2012 Insider Trading Review

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2012INSIDERTRaDINg

A n n u A l r e v i e w


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InsIde1 Overview OF inSiDer TrADinG lAw

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17 cOncluSiOn

18 Ad A - 2012: pats iosd isd Tadg postos

26 Ad B - 2012: pats iosd isd Tadg Sec efot Atos


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2012 gave us another year o aggressive enorcement o insider trading

laws. The Department o Justice (DOJ) extended its perect record at trial,

including a verdict against the ormer chie executive o McKinsey & Co. and

Goldman Sachs board member Rajat Guptathe most high-prole deendant

to date. Through 2012, the government continued its pursuit o hedge unds

and their sources o inside inormation, including expert networks.

As theRajaratnam and Gupta cases geared up or appeals, the slew o

cooperators ensnarled in the investigations began to be sentenced and

to have penalties assessed against them by the Securities and Exchange

Commission (SEC). The sentences handed down were oten ar below theSentencing Guidelines range and below what the government had requested.

2012s sentences solidied the growing notion that cooperation with DOJ

may be a deendants best chance o attaining a get out o jail card.

The increase in insider trading enorcement was not limited to US

regulators. In 2012, agencies worldwide showed increased policing and

prosecuting o insider trading.

And just as the year was winding down, regulators ound their likely next

target or insider trading enorcement: executives trades under 10b5-1

trading plans.

LookIngBack


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OVERVIEW OF INSIDERTRADING LAW

Insider trading is an ambiguousand overinclusive term. Trading

by insiders includes bothlegal and illegal conduct. Thelegal version occurs whencertain corporate insidersincluding ocers, directorsand employeesbuy and sellthe stock o their own companyand disclose such transactionsto the SEC. Legal trading alsoincludes, or example, someonetrading on inormation he or sheoverheard between strangerssitting on a train or when theinormation was obtainedthrough a non-condential

business relationship. The illegalversionalthough not denedin the ederal securities lawsoccurs when a person buys orsells a security while knowingly inpossession o material nonpublicinormation that was obtainedin breach o a duciary duty or

relationship o trust.

Despite renewed attention inrecent years, insider tradingis an old crime. Two primarytheories o insider tradinghave emerged over time. First,under the classical theory,the Securities Exchange Act o1934s (Exchange Act) anti-raud provisions apply to preventcorporate insiders rom trading

on nonpublic inormation takenrom the company in violation othe insiders duciary duty to thecompany and its shareholders.1Second, the misappropriationtheory applies to prevent trading

by a person who misappropriatesinormation rom a party to

whom he or she owes a duciarydutysuch as the duty owed by a

lawyer to a client.2

Under either theory, the lawimposes liability or insidertrading on any person whoimproperly obtains material

nonpublic inormation and thentrades while in possession osuch inormation. Also, undereither theoryuntil 2012thelaw held liable any tippeethat is, someone with whomthat person, the tipper, sharesthe inormationas long asthe tippee also knew that theinormation was obtained in

breach o a duty.

In 2012, a decision by theCourt o Appeals or the SecondCircuit inSEC v. Obus arguablyexpanded tippee/tipper liabilityto encompass cases whereneither the tipper nor thetippee has actual knowledgethat the inside inormation wasdisclosed in breach o a dutyo condentiality.3 Rather,a tippers liability could owrom recklessly disregardingthe nature o the condentialor nonpublic inormation, anda tippees liability could arise incases where the sophisticatedinvestor tippee should haveknown that the inormation mayhave been disclosed in violationo a duty o condentiality.4 It isunclear what impact Obus mayhave on uture insider tradingcases. At least one district court

judge interpreting Obus alreadycurtailed the holding by ndingthat: (1) a tippers knowledgethat the disclosure o insideinormation was unauthorized

was sucient or liability in amisappropriation case; but (2)a tippee must have knowledgethat sel-dealing occurred to beliable under the classical case.5

While the interpretation o thescope and applicability o Section10(b) and Rule 10b-5 to insidertrading is evolving, the anti-raudprovisions provide powerul and

exible tools to address eforts tocapitalize on material nonpublicinormation.

