Posted: March 12th, 2018
By: Juliana S. Inman *| Staff WriterOn January 26, 2018, in the U.S. District Court in Manhattan, the United State Securities and Exchange Commission (SEC) filed an insider trading lawsuit against “unknown traders” who allegedly engaged in “highly suspicious trading” ahead of an announcement about Sanofi’s acquisition of Bioverativ Inc. According to the SEC, the purchase and sale of options on Bioverativ stock began through a foreign brokerage firm, Credit Suisse (Switzerland) Ltd., and were executed through Credit Suisse Securities (USA) LLC. These sales and purchases generated a profit of about 4.9 million dollars. Aside from the profits and potential benefits to the market as a whole, the SEC is seeking “an order to freeze the assets of the traders, require the identification of defendants, and the repatriation of assets.”
Insider trading violations often arise when a person who has a fiduciary duty to another individual, corporation, partnership, entity, or the like makes “an investment decision based upon information related to that fiduciary duty,” which is nonpublic and material about the security at issue. In addition, insider trading violations may include releasing, or “tipping”, such information, trading by the person who received the nonpublic information, and “securities trading by those who misappropriate such information.” Although insider trading is often associated with illegal conduct as a result of insider trading scandals like Enron and former Goldman Sachs Rajat Gupta, it involves both legal and illegal conduct. Legal insider trading occurs when corporate employees, directors, or managers buy and sell stock in their own companies and report their trades to the SEC within two business days. Despite the distinction between legal and illegal insider trading, the SEC must effectively monitor all insider trading to promote a fair market and help prevent the average investor from being at a disadvantage to potential illegal inside traders.
Although the broad purpose of the SEC is to maintain efficient markets, protect investors, and aid capital formation, it is the SEC’s Division of Enforcement, under the authority of the Securities Act of 1933, that commences investigations and later brings suits for insider trading violations. The Division procures evidence of possible violations of securities laws from various sources, including but not limited to “market surveillance activities, investor tips and complaints, other Divisions and Offices of the SEC, the self-regulatory organizations and other security industry sources, and media reports.” Following investigations, the Division staff presents the case to the SEC for review. The SEC can authorize the Division to bring an administrative action or file a case in federal district court, which, as in the Bioverativ case, typically asks for an injunction to prohibit any further securities violations.
In addition to injunctive relief, the SEC may ask the court for monetary penalties and the return of illegal profits. Depending on the severity of the illegal trading the court may indefinitely bar or suspend an individual(s) from serving as a corporate officer. Furthermore, in a civil suit any person found to have violated SEC insider trading laws may be forced to disgorge any profits gained and/or losses avoided. A violator may also be subject to treble damages, which means an amount up to three times the profits gained as a result of insider trading. Since the District Court has not yet identified the “unknown traders” in the Bioverativ case it will be interesting to see how the court goes about punishing these “unknown” violators.
Juliana Inman is a second-year law student at Wake Forest University School of Law. She holds a Bachelor of Arts in English from the University of North Carolina at Wilmington and is a native of Beaufort, North Carolina. Upon graduation, Juliana intends to return to eastern North Carolina and practice family law.