The
November 2009 edition of the International Association of Hedge
Funds Professionals (IAHFP) newsletter
Dear Members,
Insider trading cases among hedge funds make the news again.
Insider trading is not something new. In 1792, William Duer, the
then Assistant Secretary in the US Department of Treasury, used
his official position to gather insider knowledge to trade, and he
was prosecuted.
Inside
information
in the United States is
"material
nonpublic information".
Inside
information
in the European Union is information of a precise nature which has
not been made public, ralating, directly or indirectly, to one or
more issuers of financial instruments or to one or more financial
instruments and which, if it were made public, would be likely to
have a significant effect on the prices of those financial
instruments or on the price of related derivative financial
instruments
In August 2000, the Securities and Exchange Commission (SEC) adopted
rules regarding insider trading.
Under Rule 10b5-1,
the SEC defines insider trading as any securities transaction made
when the person behind the trade is aware of nonpublic material
information, and is hence violating his or her duty to maintain
confidentiality of such knowledge.
"Insider trading" is a term that most investors have heard and
usually associate with illegal conduct.
But the term actually includes both legal and illegal conduct.
The legal version is
when corporate insiders—officers, directors, and employees—buy and
sell stock in their own companies.
Illegal insider trading refers generally to buying or selling a
security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic
information about the security.
Insider trading violations may also include
"tipping"
such information, securities trading by the person "tipped," and
securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the
SEC are cases against:
Corporate officers, directors, and employees who traded the
corporation's securities after learning of significant,
confidential corporate developments;
Friends, business associates, family members, and other "tippees"
of such officers, directors, and employees, who traded the
securities after receiving such information;
Employees of law, banking, brokerage and printing firms who were
given such information to provide services to the corporation
whose securities they traded;
Government employees who learned of such information because of
their employment by the government; and
Other persons who misappropriated, and took advantage of,
confidential information from their employers.
Because insider trading
undermines investor confidence
in the fairness and integrity of the securities markets, the SEC has treated the
detection and prosecution of insider trading violations as one of
its enforcement priorities.
The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insider
trading issues where the courts have disagreed.
Rule 10b5-1
provides that a person trades on the basis of material nonpublic
information if a trader is "aware" of the material nonpublic
information when making the purchase or sale.
The rule also sets forth several affirmative defenses or
exceptions to liability.
The rule permits persons to trade in certain specified
circumstances where it is clear that the information they are
aware of is not a factor in the decision to trade, such as
pursuant to a pre-existing plan, contract, or instruction that was
made in good faith.
Rule 10b5-2
clarifies how the misappropriation theory applies to certain
non-business relationships. This rule provides that a person
receiving confidential information under circumstances specified
in the rule would owe a duty of trust or confidence and thus could
be liable under the misappropriation theory.
Insider Trading, SEC, 2006
According to the Securities and Exchange Comission,
"Insider trading" refers generally to buying or selling a
security, in breach of a fiduciary duty or other relationship of
trust and confidence, while in possession of material, nonpublic
information about the security.
Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped" and
securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the
Commission are cases against: corporate officers, directors, and
employees who traded the corporation's securities after learning
of significant, confidential corporate developments; friends,
business associates, family members, and other "tippees" of such
officers, directors, and employees, who traded the securities
after receiving such information; employees of law, banking,
brokerage and printing firms who were given such information in
order to provide services to the corporation whose securities they
traded; government employees who learned of such information
because of their employment by the government; and other persons
who misappropriated, and took advantage of, confidential
information from their employers.
Because insider trading undermines investor confidence in the
fairness and integrity of the securities markets, the Commission
has treated the detection and prosecution of insider trading
violations as one of its enforcement priorities.
How Much May be Paid as a
Bounty?
Insider trading may result in enforcement action by the Commission
or in criminal prosecution by the Department of Justice.
The Exchange Act permits the Commission to bring suit against
insider traders to seek injunctions, which are court orders that
prohibit violations of the law under threat of fines and
imprisonment.
The Commission may also seek other relief against insider traders,
including recovery of any illegal gains (or losses avoided) and
payment of a civil penalty.
The amount of a civil penalty can be
up to three times the profit gained (or loss avoided) as a result
of insider trading.
The Commission is permitted to make bounty awards from the civil
penalties that are actually recovered from violators.
With minor exceptions, any person who provides information leading
to the imposition of a civil penalty may be paid a bounty. However
the total amount of bounties that may be paid from a civil penalty
may not exceed ten percent of that penalty.
How Will the Commission Make
Bounty Determinations?
All Commission determinations regarding bounties including whether
to make a payment, to whom a payment shall be made, and the amount
of a payment (if any), are in the sole discretion of the
Commission.
Any such determination is final and not subject to judicial
review. Nothing in the Commission's rules or in this pamphlet is
intended to limit the Commission's discretion with respect to
bounties.