Section 14(e) o the ExchangeAct and Rule 14e-3 also prohibitinsider trading in the limitedcontext o tender ofers. Rule14e-3 denes raudulent,deceptive, or manipulative asthe purchase or sale o a security

byany person with materialinormation about a tenderofer that he or she knows orhas reason to know is nonpublicand has been acquired directlyor indirectly rom the tenderoferor, the target, or any personacting on their behal, unlessthe inormation and its sourceare publicly disclosed beore thetrade.6 Under Rule 14e-3, liabilityattaches regardless o a pre-existing relationship o trust and

condence. Rule 14e-3 createsa parity o inormation rule inthe context o a tender ofer. Anypersonnot just insiderswithmaterial inormation about atender ofer must either rerainrom trading or publicly disclosethe inormation.

While most insider tradingcases involve the purchase orsale o equity instruments (such

as common stock or call or putoptions) or debt instruments(such as bonds), civil or criminalsanctions apply to insidertrading in connection with anysecurities. What constitutesa security is not always clear,especially in the context o novelnancial products. At least withrespect to security-based swap


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Insider Trading | Annual Review 2012

agreements, Congress has madeclear that they are covered underanti-raud statutes applying tosecurities.7

The consequences o being

ound liable or insider tradingcan be severe. Individualsconvicted o criminal insidertrading can ace up to 20 yearsimprisonment per violation,criminal oreiture, and ineso up to $5,000,000 or twicethe gain rom the oense. Asuccessul civil action by theSEC may lead to disgorgemento proits and a penalty not

to exceed the greater o$1,000,000, or three times theamount o the proit gainedor loss avoided. In addition,individuals can be barred romserving as an oicer or directoro a public company, acting asa broker or investment adviser,or in the case o licensedproessionals, such as attorneysand accountants, rom servingin their proessional capacity

beore the SEC.

Section 20A o the ExchangeAct gives contemporaneoustraders a private right o actionagainst anyone trading while inpossession o material nonpublicinormation.8 Although Section20A gives an express cause oaction or insider trading, thelimited application and recoveryaforded under the statute

make Section 20A an unpopularchoice or private litigants.Rather, most private securitiesclaims or insider trading are

brought under the implied rightso action ound in Sections 10(b)and 14(e) and Rules 10b-5 and14e-3, respectively.

2012 ENFORcEmENTAcTIVITY

In 2012, the SEC led 55 insider

trading actions, and DOJ broughtcriminal charges involving insidertrading against 31 individuals.Remarkably, although thegovernment continued to expendgreat resources on trials andappeals, enorcement activityin 2012 not only kept pace butsurpassed 2011s numbers.The combined total o civil andcriminal cases brought in 2012increased approximately 11%

rom 2011.

While the SEC and DOJ havebeen criticized, airly or not,or not bringing more casesarising rom the nancialcrisisespecially againstindividualsboth agencieshave received abundant praiseor their crackdown on insidertrading. Insider trading cases,

when compared to the sprawling

nancial crisis investigations,tend to be easier to investigateand easier to explain to a jury.

While there has been publicoutcry to nd the villains o thenancial crisis and hold themaccountable, the governmenthas had a dicult time pinningthe blame on one particularperson or institution given theunprecedented circumstancesthat so many (including thegovernment itsel) ailed topredict. On the other hand,in insider trading cases, thegovernment has had unparalleledsuccess in holding individualsaccountable.

As has been the case or the lastseveral years, insider tradingcases in 2012 were notable or

their size, both in terms o thesprawling webs involved and theoutsized prots alleged. Just as itappeared the cases spawning romOperation Perect Hedge9a

nationwide insider tradinginvestigation o a size not seensince the days o Ivan Boesky andDennis Levinewere coming toan end, at the end o 2012, thegovernment announced the lingo what it termed the largestinsider trading case ever, allegingtrading prots and losses avoidedtotaling more than $270 million.

GALLEON UpDATE

We pick up the Galleon storywhere we let of last year. RajRajaratnam continued to presshis appeal beore the SecondCircuit and now awaits a ruling,

while national attention turnedto the trial o Rajat Gupta,the ormer chie executive oMcKinsey & Co. and ormer

board member o Goldman Sachsand Procter & Gamble, who wasindicted in late 2011.

