FRIDAY AFTERNOON SMACKDOWN – THE SEC v. THE HOUSE OF REPRESENTATIVES

On Friday, June 20, 2014, the Securities and Exchange Commission filed an action against the Committee on Ways and Means of the U.S. House of Representatives and congressional staffer Brian Sutter seeking enforcement of subpoenas the SEC issued. The SEC is investigating whether laws against insider trading, specifically applicable to members and employees of Congress via the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”), were violated by the disclosure of non-public information about Medicare reimbursement rates. This is pretty exciting stuff for securities lawyers. It isn’t everyday that one branch of the federal government sues another. (Generally, the facts set forth below are derived from the SEC’s court filing and have not yet been established as true in court.)

About a year after the STOCK Act became law, the SEC launched an investigation into whether information regarding the April 1, 2013 announcement by the U.S. Centers for Medicare and Medicaid Services (“CMS”) on the 2014 reimbursement rates for the Medicare Advantage program was leaked improperly prior to the official public announcement. In its brief filed with the United States District Court for the Southern District of New York, the SEC details the opening of a formal investigation to determine, among other things, the source(s) of information in an email sent from a lobbyist to a broker-dealer that issued a “flash report” indicating that certain Medicare reimbursement rates would actually increase, rather than decrease as had been expected. The flash report was issued approximately 40 minutes before the official CMS announcement regarding the reimbursement rates and was followed promptly by a dramatic increase in the price and trading volume of certain health care stocks.

On May 6, 2014 the SEC staff issued subpoenas to the House Committee on Ways and Means and Brian Sutter. Mr. Sutter is the Staff Director of the House Ways and Means Committee’s Healthcare Committee. Before becoming Staff Director, Mr. Sutter was a staff member to the Subcommittee. Both the Committee and Mr. Sutter have refused to comply with the subpoenas, citing a number of legal objections, including that the documents demanded are protected by the Constitution’s Speech or Debate Clause. The SEC is having none of that and, on June 20, 2014, the SEC filed an action to enforce subpoenas it issued in connection with its investigation, potentially setting up a Constitutional showdown.    

From my perspective, there are at least two interesting points here. First, the SEC appears to be aggressively enforcing the STOCK Act. Hopefully, the courts will find a way to support the SEC in its efforts to conduct the investigation. If the SEC cannot investigate, the STOCK Act may have little, if any, bite. (If you would like to read more about the STOCK Act, please see our summary in the April 2012 issue of Up to Date.) Second, it will be very interesting to watch the matter unfold from a Constitutional perspective.

Insider Trading Updates: Cuban Jury to SEC – No Cigar; Heinz Tippees Revealed (But Who Were the Tippers?)

The SEC loses some and wins some insider trading cases:

The SEC’s five year old insider trading case against Dallas Mavericks owner, Mark Cuban, came to a sad conclusion for the SEC on Wednesday when a federal jury acquitted Mr. Cuban of insider trading charges.

The SEC had accused Mr. Cuban of insider trading in the securities of Mamma.com, a publicly traded Internet search engine company. According to the complaint, in June 2004, Mr. Cuban sold his entire 600,000 share position in Mamma.com after learning from the CEO that the company was planning to conduct a PIPE offering. The complaint alleged that Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the PIPE offering.

The SEC alleged that Mr. Cuban verbally agreed to keep confidential and not trade on the information that the CEO gave him about the private offering. Mr. Cuban denied any such agreement and the jury agreed. Possibly hurting the SEC’s position was the fact that their main witness, the Mamma.com CEO, did not testify in person.

And now for a win.

The SEC announced that they had come to a settlement with the previously unknown inside traders who pocketed 1.8 million in profits by trading call options in advance of the public announcement of the sale of the H.J. Heinz Company.

The SEC filed an emergency enforcement action earlier this year to freeze assets in a Swiss-based trading account used to reap the illegal trading profits in advance of the Heinz announcement.

In an amended complaint filed earlier this month, the SEC alleged that the order to purchase the Heinz options was placed by Rodrigo Terpins while he was vacationing at Walt Disney World in Orlando, and that the trading was based on material non-public information that he received from his brother Michel Terpins. The trades were made through an account belonging to a Cayman Islands-based entity. Rodrigo Terpins purchased nearly $90,000 in option positions in Heinz the day before the announcement, and those positions increased by more than 20 times the next day.

The Terpins brothers agreed to disgorge the entire $1.8 million in illegal profits made from trading Heinz options. The Terpins brothers also will pay $3 million in penalties.

Interestingly, the amended complaint does not reveal the identity of the “tipper” that provided the information to Michel Terpins, other than to say that the SEC believed that the “information source” had disclosed the information about the pending deal “in breach of a duty.”

10b5-1 Trading Plans Continue to Draw Attention

As we previously discussed, executives’ trading under Rule 10b5-1 plans has been the focus of SEC scrutiny.  The Wall Street Journal continues to publish articles casting 10b5-1 trading plans in a harsh light, and the SEC is continuing its aggressive pursuit of those illegal insider trading.  Recently, the Council of Institutional Investors wrote to the SEC to reiterate the requests made in its December 28, 2012 letter asking the SEC to consider various changes to Rule 10b5-1 or the issuance of interpretive guidance “to address the variety and number of abuses that have been identified” with respect to 10b5-1 trading plans. 

The SEC has a lot on its plate at the moment and the SEC may not address the perceived abuses or misuses of 10b5-1 trading plans any time soon.  Nonetheless, public company boards should consider reviewing their policies regarding 10b5-1 trading plans to be sure the policies are up to date and adequately address the needs of the company’s officers and directors as well as investors’ concerns.  For more on what to consider when reviewing your 10b5-1 trading plans, please see our December 2012/January 2013 issue of Up to Date.

Beware Inside Traders: SEC has “57 Varieties” of Ways to Get You!

The SEC announced last Friday that it had obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that allegedly was used to reap more than $1.7 million in insider trading profits in advance of the February 14th announcement of the acquisition of the H.J. Heinz Company by Berkshire Hathaway and 3G Capital Partners. The case is noteworthy because of the speed of the SEC’s action and the fact that there is only the suspicion of insider trading.

According to the SEC complaint, “certain unknown traders engaged in highly suspicious and highly profitable trading in Heinz calls through an omnibus account located in Zurich, Switzerland.” The traders purchased 2,533 out-of-the-money June $65 call options, each of which would enable the holder to purchase 100 shares of Heinz stock for $65 per share before the calls expired on June 22, 2013. The SEC complaint termed this trade “highly suspicious” for several reasons, including:
• at the time preceding the June $65 call option purchase, Heinz stock had typically traded around $60 per share;
• the general historical lack of trading in the June $65 calls;
• the fact that the trading account had no prior trading history in Heinz stock or options; and
• the timing of the investment of nearly $90,000 in risky call options the day prior to the Heinz acquisition announcement.

The SEC alleged that the trades were effected while the traders were in possession of material, nonpublic information about the contemplated Heinz acquisition and, therefore, were in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5.

According to Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, “Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen.”

Guess that leaves the “suspicious traders” in a pickle!