If insider trading is weighing on more minds than usual this month, it’s no surprise. On Sept. 9, Mathew Martoma, a former SAC Capital Advisors portfolio manager, learned that he will be going to prison for nine years after he was found guilty of accessing and using the results of a secret drug trial to make investment decisions.
A webinar from Mayer Brown’s Global Financial Markets Initiative, “Insider Trading: The Changing Landscape,” brought together two Mayer Brown partners, Richard Rosenfeld, colead of the firm’s U.S. securities litigation and enforcement group, and Michael Martinez, a member of the firm’s litigation and dispute-resolution and white-collar defense and compliance practices, to talk about recent developments in insider trading and enforcement.
One of the first trends noted by the attorneys was that the last few years have brought several big losses for the U.S. Securities and Exchange Commission in its attempts to make high-profile insider trading cases work. The failed case against Dallas Mavericks owner and “Shark Tank” star Mark Cuban and one involving Nelson Obus of Wynnefield Capital Inc. stand as recent examples of where the commission has aimed high but fallen short.
“At the same time the SEC went through these high-profile trial losses,” noted Martinez, “it has also been increasing the number of enforcement actions brought at administrative proceedings rather than the traditional federal court lawsuits.”
The trend of letting SEC administrative law judges take care of insider trading charges has accelerated, and there are some good reasons why the agency might want to keep these matters for itself. “The SEC can essentially get the same remedies. But the targeted companies and the individuals, they’re denied the procedural rights they would get in federal court,” Martinez said. For example, in administrative proceedings, the commission can take testimony during its investigations, but targeted entities cannot take depositions. There’s also the fact that ALJs making the decisions in these cases get their salaries paid by the SEC, he added.
Another pattern noted by the attorneys is that the pharmaceutical, biotech and medical device industries seem to be a magnet for insider trading allegations and enforcement. “There are key points during the clinical trials for these drugs and medical devices where insiders have information that’s very valuable to the marketplace,” said Martinez. “And let’s face it, sometimes the temptation is too much for some of these individuals.” This may very well have been the case with Martoma, who reaped $250 million in profits for SAC by dumping shares in two companies after he found out about confidential test results for an Alzheimer’s drug.
Besides the testing issue, according to Martinez, the active landscape for mergers and acquisitions in medical and pharmaceutical fields is another reason why insider trading allegations might be more common in this sector. When information is passed around in the course of an M&A, there are more secrets to act on.
The lawyers also touched on another hot topic in insider trading and many other areas of white-collar enforcement: whistleblowing. “It’s an incredibly significant source of enforcement actions these days, and it really goes to needing to consider your whistleblower compliance internally, and really needing to consider how you have your policies and procedures done and how you deal with whistleblowers,” said Rosenfeld.
The attorneys pointed to the $300,000 award given in August to a still-unnamed audit and compliance professional, the first whistleblowing award to be given by the SEC to someone in this function under its Dodd-Frank Act program. They also noted that in June, the commission brought its first antiretaliation case under the program. The case, against Paradigm Capital Management, came after an employee blew the whistle, and then was promptly stripped of his title and his job responsibilities, and lost access to his company’s computer systems and his work email.
Rosenfeld said that the company probably was just trying to control the situation but made many mistakes in its attempts to do so. “It just highlights that extreme caution in trying to deal with the whistleblower, make them feel heard—do not retaliate,” he said.
Reprinted with permission from the 23 September 2014 edition of Corporate Counsel © 2014 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.”