RAjARATNAm AppEAL pRESSES ON

Following Raj Rajaratnamsconvictionand 11-yearsentenceon ourteen counts osecurities raud and conspiracylast year, the ormer hedgeund mogul began 2012 bycontinuing his ght against thegovernments use o wiretapevidence. Rajaratnam mustght his conviction rom jail as,in December 2011, the Court o

Appeals or the Second Circuitdenied his request to remain reeon bail while the court considersarguments on whether tooverturn his conviction.


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As we reported in both o ourlast two Reviews, Rajaratnamhad moved to suppress wiretapevidence in the criminal caseagainst him based on hiscontentions that the government(i) was not entitled to use

wiretaps to investigate insidertrading because it is not acrime specied in Title III; (ii)ailed to establish probablecause or necessity in its wiretapapplications; and (iii) ailedto minimize monitoring o theconversations recorded.10 JudgeHolwell summarily rejectedRajaratnams suppression

motion, nding that althoughthe adavits in support othe governments applicationscontained some misstatements,namely the governments ailureto disclose an ongoing SECinvestigation, the district courtstill had sucient acts to ndprobable cause.11 Ultimately,more than 45 wiretappedconversations were played atRajaratnams trial.

The wiretap evidence critical toRajaratnams prosecution is nowcentral to his appeal. In briesled with the Court o Appeals orthe Second Circuit early in 2012,Rajaratnam again attacked the

validity o the 2008 wiretap orderon various grounds, includingDOJs ailure to disclose theongoing SEC investigation intoGalleon Group.12 Rajaratnam

argued that misleadingstatements in the governments

wiretap application made itimpossible or the court to ndeither probable cause or necessityo the wiretap beore authorizingprosecutors to intercept andrecord phone conversations oRajaratnam and others. He wenton to urge that Judge Holwells

ater-the-act determination thatprobable cause or the wiretapexisted could not save the aultyapplication relied on in the rstinstance.13

The Second Circuit heard oralargument on Rajaratnams appealon October 25, 2012. Duringthe argument, Rajaratnamslawyer contended that the lacko disclosure o the parallel civilinvestigation was a recklessdisregard or the truth and theadavit supporting the wiretapapplication had cascadingerrors, paragraph ater paragraphater paragraph.14 For themost part, the three appellate

judges provided little insightduring the argument into theirthinking on the case. While theydid not ask the prosecutor anyquestions revealing skepticismo the governments application,they also permitted Rajaratnamslawyer to argue or double herallotted time.

I the appeal is successul, it willhave ar-reaching implicationsor the sprawling web o Galleon-related insider trading trials othe past two years, all o whichderived rom wiretap evidence.I Rajaratnams conviction is

vacated because o a taintedwiretap, the government maybe orced to retry not only theRajaratnam case, but alsopossibly the related cases against

Zvi Gofer and Rajat Gupta, allwithout its powerul wiretapevidence.15

ThE GUpTA SAGA

With Rajaratnams criminalconviction winding its waythrough the appellate process,attention turned to Rajat Gupta.Late in 2011, DOJ indicted

Gupta on charges o conspiracyand securities raud, therebyensnaring the most well-knowncorporate executive to dateinto Operation Perect Hedgeand conrming that he was theman widely speculated to be thegovernments big sh.16

The Gupta trial was particularlynoteworthy because thegovernments case againstGupta lacked two key elementso its case against Rajaratnam:(i) there were no wiretappedconversations directly involvingor explicitly mentioning Gupta;and (ii) the government could notpoint to any tangible benet toGupta rom his participation inthe alleged conspiracy.

