On September 28th, 2016, the Securities and Exchange Commission (“SEC”) charged a Peruvian brokerage firm manager and two lawyers with making trades that were informed by insider knowledge regarding the imminent merger of two mining companies (“The Complaint”). The SEC alleges that the Defendants Nino Coppero del Valle (“Valle”) and Julio Antonio Castro Roca (“Roca”) (collectively the “Defendants”) conspired to trade on information regarding the tender offer that Canadian-based Hudbay Minerals (“Hudbay”) made to acquire shares of Arizona-based Augusta Resource Corp. (“Augusta”). The Complaint charges the Defendants with violating the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 (“The Exchange Act”). In addition, Valle, Roca, and broker affiliate Ricardo Carrion (“Carrion”) are charged with violating clauses regarding a stay on trading ahead of the announcement of a tender offer contained in Exchange Act Section 14(e) and Rule 14e-3.
Valle was an attorney at Hudbay who was privy to the acquisition, and relayed this knowledge to his close friend and fellow attorney Roca, who then allegedly acted on this information by making trades through a brokerage account he set up in the British Virgin Islands. This account was allegedly registered offshore in order to avoid regulatory scrutiny about the timing of the trades and their connection to insiders. The Complaint alleges that these unlawful trades netted Valle and Roca over $112,000 in illegal profits.
While researching how to make trades untraceable, Valle allegedly sourced an acquaintance Carrion—an employee at a Peruvian brokerage House—and gave him insider information in exchange for advice on obscuring the trades that his friend Roca intended to make. Carrion’s brokerage house made a profit of $73,000 off of the insider information that Hudbay was intending to acquire a large percentage of Augusta and its operations. In a warning to others and a reference to the SEC’s cross border enforcement powers, Andrew M. Calamari, Director of the SEC’s New York Regional Office, told the press: “[T]ry as they might, overseas traders shouldn’t presume they can cover their tracks to avoid detection and scrutiny from U.S. law enforcement when they violate insider trading laws.”
Insider trading occurs in two forms–legal and illegal. Legal insider trading occurs when officers of a company buy or sell their own company’s stock, which falls within the bounds of the law so long as they file disclosures to the SEC on these transactions, thereby keeping the public informed of insider’s confidence in their own company. Insider trading is illegal when it involves a breach of fiduciary duty or other agreement regarding trust and confidence, or when it involves a misappropriation of information, as in the case of an insider “tipping” another individual with privy information. In this case, both the person conveying the information and the person trading on it are liable to be held in violation of insider trading laws. In the UK and EU, market abuse in the form of insider trading is defined to include almost any trading while in possession of non-public, market-moving information. However, in the US, the laws are narrower and insider trading rules regarding misappropriation of information require a higher burden of proof. The SEC must show that confidential information was misappropriated with intent to either benefit the insider, or the recipient of the tip. Casually or inadvertently informing an individual of inside information with no intention of their benefitting from it may skirt insider trading laws, although the employee in question may be liable for termination due to negligence.
However, some industry insiders believe the SEC’s definition of insider trading is too broad given the natural role that networking and fishing for information plays in the securities industry. According to Yale Law School professor Jonathon Macy, many insider trading cases represent “part of an ongoing doctrinal war pitting the rather extreme views of the Securities and Exchange Commission against the carefully considered law of insider trading articulated by the Supreme Court. The SEC does not draw a distinction between trading on the basis of legitimate albeit unorthodox research and illegal trading on the basis of improperly acquired proprietary information. But it should.” The SEC’s definition of insider trading is in contrast to the Supreme Court’s definition, which states “[T]he Supreme Court recognizes that if a person acquires information in the course of legitimate business activities, like research or mining sources appropriately, then he has a right to that information and should be able to trade without disclosing it. The government, on the other hand, espouses a socialist philosophy that valuable information belongs to the people—regardless of how it was obtained.” The tension between the SEC desire to aggressively pursue insider trading cases and the Supreme Courts more restrained tone will likely continue to lead to an inequitable variability in prosecution choices and case outcomes regarding insider trading.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals, and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.