The Future’s Best Predictor: What Can FY2021 Insider Trading Actions Tell Us About FY2022? – Corporate/Commercial Law

Last month, Holland & Knight published an alert that led to the collapse of the US Securities and Exchange Commission’s (Division) Enforcement Annual Report for Fiscal Year (FY) 2021. Highlights from the report included, among other things, 1) a decrease in total actions Enforcement but an increase in newly filed independent actions, 2) a record-breaking year for the whistleblower program and 3) a persistent decrease in the acceptance of whistleblowers by public companies and affiliated defendants.

In the insider trading space, the agency filed 28 total insider trading actions in fiscal year 2021 — 19 civil lawsuits and nine stand-alone administrative actions — down from a total of 33 in fiscal year 2020.1 Although insider trading numbers have been down year on year, looking at the numbers alone is a misleading approach to assessing a department’s focus on insider trading, or any particular case rating for that matter. This is because there is a gap between the time it takes to open an investigation and finally deliver an enforcement action, usually several years. The best predictor is an assessment of whether the division has “pushed the envelope” in any of its affairs and whether the ever-evolving case law in the space has changed materially during the year. In fiscal year 2021, it did.

Although the agency continued to provide insider trading “bread and butter” actions in fiscal year 2021 against insider trading rings and insider insiders for companies and individuals who perpetuate forward operating schemes, two SEC enforcement actions have proven helpful about how The department researched new and innovative ways to charge individuals with insider trading. This blog post explores these matters below and considers how a recent directed ruling rejecting an agency insider trading procedure in the middle of a trial could affect future trials.

Exceeding Insider Trading Limits

In July 2021, the Securities and Exchange Commission charged Apostolos Trovias with violating Section 10(b) of the Exchange Act and Rule 10b-52 By implementing a scheme to sell “insider trading tips” on the dark web, a part of the internet that requires specialized software to access and is designed to hide users’ identities. According to the SEC complaint, Trovias told dark web users that his advice consisted of material non-public information (MNPI) from a stock exchange.3 Although presented as an “insider trading issue,” the SEC complaint essentially alleges two alternative theories under Section 10(b): 1) the ads were materially false and misleading because the “inside advice” was fake or 2) Trovias shared The MNPI is in violation of the duty to trust and to trust for personal benefit because the “inside advice” was correct.4

The first – and likely preliminary – theory that the SEC has is fraud. This theory reverberates in many respects the US Court of Appeals ruling in the 2009 Fourth Circuit case in which the defendant was charged with violating Section 10(b) by selling an email “Super Insider Tip” to potential investors that was not an insider tip on Absolutely.5 There, the court upheld the Section 10(b) fraud charges even though there was a somewhat causal relationship between the defendant’s alleged fraud and the email readers’ purchase of securities.6 Trovias It might raise similar issues and could once again test the Section 10(b) fraud theory of selling “fake” insider advice – although this time to completely anonymous dark web users. Given the alternative theories, as litigation begins, it will be interesting to see if the SEC should provide proof of insider trading theory, specifically regarding Trovias’ breach of duty. Any ruling as such would have far-reaching implications for the agency’s ability to monitor insider trading on the dark web going forward.

Second, in what became known as a “shadow trading” case, in August 2021 the SEC filed a lawsuit based on a new version of the alleged insider trading. According to the complaint, Matthew Panwat was head of business development at Medivation, a biopharmaceutical company, when he bought short-term stock options in anticipation of his company’s unannounced merger with a separate entity. development? Panuwat did not purchase securities in either of the two companies associated with the merger. Instead, he bought stock of a similar but completely separate biopharma company, Incyte Corp. , hoping that news of his company’s merger would tacitly boost Incyte’s stock. Panuwat has never received any first-hand confidential information about Incyte.

The issue is ongoing, and whether the “shadow trading” theory will expand the scope of fiduciary responsibilities remains an open question. Although there are many unique facts in the case that might make it strange,7 The SEC insider trading theory of misappropriation raises many questions related to insider trading law. For example, it is unclear how the Securities and Exchange Commission (SEC) plans to demonstrate that Panuwat is trading “on the basis of an ‘MNPI’ for that security or issuer” – that is, Incyte – as required by Rule 10b5-1(a).8 Based on existing case law, the Securities and Exchange Commission (SEC) will need to establish a new theory that confidential information about Company A can form an MNPI about other companies in Company A’s industry. The court heard oral arguments on Panuwat’s motion to dismiss on January 12, 2022, in which the judge asked, “You will waive, isn’t there another case involving material non-public information being used by a third party, against the company of the actual employer?” Only time is Which will determine whether the theory of “shadow trading” has any long-term viability, but the case will have significant ramifications for the application of insider trading. Holland & Knight will take a deeper dive after the court rules on the lawsuit.