Early in 2012, Gupta ollowedRajaratnams lead in seekingto exclude our wiretappedconversations the governmentsought to use against him at trial.He pressed the same argumentsor suppression beore JudgeRakof that Rajaratnam hadmade beore Judge Holwell, andmet with the same result: JudgeRakof allowed the governments

wiretap evidence.17

Absent any recordings o Guptahimsel, at trial the governmentofered conversations betweenRajaratnam and others to supportits theory that Gupta breachedhis duciary duties and passedmaterial inside inormationregarding Goldman Sachs to hisriend, Rajaratnam.18 To takeone example, the governmentplayed a recording o an October2008 conversation betweenRajaratnam and a Galleon traderin which Rajaratnam said, Iheard yesterday rom somebody

whos on the board o Goldman


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Sachs that they are going to lose$2 per share.19

Guptas lawyers also soughtto sow doubt based on thelack o any direct recordings

or explicit mention o Gupta,suggesting there may have beenanother Goldman Sachs insiderconnected to Rajaratnam whocould have been the source o theGoldman inormation.20 Guptaslawyers sought to introducepurported recordings o the otherGoldman executive passing tipsto Rajaratnam, but the tape-recorded conversations wereexcluded by Judge Rakof asinadmissible hearsay.21 Unableto ofer evidence to support itstheory o an alternative tipper,the deense could not capitalizeon the lack o Guptas own voiceon tape-recorded conversations.Guptas deense also highlightedthe governments inability toshow that Gupta received anytangible benet rom passing tipson to Rajaratnam.

The deense ocused heavily onthe act that the governmentscase was vastly circumstantial.For example, the governmentdid not introduce any directevidence that Gupta tippedRajaratnam about WarrenBufetts $5 billion investmentin Goldman Sachs. Ratherthan presenting recordings, thegovernment presented the record

that Gupta had participated in aGoldman Sachs Board meetingon September 23, 2008, whereBufetts upcoming investment

was discussed. That sameaternoon, Gupta made a callto Rajaratnam that ended atapproximately 3:55 pm. Thereis no record o what was said

between Gupta and Rajaratnam

on that call. Beore the marketclosed that dayand beoreGoldman Sachs made theannouncement o the BufettinvestmentRajaratnampurchased approximately $40million worth o Goldman Sachsstock. At trial, Rajaratnamsassistant testied that onSeptember 23, 2008 Rajaratnamdid not receive any calls on hispersonal line between 3:00 pmand 4:00 pm other than Guptascall. At summation, Guptaslawyer emphasized the lack oconcrete evidence: With all thepower and majesty o the United

States government, they ound noreal, hard, direct evidence. . . . Asthey say in that old commercial,

wheres the bee in this case?22

The deense, however, was notable to overcome the strongcircumstantial evidence presentedto the jury and, on June 15, 2012,Gupta was convicted o onecount o conspiracy to commitsecurities raud and three

counts o securities raud.23The governments successulprosecution o Gupta despite thelack o direct evidence may serveto embolden uture prosecutions.However, the deense eforts werenot entirely in vain and likelycontributed to Guptas relativelylight sentence and reasonableprospects on appeal.

Following Guptas conviction,

the government requested aGuidelines sentence o 78 to 97months imprisonment. At theother end o the spectrum, Guptaasked that he be sentenced tono prison time and instead berequired to perorm communityservice in Rwanda.24 Insentencing Gupta, Judge Rakofsharply criticized the result

dictated by the Guidelines, notingthe bizarre result o assigningonly two points to Gupta basedon his abuse o a position o trust,

which was, as the court put it,the very heart o his ofense. Bycontrast, Judge Rakof noted thatthe Guidelines assigned Gupta noless than 18 points based on theunpredictable monetary gainsmade by others, rom which Mr.Gupta did not in any direct sensereceive one penny, suggestingthat Guptas arguments about hislack o benet did not all on deaears.25

Judge Rakof was also swayedby Guptas argument that hehad selessly devoted a hugeamount o time and efort toa very wide variety o socially

benecial activities and that hedid so without anare or sel-promotion.26 The Guidelinessentence, Judge Rakof ruled,did not adequately square

with the acts o Guptas case.Taking into consideration Guptas

personal circumstances andother sentencing actors under18 U.S.C. 3553, Judge Rakofultimately sentenced Gupta to 24months imprisonment, a shortsentence compared to othersrom the Galleon web who havegone to trial.

