Tuesday, February 24, 2015

SEC Litigators Discuss Impact of Newman, Halliburton

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

Andrew Ceresney, Director of the SEC’s Division of Enforcement, was joined by his staff and staff from the SEC’s Office of the General Counsel at this year’s SEC Speaks conference to discuss a record year for enforcement actions, as well as notable opinions from the Supreme Court and Second Circuit that are impacting both the SEC’s enforcement program and private securities fraud litigation.

Matthew Solomon, Chief Litigation Counsel for the Division of Enforcement, recounted that the division brought a record number of actions in 2014 and participated in the most trials in 10 years. He also noted that the Division has won 10 of its last 12 jury trials in federal court. Two thirds of the Division’s trials have been in federal court, he said, with the remainder taking place before an Administrative Law Judge.

Impact of Newman. Insider trading prosecution efforts were dealt a setback in December by the Second Circuit in U.S. v. Newman, which vacated the criminal convictions of two hedge fund portfolio managers. The court held that the U.S. Attorneys prosecuting the case did not present sufficient evidence that the portfolio managers knew they were trading on tips obtained from insiders, or that those insiders received any benefit in exchange for the tips.

SEC Solicitor Jacob Stillman said the Newman decision would lead to confusion because it altered the recognized standard for the personal benefit that must be shown to establish insider liability. Newman found that personal friendship is not enough, which is inconsistent with the broader interpretation of “benefit” previously applied, he argued.

Deputy Director of Enforcement Stephanie Avakian said that the Second Circuit’s decision impacted only a subset of the Commission’s insider trading cases, but could still affect its ability to bring some cases, and, therefore, could hurt efforts to maintain investor confidence in the fairness and integrity of the markets. The SEC has filed an amicus brief supporting the U.S. Attorney’s office in its effort to obtain a rehearing en banc of the case. The case has had some impact on lower court cases. The guilty pleas of four insiders targeted in U.S. v. Conradt were vacated by Southern District of New York Judge Andrew Carter in January, in reliance on Newman.

Former Commissioner Paul Atkins said that, in his opinion, the case would have a positive effect because it would serve to deter prosecutors from going after “headlines” instead of justice. Atkins thought the targeting of remote tippees showed questionable prosecutorial judgment, and referring to the insider trading jurisprudence generally, he commented, “Remember, this is completely judicially-made law.” Former Commissioner Roberta Karmel and former Chairman David Ruder floated the possibility that the SEC could further define insider trading by rule, as it has attempted to do in Rules 10b5-1 and 10b5-2.

It was noted that a decision on the cert petition filed in U.S. v. McGee, seeking high court review of Rule 10b5-2, would be expected sometime this week, and it in fact was denied today. The rule defines a “duty of trust or confidence” for purposes of the misappropriation theory of insider trading. The petitioners argued that it directly conflicted with the Supreme Court's holdings in U.S. v. O'Hagan, Dirks v. SEC, and Chiarella v. U.S., and consequently was invalidly promulgated.

Halliburton. Commentator Roberta Karmel noted that she had difficulty reconciling the Supreme Court’s decision in 2013 opinion in Amgen v. Connecticut Retirement Plans and Trust Fund, which held that plaintiffs in 10b-5 litigation need not prove the materiality of alleged misrepresentations at the class certification stage, with its June 2014 decision in Halliburton Co. v. Erica P. John Fund, Inc., which established that a defendant may present evidence of a lack of price impact to rebut the fraud-on-the-market presumption before class certification.

Deputy General Counsel Michael Conley seemed to agree with Karmel’s assessment, noting that evidence showing materiality would be the same as evidence showing price impact. Karmel opined that the simple answer was that there was a “political decision” made to respect stare decisis in the Halliburton case. “Same as healthcare,” noted former Commissioners Atkins, apparently referring to the Court's decision is National Federation of Independent Business v. Sebelius. Chief Justice John Roberts was the author of both opinions.