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Insider Trading Enforcement: "The Hits Just Keep on Comin’"

By Dennis A. Stubblefield of Shustak Reynolds & Partners, P.C. posted on Tuesday, August 30, 2016.

Dennis A. Stubblefield

Dennis A. Stubblefield


“Summertime, and the livin’ is easy.” Remember that lazy refrain from Porgy and Bess, written by Ira Gershwin, and made even more famous by Billy Stewart in 1966?

Many of us are lucky enough to still enjoy some sweet summers, but not so lucky are those persons and companies caught up currently in the government’s securities enforcement dragnet. And the lawyers who represent them are likely not seeing a stress-free summer. So, for both those toiling in the trenches now as well as those with a bit of a break in the action in these last few days before the unofficial start of fall, here is an irreverent guide and portal to Insider Trading Cops and Robbers, powered in part by music, movies, advertising and sports, and conveyed here with great thanks to our generous and talented colleagues whose blogs have already teed things up pretty darn well. 

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“Listen…do you want to know a secret?

Do you promise not to tell?”

“Do You Want to Know a Secret?” (McCartney/Lennon), as recorded by The Beatles in 1963.

 “Something tells me I'm into something good”

“I’m Into Something Good,” (Goffin/King), as made famous by Herman’s Hermits in 1965.

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Secrets can be good, we suppose, even though we’re usually not sure what they really mean. But, we know that you can’t trade stocks, bonds, funds and the like on secret information if you get whispered this intel via a process which involves upstream whisperers doing naughty things and you knowing the naughtiness. 

Golf has been the game of this insider trading summer. The big news in the spring was “Mickelson’s Mulligan Moment”. And, two First Circuit cases came down which make us wonder: just how fine must the benefits be of cocktails, cuisine and chumminess: Does a tough steak at the 19th Hole Cut it under Newman?” and “Free dinner and wine, and being ‘one of the guys.’”

So, let’s review:

Dirks sez: tippers need to get some sort of benefit from their tipping, and tippees must “know,” or “should know” of the benefit.

Newman sez, 30-odd years later: “hold your horses, Nellie: the benefit has to have meat on the bone (arguably USDA Prime), and the “tippee” had better really know about it---none of this loosey-goosey negligence stuff which was thrown out when the Ninth Circuit’s White v. Abrams and its kissin’ cousins bit the dust as the Hochfelder sheriffs came into town.

SDNY Judge Jed Rakoff, authoring Salman sez: no, thank you very much: I obviously pay great deference to the boys and girls upstairs in Manhattan, but Dirks means what its words say it means: so what’s not to like about the warm and fuzzy feeling of contentment on the laying on of a “gift”?  “Does he or doesn’t he” recalls the classic Clairol ad from yesteryear, and we wonder here if this very prominent district court judge really does believe that we should go back to a full-on parity-of-information standard, as his, and our, Mother Circuit seemed to hold many years ago in Texas Gulf Sulphur. Perhaps only his law clerks know for sure. 

Jed Rakoff certainly strikes us as the philosophical polar opposite of Seventh Circuit leading lights such as Posner and Easterbrook. Judge Rakoff has surely had before him enough insider trading cases to know that Justice Blackmun may have been right in footnote 13 of his Dirks dissent, where he questioned the wisdom of judges getting right what philosophers never could: i.e., whether pure altruism can ever really exist. We certainly don’t presume to suggest the optimum legal standard which should be seen to define illegal tipping, but Dirks’ weird construct of a slip-sliding tort duty within a supposedly rock-solid scienter box seems to have only heralded in the worst of all worlds: less certainty and more cost (costs to clients; benefits to lawyers representing them).

The Supreme Court declined to take Newman; it took Salman, and will take another shot at decreeing clarity, likely next year, and hopefully at the very last minute in June so as to take advantage of the latest guidance to be had from realms ranging from law and economics to philosophy, from human psychology to popular culture. Already, amici are weighing in, including a brief filed by Mark Cuban, as authored by the Commission’s former GC, Ralph Ferrara.

There’s no shortage of commentary in this area. But, all you probably need to do (at least in these final lazydaze of summer), is check out the following sources to get what’s happening now (including Bharara’s recent win in U.S. v. Sean Stewart, the first insider trading conviction after trial in Manhattan since Newman), what came before, and what may be coming down the pike in 2017: Tom Gorman’s blog, Cady Bar the Door, Professor Bainbridge’s blog, Bloomberg’s recent coverage on Bharara’s Barrage, and our previous posts on Salman and Newman.

Then, take a deep breath and ask yourself, “Do you feel lucky…?”  Because, if you don’t, or, for that matter, even if you do, you probably won’t be very lucky in our brave new world of big data and analytics. So our advice to you is, as Meghan Trainor sings this year, just say “No.” (Trainor, Frederic and Hindlin)

But, wait, you say, why shouldn’t I have my shot at a killing: isn’t that what Cuban did, what Martha Stewart did?  Isn’t that what we’re supposed to do in the great U. S. of A.? Well, “kinda-sort of.” It’s still OK, for now, to get filthy rich, as long as you do it “legally,” and you’re not too much of a “filthy animal” (apologies to the creative team behind the original “Home Alone” which had crafty Kevin McCallister scare off the bad guys with firecrackers and a gangland TV clip!; and, of course, apologies to our wonderful four-legged friends).

If you’re still inclined to try and beat the odds, we would have you ask yourselves what The Young Rascals did in ’68: “How Can I Be Sure (in a world that’s constantly changing)?” (Cavaliere and Brigati)

If you ask us, we say this: play it, as Capital Cities did in 2013,Safe and Sound” (Merchant and Simonian), unless, perhaps, you can really say that you’re “one of the big boys downtown.” Before Preet Bharara piled on to the Countrywide “Hustler” whistleblower suit back in 2012, he reportedly told the attorney for Rebecca Steele (once in charge, under another name, at Countrywide, of a certain mortgage program): “Don’t worry, Marc…it’s just a civil case.”

That “civil case” resulted in a jury verdict back in November 2013 with a finding of fraud, and the court ordering Ms. Steele to personally pay $1million. The Second Circuit Court of Appeals just reversed that lower court ruling; but Ms. Steele cannot get her own Mulligan, after the fact, undoing the resulting 2 ½ years of hell.

The Commission’s cases are civil too, but a lot of ostensibly good actors who have gotten caught in the gears of the government’s securities enforcement apparatus would think that it’s hardly civil to force them to defend themselves (yes, we use that term to refer to those witnesses merely having to go through the process of  complying with SEC subpoenas when the government comes knocking) seemingly ad infinitum as the ends of investor protection and fair and orderly markets sometimes get lost amidst the means of broken windows enforcement. Economists call dealing with all this stuff “transactions costs.” 

So, good luck to all men, women and companies of good will in keeping those costs down.

And enjoy the last few days of summer. Hopefully you won’t have to labor too hard over this holiday, or worry too much about the final push expected this fall in pending insider trading, and other, investigations, as the Commission’s Staff clears its caseload, and prepares for a changing of the guard in November.

Dennis A. Stubblefield is a partner with Shustak Reynolds & Partners, P.C. He formerly served with the SEC’s Enforcement Division. His practice focuses on securities enforcement defense, corporate internal investigations, and securities-related expert witness testimony and consultation.

Shustak Reynolds & Partners, P.C. has extensive experience in securities and financial services law. The firm regularly represents broker-dealers and their reps and rep groups, investment advisers, high-net-worth investors and others in connection with litigation, arbitration and government and SRO investigations. For more information, contact Dennis A. Stubblefield, Partner, at 760-533-0233, via e mail at [email protected], or visit our website at

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