Following his conviction andsentence, Gupta sought bailpending appeal, which the district

court denied. In a surprising turno events, the Court o Appealsor the Second Circuit reversedthe district courts denial o bail,allowing Gupta to remain ree

while he appeals his conviction.27The Court o Appeals ordersignals that Gupta has raisednon-rivolous issues on appealthat could warrant vacating his


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conviction. In addition to Guptaschallenge to the governmentsuse o the Rajaratnam wiretapsagainst him, he also intendsto argue that Judge Rakofimproperly excluded wiretapevidence purportedly pointingto an alternate Goldman tipper,as well as evidence that Guptaand Rajaratnam had a alling outshortly beore Gupta allegedlytipped Rajaratnam.28

The SECs parallel case againstGupta is still pending. The SEC islooking to impose a $15 millionpenalty on Gupta. Meanwhile,to end 2012, Rajaratnam enteredinto a consent agreement withthe SEC to resolve the SECs caseagainst him or the Gupta-relatedtrades. Rajaratnam agreed to pay$1.45 million.29

Guptas appeal o his criminalconviction will be expeditedand, together with Rajaratnamspending appeal, places the insidertrading spotlight rmly on theSecond Circuit as we enter 2013.

cOOpERATORS SENTENcED

Throughout 2012, a large cohorto the cooperating witnesses in

bringing down Rajaratnam andGupta was sentenced. O theeight Galleon-related cooperatorssentenced this year, all avoidedprison sentences. MichaelCardillo, a ormer Galleon trader

who pleaded guilty to one count

o conspiracy and one counto securities raud, aced up to20 years imprisonment.30 ButCardillo provided cooperationthat the government calledextraordinary in terms o itsextensive impact, in terms o its

breadth and scope, in terms oits timing, in terms o its directresult in convictions o multiple

individuals, and in terms o histestimony during two o themost high-prole trials in insidertrading cases in history, namelythe Gupta and Gofertrials.31For this cooperation, Cardilloreceived three years probation,

but not a day in jail.32

Likewise, Adam Smith, DavidSlaine, Rajiv Goel, AnthonyScolaro, Anil Kumar, and FranzTudorwho were sentenced

by ve diferent district courtjudgesall received sentenceso probation or their eforts toassist the government.33 OnlyGautham Shankar received more,

when Judge Sullivan sentencedhim to six months homeconnement.34 As the Galleontale winds down, one thing isclear: cooperators were rewardedhandsomely.

ExpERT NETWORkcASES

As we noted in last yearsReview, by the end o 2011, thegovernment had charged 18individuals in the expert networkcasestwo o whom wereconvicted ater jury trials, whilethe remaining 16 entered guiltypleas. 2012 showed no sign oabatement in the governmentsaggressive pursuit against theillegal use o expert networks.

The year started of with predawnarrests on January 17 o ourindividuals rom hedge undsassociated with the expertnetwork cases: DiamondbackCapital Management LP, WhittierTrust Co., and Sigma CapitalManagement, a division o SACCapital Advisors LP. The sameday the government also unsealed

charges against three otherindividuals. Five o the sevenindividuals have since enteredguilty pleas and the two thatought and went to trial, AnthonyChiasson and Todd Newman,

were convicted exactly 11 monthsater the date o their arrests.

Also in December, DiamondbackCapital Management announcedit would close ater investorssought redemptions o $250million in capital.

In 2012, the expert networkcases were not contained to thecircle o riends o the sevendeendants mentioned above.Throughout the year, additionaland unrelated individualsentered guilty pleas to insidertrading charges involvingexpert networks. For example,last summer, Tai Nguyen, thepresident and sole employee oInsight Research LLC, entereda guilty plea admitting that heprovided condential earningsinormation regarding biotech

company Abraxis Inc. to twohedge und managersboth owhom had already entered pleaso guilty to insider trading in2011. Likewise, John Kinnucan,ounder o Broadband ResearchLLC and an outspoken thorn inthe side o the FBI and DOJ,35pled guilty to conspiracy andsecurities raud charges based onhis having passed on to clientsmaterial nonpublic inormation

he had obtained rom employeeso publicly traded companies.

And then, just as it appeared theexisting expert network cases

were winding down, in Novemberthe U.S. Attorneys Oce orthe Southern District o New

York and the SEC announcedthe ling o what they termed


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the largest insider trading caseever against Mathew Martoma, aportolio manager at CR IntrinsicInvestors, LLC, an aliate o SACCapital. The government alleges

that Martoma met Dr. SidneyGilman through Gerson Lehrman,one o the rst and most well-established expert network rms.

