Preet Bharara, United States Attorney for the Southern District of New York, has petitioned the United States Court of Appeals for the Second Circuit for a rehearing en banc of last month’s landmark decision vacating multiple insider trading convictions, arguing that the decision creates a new “deeply confounding” standard that splits from precedent in this and other circuits, and threatens the effective enforcement of the securities laws.
Continue Reading Bharara Appeals Second Circuit’s Decision Vacating Insider Trading Convictions

Academics in Hong Kong have found that companies that have adopted executive compensation clawback provisions tend to substitute one type of earnings manipulation for another, and that this trend is more pronounced in companies with high growth or transient institutional ownership.

In an article published in the American Accounting Association’s journal, the authors analyzed companies from the Russell 3000 that voluntarily adopted clawback provisions of the type required by Section 954 of the Dodd-Frank Act. Because the Securities and Exchange Commission has not yet finalized the rules to implement this section, only some companies have adopted these measures. Section 954 is intended to deter financial misstatements.
Continue Reading Study Finds Executive Compensation Clawback Provisions Do Not Eliminate Possible Earnings Manipulation

On December 8, the Securities and Exchange Commission sanctioned a computer programmer for operating two online exchanges that traded securities using virtual currencies without registering them as broker-dealers or stock exchanges. The programmer, Ethan Burnside, operated the two exchanges through his company, BTC Trading Corp., from August 2012 to October 2013. Account holders were able to purchase securities in virtual currency businesses using bitcoins on BTC Virtual Stock Exchange and using litecoins on LTC-Global Virtual Stock Exchange. The exchanges were not registered as broker-dealers but solicited the public to open accounts and trade securities. The exchanges also were not registered as stock exchanges but enlisted issuers to offer securities to the public for purchase and sale. Burnside also offered shares in LTC-Global Virtual Stock Exchange itself, as well as interests in a separate Litecoin mining venture, LTC-Mining, in exchange for virtual currencies. The SEC charged Burnside with willful violations of Sections 5(a) and 5(c) of the Securities Act of 1933 and Burnside and BTC Trading Corp. with willful violations of Sections 5 and 15(a) of the Securities Exchange Act of 1934. Burnside cooperated with the SEC’s investigation and settled, paying more than $68,000 in profits plus interest and a penalty. The SEC also barred Burnside from the securities industry.
Continue Reading SEC Sanctions Operator of Unregistered Virtual Currency Exchanges

On December 5, the New York State Department of Taxation and Finance (DTF) issued the memorandum “Tax Department Policy on Transactions Using Convertible Virtual Currency.” The memorandum clarified that under New York law, convertible virtual currency (such as bitcoin) is considered “intangible property,” which is not subject to sales tax. Therefore, the purchase or sale

The US Court of Appeals for the Second Circuit recently held that, in order to convict a tippee for insider trading under Section 10(b) of the Securities Act of 1934 and Rule 10b-5, the government must prove beyond a reasonable doubt that the tippee had knowledge of the benefit received by the tipper who breached his or her duty of confidentiality.
Continue Reading Second Circuit Clarifies a Heightened Standard for Insider Trading Convictions

Convicted investment fund founder Raj Rajaratnam filed an appeal of his Securities and Exchange Commission case in the United States Court of Appeals for the Second Circuit, arguing that the district court improperly sought to impoverish him by imposing a $92.8 million civil fine. 

Rajaratnam, who founded Galleon Group, had faced both criminal and civil charges for insider trading. After an eight-week jury trial, he was convicted in his criminal case of nine counts of securities fraud and related conspiracy counts, and was subsequently sentenced to 11 years of incarceration and was ordered to forfeit more than $50 million dollars. Following his criminal conviction, the SEC moved for summary judgment in their civil case where the arguments centered around the amount of a civil penalty. Rajaratnam argued to Judge Rakoff that no civil penalty was warranted due to the punishment already doled out in the criminal case or, alternatively, that the punishment should be calculated from the amount Rajaratnam stood to gain personally, a sum approximating $4.7 million. The district court ultimately determined that it was inappropriate to separate out what Rajaratnam gained personally from what third parties may have gained from his conduct. Instead, it found that the total profit from the scheme was $30.9 million, and trebled this number using a statutory calculation to arrive at civil fine of $92.8 million. According to the brief submitted by Rajaratnam, Judge Rakoff had alluded at oral argument as to the aspiration of leaving insider traders “worthless, homeless, and maybe clothesless”—“the point being, [to] take everything they have.”
Continue Reading Raj Rajaratnam Appeals $92 Million Civil Fine to Second Circuit Court of Appeals

The Securities and Exchange Commission recently charged a former pharmaceutical company executive and his longtime friend with insider trading, alleging that the friend generated more than $1 million in illicit profits by trading on tips from the former executive.         

Defendant Saran Sabrdaran was the former director of Drug Safety Risk Management at InterMune Inc., a

The Securities and Exchange Commission recently accepted an offer of settlement submitted by Filip Szymik, in anticipation of a cease-and-desist proceeding resulting from the purported insider trading in Herbalife, Ltd. stock.
Continue Reading SEC Settles Insider Trading Case, Finding Roommate Relationship Created Duty of Trust and Confidence

The Commodity Futures Trading Commission accepted an offer of settlement submitted by the owner of Peak Capital Group, Inc., Scott Beatty, in anticipation of an administrative proceeding resulting from Beatty’s alleged violations of the Commodity Exchange Act (CEA) and other CFTC regulations. 
Continue Reading CFTC Settles Fraudulent Trading Violations with Forex Trader