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Second Circuit Case Shows How Confidentiality Pact May Support Insider Trading Charges

A recent decision by the U.S. Court of Appeals for the Second Circuit shows how an investor’s entering into a confidentiality agreement with an issuer of securities may support insider trading charges against the investor.

The decision, United States v. Kosinski, No. 18-3065 (2d Cir., Sept. 22, 2020), did not create new law in the Second Circuit.  But the court did reaffirm its earlier holding that by agreeing to keep confidential  information provided by an issuer, a trader had taken on a fiduciary-like duty to the issuer sufficient to support insider trading charges under section 10(b) of the Securities Exchange Act of 1934.  And it rejected the argument that to create the requisite duty, the agreement needed to have a no-trading provision as well as a confidentiality provision.

What creates a sufficient duty has been a hotly disputed issue in insider trading law in recent years.  It elicited heightened attention during the SEC’s case against billionaire Dallas Mavericks owner Mark Cuban, where the SEC’s charges were based in part on an alleged promise by Cuban to maintain confidentiality as to information provided by issuer Mamma.com.

But Cuban’s case did not resolve that issue as a legal matter.  Rather, the U.S. Court of Appeals for the Fifth Circuit, without addressing all of the legal questions posed,  held that the SEC had alleged enough to support a finding that Cuban had agreed both to maintain confidentiality and not to trade, so that the case could go to a jury.  It did,

Supreme Court Affirms SEC Disgorgement Powers, But With Limits

Liu v. Securities and Exchange Commission,  the U.S. Supreme Court decision this week affirming the SEC’s right to seek disgorgement,  displayed a striking consensus on the securities regulatory agency’s ability to seek return to investors of wrongdoers’ ill-gotten gains.  The decision was not a complete victory for the SEC, however, since the Court also emphasized limitations on disgorgement that it suggested the SEC had exceeded with its past practices.

At issue was a remedy the SEC has long claimed the right to seek in civil enforcement actions: disgorgement of the defendant’s gains for return to injured investors.  The SEC in many fraud cases seeks both civil penalties, as authorized by statute, as well as disgorgement as an equitable remedy.  And courts generally permit that practice.

In light of certain recent Court rulings against the SEC on various issues and the Roberts court majority’s attitude toward administrative agencies generally, some securities practitioners anticipated a ruling in Liu that courts lacked the power to order disgorgement as a remedy in securities enforcement civil actions, upsetting years of prior judicial practice. However,  the Court’s June 22 decision in Liu affirmed the SEC’s right to seek disgorgement by an 8-1 vote, with only Justice Clarence Thomas dissenting.

The majority opinion by Justice Sonia Sotomayor did identify certain limits on disgorgement, which may constrain the SEC from seeking disgorgement as freely as it has in the past. The opinion also articulated those limits in a manner that leaves substantial room for argument over how they

U.S. SEC Enforcement Division Pursues Coronavirus-Related Fraud Claims

June 5, 2020

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Federal, state and local law enforcement and consumer protection agencies have been issuing alerts and investigating cases regarding efforts by fraudsters to exploit the coronavirus crisis for profit.  The SEC is taking similar action, focused on the use of public securities markets to carry out fraud.

Since the onset of coronavirus, or COVID-19, the SEC has suspended  trading in the stock of more than 30 companies in connection with coronavirus-related fraud, pursuant to its authority to suspend trading temporarily where it believes that information about a company is unreliable or inaccurate.

And the SEC’s Enforcement Division in recent weeks has brought enforcement  actions in several cases alleging fraudulent statements regarding coronavirus products designed to boost a company’s share price.  The actions were brought against smaller companies issuing releases with false claims about products and services likely to be in high demand because of the pandemic, such as virus tests, hand sanitizer and masks.  The statements are alleged to cause rapid increases in stock price and volume, and are alleged to violate section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5.

The SEC’s latest coronavirus-related complaint, filed this week in the Southern District of Florida, involved a different fact pattern. It charged an investment adviser, E*Hedge Securities, Inc., and its CEO with violations of the Investment Advisers Act of 1940 for failure to produce books and records in the course of an SEC investment-adviser examination, and for failure to properly register under the Act.  E*Hedge on March 22,

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