In making determinations regarding bounty applications the
Commission will be guided by the purposes of the bounty
provisions.
These purposes include the intent of the United States Congress to
encourage persons with information about possible insider trading
to come forward.
The Commission will also consider other factors that it deems
relevant. Examples of other factors that may be relevant are: the
importance of the information provided by an applicant; whether
the information was provided voluntarily; the existence of other
applications in the matter; and the amount of the penalty from
which bounties may be paid.
Normally, the Commission will not make any determination on a
bounty application until a payment of a penalty is both ordered by
a court and recovered. A person who files an application meeting
the requirements of the Commission's rules will be notified of the
Commission's determination on the application.
How and When Do You Apply for a Bounty?
An application must be clearly marked as an "Application for Award
of a Bounty," and must contain the information required by the
Commission's rules. The application must give a detailed statement
of the information that the applicant has about the suspected
insider trading.
Any person who desires to provide information to the Commission
that may result in the payment of a bounty may do so by any means
desired.
The Commission encourages persons having information regarding
insider trading to provide that information in writing, either at
the time they initially provide the information to the Commission
or as soon as possible afterwards.
Providing information in writing reduces the possibility of error,
helps assure that appropriate action will be taken, and minimizes
subsequent burdens and the possibility of factual disputes.
In any event, a written application for a bounty must be filed
within 180 days after the day on which the court orders payment of
the civil penalty.
Can You Apply for a Bounty
Anonymously?
The Commission recognizes that there may be instances when a
bounty applicant wishes to remain temporarily anonymous.
The bounty rules take these instances into account. While the
Commission will only award bounties to applicants who provide
their identity and mailing address, that information may be added
by a later amendment to the application.
The amendment must be filed within 180 days after the entry of the
court order requiring the payment of the penalty upon which the
bounty is based.
An
anonymous applicant
who fails to file such an amendment (and anyone who fails to make
a written application) runs the risk of losing eligibility for a
bounty through lapse of time and ignorance of the fact that a
penalty has been recovered.
Absent compelling cause, the Commission ordinarily does not
disclose the identity of a confidential source.
In some instances however disclosure of that identity will be
legally required, or will be essential for the protection of the
public interest.
For example, a court may order disclosure during litigation, or
the Commission may need to present the testimony of a bounty
claimant to ensure the success of an enforcement action.
Consequently while the Commission and its staff will give serious
consideration to requests to maintain the confidentiality of a
source's identity, no guarantees of confidentiality are possible.
Statutory and Regulatory Provisions
Section 21A(e) of the Exchange Act
There shall be paid from amounts imposed as a penalty under this
section and recovered by the Commission or the Attorney General,
such sums, not to exceed 10 percent of such amounts, as the
Commission deems appropriate to the person or persons who provide
information leading to the imposition of such penalty.
Any determinations under this subsection, including whether, to
whom, or in what amount to make payment, shall be in the sole
discretion of the Commission, except that no such payment shall be
made to any member, officer, or employee of any appropriate
regulatory agency, the Department of Justice, or a self-regulatory
organization.
Any such determination shall be final and not subject to judicial
review.
Subpart C of Part 201 of Title 17 of the Code of Federal
Regulations
Procedures Pertaining to the Payment of Bounties Pursuant to
Subsection 21A(e) of the Securities Exchange Act of 1934
Rule 61 Scope of subpart
Section 21A of the Securities Exchange Act of 1934 authorizes the
courts to impose civil penalties for certain violations of that
Act. Subsection 21A(e) permits the Commission to award bounties to
persons who provide information that leads to the imposition of
such penalties.
Any such determination, including whether, to whom, or in what
amount to make payments, is in the sole discretion of the
Commission.
This subpart sets forth procedures regarding applications for the
award of bounties pursuant to subsection 21A(e). Nothing in this
subpart shall be deemed to limit the discretion of the Commission
with respect to determinations under subsection 21A(e) or to
subject any such determination to judicial review.
Rule 62 Application required.
No person shall be eligible for the payment of a bounty under
subsection 21A(e) of the Securities Exchange Act of 1934 unless
such person has filed a written application that meets the
requirements of this subpart and, upon request, provides such
other information as the Commission or its staff deems relevant to
the application.
Rule 63 Time and place of filing.
Each application pursuant to this subpart and each amendment
thereto must be filed within one hundred eighty days after the
entry of the court order requiring the payment of the penalty that
is subject to the application. Such applications and amendments
shall be addressed to: Office of the Secretary, Securities and
Exchange Commission, 100 F Street, NE, Washington, DC 20549-9303.
Rule 64 Form of application and information required.
Each application pursuant to this subpart shall be identified as
an Application for Award of a Bounty and shall contain a detailed
statement of the information provided by the applicant that the
applicant believes led or may lead to the imposition of a penalty.
Except as provided by Rule 65 of this subpart, each application
shall state the identity and mailing address of, and be signed by,
the applicant.
