By John Filar Atwood
SEC Enforcement Director Andrew Ceresney believes that the Supreme Court appeared to be sympathetic to the government’s claims in the recently-argued Salman v. U.S. case, and he is hopeful that the court will uphold the insider trading personal benefit test established in Dirks v. Securities and Exchange Commission in 1983. A decision in the government’s favor would be consistent with the direction in which case law has gone since 2014’s U.S. v. Newman decision, he noted.
In an enforcement panel discussion at Practising Law Institute’s securities regulation conference, Dechert’s Jonathan Streeter agreed with Ceresney, saying that it looked like the government was winning the Salman oral argument. One friend giving the gift of information to another friend is going to be considered insider trading, he said.
Ceresney said that the SEC’s enforcement program, which brought 40 insider trading cases last year, has been much more focused on the issue of personal benefit since Newman. The test requires that the tippee know that the tipper was getting a personal benefit by providing the information, he said. In many cases that has been very hard to determine, he added.
Big data. Ceresney also discussed the rise in the number of instances where his staff requests large quantities of data from companies. That stems from Office of Compliance & Inspection’s current approach to examinations, which involves considerable data analysis, he said. The staff asks for the data, then looks for patterns such as insider trading, cherry picking, or mark-ups.
If the staff finds unusual patterns in the data, he noted, it will inform the company of its findings and ask the company to explain. Ceresney said that if the explanation convinces the staff that there is no reason for concern, it will not bring charges. The staff never brings a case without first discussing the data with the company, he said.
Cooperation benefits. On the issue of cooperation, Ceresney said that the staff has been trying to send a message that a company will get a benefit from self-reporting. This happened in the FCPA case involving Harris Corp., he noted, as well as in the Goodyear case where Goodyear was not penalized. In addition to reduced penalties, the staff will consider a non-prosecution agreement where a company self-reports, he added.
Milbank, Tweed, Hadley & McCloy partner George Canellos said that he is skeptical of the benefits of self-reporting. The staff will say that it considered a company’s cooperation, then impose a large penalty anyway. There is no way to measure whether the cooperation was considered, he noted, which has created a credibility gap with respect to the staff’s claims.
Whistleblowers. Ceresney provided an update on the whistleblower program, which passed $100 million in awards last year. To date, about half of the whistleblowers have been company insiders, and the other half are investors, people at competitors, people who do data analysis, or people with a personal relationship with the wrongdoer, he said.
Last year there was an increase in cases where companies interfered with the whistleblower, according to Ceresney. In these cases, the staff is looking for more proof than simply a company’s claim that no one was impeded. In particular, if there is an agreement in place that limits an employee’s options for coming forward, that in itself is considered interference, he said.
Other issues. Ceresney would not comment on whether there is an enforcement sweep underway in the area of non-GAAP reporting. It is an area the enforcement division has focused on, he noted, citing a recent non-GAAP case. The staff’s focus in this instance was whether the company had reconciled the non-GAAP numbers to GAAP and the prominence of the non-GAAP disclosure.
Asked whether the enforcement staff planned to take steps to cut down on overlapping actions with other agencies, Ceresney said the division already engages in coordination efforts with foreign authorities and the DOJ. The SEC handles disgorgement and the DOJ imposes penalties and they do not double count, he stated. The division also holds quarterly meeting with FINRA and the PCAOB to discuss who will handle cases, and sometimes hands matters over to state regulators, he added.