A setback for the SEC’s use of data analytics?

Despite new and new theories from the SEC, the recent litigation setback may give the department some pause in insider trading proceedings based on data-driven statistical evidence. A federal judge in the US District Court for the Eastern District of Virginia recently granted the defendant’s request for a directed ruling at the end of the SEC president’s case, dismissed the insider trading case before the defense was asked to provide any evidence, and found that the circumstantial evidence did not support the SEC Finance and stock exchanges insider trading conclusion. Although the agency provided evidence about the timing of the defendant’s communications with his sister’s brother, a former company insider, and details of the allegedly suspicious nature of the defendant’s trading, the court agreed to the defendant’s oral arguments for a judgment of law. The court noted that it had not heard any direct or circumstantial evidence that the defendant had in fact obtained any personal information. It is not clear whether the Securities and Exchange Commission will appeal the court’s ruling.

Given the agency’s increasing reliance on data analytics to identify suspicious trade, this case may be a blow to situational situations where the agency cannot provide more tangible evidence of altering actual underlying physical people, a difficult task in the age of ephemeral and anonymous messaging applications. Although some asserted that the SEC’s loss had “disrupted its insider trading strategy,” this was likely an overreaction. This case serves as a healthy reminder to the department not to become myopic in the way it analyzes trading data, but there is no doubt that the department will continue to utilize data analytics as a key tool for identifying, investigating and litigating insider trading trials.

Looking ahead: What is expected in the 2022 fiscal year?

Although the recent directed ruling may prompt the agency to take a closer look at insider trading procedures for circumstantial evidence only, a full reading of the tea leaf suggests that there is a lot more enforcement activity to follow in fiscal 2022. In addition to the push-points Envelope theories detailed above, and statements by SEC President Gary Gensler and proposed rulemaking by the commission indicate that the agency is looking to advance all possible methods of implementation in space. For example, the Securities and Exchange Commission has already proposed amendments to narrow the availability of the positive defense of Rule 10b5-1, which allows informed companies to trade securities according to a predetermined trading plan. Gensler said the proposals would “add new provisions to the existing positive defense under Rule 10b5-1(c)(1), to help address concerns about potential abusive practices associated with the use of this defense.” As the Securities and Exchange Commission continues to follow actions in this area, Holland and Knight will provide updates on noteworthy developments.


1. Compare US Sec & Exch. Comm’n, Supplement to the Fiscal Year 2021 Enforcement Division press release, 1 o’clock (2021), with US Sec & Exch. Comm’n, Division of Enforcement 2020 Report Annual, at 29 (2020).

2. The Securities and Exchange Commission (SEC) sues insider trading for violations of Section 10(b) of the Exchange Act and Rule 10b-5.

3. Complaint in 2, SEC Trovias, 1:21-cv-05925 (SDNY July 9, 2021), ECF #1.

4. for exampleAnd
Identification card. at 13.

5. SEC v. Pirate Investor LLC, 580 F.3d 233, 238, 240 (4th District 2009).

6. To be charged with fraud under Section 10(b), the false statement or omission must be “related to the purchase or sale of securities.”
hacker investor, 580 F.3d at 239; See also id. at 247 (“[T]Allegedly, the fraud was not limited to the company’s disclosures to individual investors. . . . “);
Identification card. at 248-51 (arguing that statements made to investors whom the defendant knows will rely on investment advice satisfy the “in respect of securities” element of the Act, even if a “reasonable investor” does not rely on it).

7. The Securities and Exchange Commission stressed that “[b]Insiders in the electronic pharmaceutical industry often have access to physical, nonpublic information. It affects not only the stock price of their companies, but also other companies in the industry.” Identification card. (Quoting SEC Director of Enforcement Gurbir Grewal); See Howard A. Fischer, Aggressive SEC casts shadow over corporate insiders, Thomson Reuters (October 1, 2021) (highlighting ‘perfect storm’ of facts, including (1) Banat signed various confidentiality agreements, (2) Transactions were short term, out of the money options, and (3) the trades were made on his business computer within minutes of learning the acquisition).

8. 17 C.F. §240.10b5-1(a).

The content of this article is intended to provide a general guide to the topic. It is recommended to take the advice of specialists in such circumstances.


Leave a Comment