumer financial services in narrative format.  While the CFPB has maintained the Database since 2012, under the Policy Statement, consumers would be able to submit detailed descriptions of their experiences in dealing with providers of consumer financial products and services. Once a complaining consumer consents to publication, the CFPB would remove personally identifying information and then feature the consumer’s full complaint in narrative … Read more
Thank you, David, for that kind introduction. I am very honored to address the Garrett Institute, one of the most important programs in the country for corporate and securities lawyers, and to be in David’s home territory of Northwestern Law School where he served as Dean before going on to serve as a very distinguished Chairman of the SEC in the late 1980s.
Although the Garrett Institute was established 35 years ago to honor former SEC Chairman Ray Garrett, Jr., I really first came to learn about him when I did a bit of research for a speech I gave … Read more