According to the allegations,Dr. Gilman provided Martoma

with inside inormation aboutdisappointing clinical trial resultsor an Alzheimers drug being

jointly tested by pharmaceuticalcompanies Elan Corporation and

Wyeth. The government alleges

that Martoma liquidated hisunds long positions in Elan and

Wyeth beore the clinical trialresults became public and whichcaused both stocks to tumble. Asa result, the government contendsthat the trading prots andlosses avoided totaled over $276million. Martoma has assertedhis innocence and has vowed toght the governments charges.Dr. Gilman entered into a non-

prosecution agreement with DOJand is alleged to be cooperating

with the regulators. Thegovernments desire to developa case against Martomas ormer

boss Steve Cohen, the head oSAC Capital, perhaps explains theunusual step o granting a totalpass to Dr. Gilman, the tipper othe alleged nonpublic inormationand thereore the but-or causeo any alleged subsequentmisconduct.

AppEALS AND TRIALS

On AppeAl FrOm 2011 TriAls

The two deendants in the expertnetwork cases who went to trialand were convicted in 2011 ledappeals in 2012.

As we reported last year, WiniredJiau, a ormer Primary GlobalResearch LLC consultant, was therst deendant to be convicted oinsider trading in connection with

the expert network investigations.Jiau was convicted quicklyby a jury ater hearing ampleevidence, including the testimonyrom Noah Freeman, a ormerportolio manager at SAC Capital

Advisors, who himsel entered aplea o guilty to insider trading.Freeman testied that Jiau tippedhim about results and trends atchipmakers Marvell Technologyand Nvidia Corp. During the

trial, Freeman testied thatJiau provided us with almostthe complete nancial results

beore they were announced.36In return, Freeman and otherhedge und managers paid Jiaumore than $200,000 and gaveher restaurant git certicates,iPhones, and a dozen lobsters.

Judge Rakof sentenced Jiauto our years in prison and

ordered her to begin her sentenceimmediately. Jiau made a numberopro se motions beore JudgeRakof, including asking thatshe be reed while her appeal ispending. Judge Rakof rejectedJiaus request and said he wouldno longer accept legal requests byJiau without a lawyers assistance.Judge Rakof denied her requestor bail pending appeal, notingthat [n]one o Jiaus other

contentions are suciently likelyto result in reversal, a new trialor a reduced sentence.37 SinceJudge Rakofs denial, Jiau ledaprose brie in support o herappeal alleging that her counseldid not adequately represent herat trial and that her sentence isdisproportionate to those given toothers convicted o insider trading.

In the second trial in 2011,James Fleishman, a ormer salesexecutive at Primary Global,

was also convicted o insidertrading within hours o the case

being turned over to the jury.The case against Fleishman wasunique in that Fleishman wasa salesman recruiting clientsor Primary Global, but he wasnot directly involved in working

with the experts. Thereore, itseemed it would be harder orthe government to establishthat Fleishman was privy tomisappropriated inormation.

At trial, the government relied

heavily on cooperating witnesses,such as Mark Anthony Longoria,a consultant or Primary Global

who testied that he providedmaterial nonpublic inormationto Fleishmans customers.The government alleged thatFleishman deliberately connectedthe insider with his customersknowing that the insider

would provide the improperinormation. Fleishman was

sentenced to 2.5 years in prison.

In his appeal, Fleishman argued,among other issues, that the

jury was not properly instructedthat the guilty pleas by severaltestiying cooperating witnesses(who were allegedly part o thescheme in which Fleishmanparticipated) should not have

been considered substantiveevidence o Fleishmans own

guilt. Fleishman urthercontended that Judge Rakofshould have permitted him tointroduce evidence that he had

been approached by the FBI andofered a cooperation deal, but heturned it down because he elt he

was innocent. The governmentcountered that Fleishmanslawyers ailed to object timely to


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Judge Rakofs jury instructionsas they were given. In January2013, the Court o Appeals or theSecond Circuit heard Fleishmansarguments and armed thedistrict courts nal judgment oconviction.

perFecT TriAl recOrd cOnTinues

Given the tremendous successthe U.S. Attorneys Oce or theSouthern District o New Yorkhas recently had in prosecutinginsider trading cases, eachsuccessive guilty verdict no longerseems newsworthy. However,the convictions o Chiasson and

Newman are noteworthy in thatthe government relied mostlyon old ashioned evidenceat the trial. Unlike the otherrecent insider trading cases,the government did not haverecordings o the deendants.