When the application is not the means by which the applicant
initially provides such information, each application shall
contain: the dates and times upon which, and the means by which,
the information was provided; the identity of the Commission staff
members to whom the information was provided; and, if the
information was provided anonymously, sufficient further
information to confirm that the person filing the application is
the same person who provided the information to the Commission.
Rule 65 Identity and signature.
Applications pursuant to this subpart may omit the identity,
mailing address, and signature of the applicant; provided that
such identity, mailing address and signature are submitted by an
amendment to the application.
Any such amendment must be filed within one hundred eighty days
after the entry of the court order requiring the payment of the
penalty that is subject to the application.
Rule 66 Notice to applicants.
The Commission will notify each person who files an application
that meets the requirements of this subpart, at the address
specified in such application, of the Commission's determination
with respect to such person's application. Nothing in this subpart
shall be deemed to entitle any person to any other notice from the
Commission or its staff.
Rule 67 Applications by legal guardians.
An application pursuant to this subpart may be filed by an
executor, administrator, or other legal representative of a person
who provides information that may be subject to a bounty payment
or by the parent or guardian of such a person if that person is a
minor.
Certified copies of the letters testamentary, letters of
administration, or other similar evidence showing the authority of
the legal representative to file the application must be annexed
to the application.
Rule 68 No promises of payment.
No person is authorized under this subpart to make any offer or
promise, or otherwise to bind the Commission with respect to the
payment of any bounty or the amount thereof.
European Union
Market abuse
The European Parliament and the Council have adopted a directive
on insider dealing and market manipulation.
It is intended to guarantee the integrity of European financial
markets and increase investor confidence. The objective is to
create a level playing field for all economic operators in the
Member States as part of the effort to combat market abuse.
Directive 2003/6/EC of the European Parliament
and of the Council of 28 January 2003 on insider dealing and
market manipulation (market abuse) [See amending acts].
Background
The Lisbon European Council of 24 March 2000 undertook to
integrate European financial markets by 2005 at the latest.
The Stockholm European Council
of 23 and 24 March 2001 considered that an integrated securities
market should be achieved by the end of 2003 by giving priority to
the measures provided for in the Financial Services Action Plan
(FSAP).
In line with the
recommendations in the "Lamfalussy" report, account should be
taken of new market practices and techniques so as to ensure that
the transparency and legal certainty of the securities market are
respected.
Furthermore, the events of 11
September 2001 showed that market abuse may be part of a wider
terrorist strategy of destabilisation, which thus takes on a new
aspect.
That is why the independent
Committee of European Securities Regulators (CESR) adopted a work
programme which includes the preparation of measures to implement
the Directive.
Scope
There are two main categories of market abuse:
insider dealing and market manipulation,
which were previously dealt with by the Insider Dealing Directive
(89/592/EEC), which is no longer in force, and the Investment
Services Directive 93/22/EEC.
Both the Insider Dealing Directive and a separate Directive on
market manipulation served the same objective: to ensure the
integrity of European financial markets and to enhance investor
confidence in those markets.
It was therefore felt that Directive 89/592/EEC should be repealed
and replaced by a common legal framework covering both insider
dealing and market manipulation.
The new instrument is not confined to "regulated markets" but also
takes in other types of market (such as Alternative Trading
Systems (ATS)), as these can be used for insider dealing or market
manipulation in connection with financial instruments negotiated
on regulated markets.
Definition
The definition of what constitutes market abuse is a general one
and is flexible enough to last as long as possible.
Market abuse may arise in
circumstances where investors have been unreasonably
disadvantaged, directly or indirectly, by others who:
have used information which is not publicly available (insider
dealing);
have distorted the price-setting mechanism of financial
instruments;
have disseminated false or misleading information.
This type of conduct can undermine the general principle that all
investors must be placed on an equal footing.
Cooperation
The Directive requires each Member State to designate a single
regulatory and supervisory authority with a common minimum set of
responsibilities. These authorities use convergent methods to
combat market abuse and should be able to assist each other in
taking action against infringements, particularly in cross-border
cases. The administrative cooperation procedure followed could in
particular help to combat terrorist acts.
Dear
members,
Write in your CV, resume, websites etc. that you are members of the
International Association of Hedge Funds Professionals
(IAHFP)
Take advantage of the distance learning and online
certification program of our Association - at a cost that is unheard
of.
www.hedge-funds-association.com/Distance_Learning_and_Certification.htm
Best
Regards,
George Lekatis
President of the International
Association of Hedge Funds Professionals (IAHFP)
General
Manager, Compliance LLC
1200 G Street NW Suite 800, Washington
DC 20005, USA
Tel: (202) 449-9750
Email:
lekatis@hedge-funds-association.com
Web:
www.hedge-funds-association.com
HQ: 1220 N. Market Street Suite 804, Wilmington DE 19801, USA
Tel: (302) 342-8828
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