Without wiretap evidence, thegovernment relied heavily oncooperating witnesses.

Also notable is that, while the

government called the twodeendants members o a close-knit criminal club,38 at trialthere was no evidence o directdealings between the two othem. Rather, the government

was able to obtain a convictionagainst the two deendants oncharges o conspiracy based onthe wider interconnected webo tippers and recipients whopassed along material nonpublicinormation. As a result ohaving been ound to be part oa larger conspiracy, Chiassonsgains and losses avoided may beattributable to Newman and vice-

versa, even i one is unaware othe others trading activity. Assuch, Newman may be liable orChiassons gainswhich were

much larger than his own.

Newman and Chiasson are tobe sentenced by Judge Sullivansometime this year. It is widelyexpected that both deendants

will appeal their convictions. Asthey did in ront o Judge Sullivanin their unsuccessul motionsor separate trials, we expectone o the issues on appeal to be

based on the argument that theevidence did not show that they

were part o a single purportedconspiracy.

WhAT TO expecT nexT

As we noted in last yearsReview, in connection with the

Fleishman case, the governmentrepresented that it was stillsiting through evidenceincluding wiretap inormationon at least 50 hedge unds. In2012, the government deliveredon its promise by bringingnew cases, but the level oenorcement activity did notinvolve 50 hedge unds. The

question remains, what else isout there?

The inclusion o PortolioManager Awidely understoodto be Steve Cohenin the

Martoma criminal complaintmay have been a signal romthe government about the ocuso its eorts. To date, neither.Cohen nor SAC Capital has beencharged with any wrongdoing

related to insider trading. SACCapital has publicly disclosedthat it received a Wells Noticerom the SEC in Novemberrelated to insider trading. Itremains to be seen whetheranything will come o thegovernments pursuit o Cohen.

WhAT DOEScOOpERATION BUYYOU?

Cooperation. The word is lledwith meaning or enorcementproessionals. SEC and DOJproess to weigh it heavily whenmaking charging and sanctioningdecisions. Courts claim to

balance it careully when makingsentencing decisions. But doescooperating really yield tangible

benets or insider tradingdeendants? Or does it makesense to roll the dice and go to

trial? Unsurprisingly, the answeris highly act-specic. But, ouranalysis o insider trading casesin 2012 and earlier years providesinteresting inormation that mayinorm the calculus.

WhAT DOES IT mEAN TO cOOpERATE?

This is an important gatekeeperquestion. Despite detailedrameworks or evaluating

cooperation, the SEC and DOJhave provided precious ewspecics or insider tradingdeendants. The SEC engagesin a our-part analysis to gaugean individuals cooperation, butat the time o an investigationa potential deendant cancontrol only a single prong: theassistance provided.39 Here, theSEC actors in both the value andthe nature o the cooperation,

considering issues like thetimeliness and voluntariness othe cooperation and the benetsto the SEC o the cooperation.DOJ likewise may weigh anindividuals cooperation whenmaking charging and sentencingrecommendations.40 TheGuidelines, akin to the SECspolicies, also ocus on the timeliness


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and comprehensiveness o thedeendants assistance.41

Timely cooperation is dicultto provide in an insider tradingmatter. Investigations requently

begin mere days (i not hours)ater the suspicious trading, oten

without potential deendantsbeing any the wiser. Absentadvance sel-reporting o insidertrading, timeliness thus may best

be gauged rom the moment orst contact by the authorities.One case led in September 2012demonstrates this redenedtimeliness. In that matter, the

SEC credited Kenneth F. Wrangellwith promptly ofer[ing]signicant cooperation.42 Whencontacted about his trading inOctober and November 2010 (theSEC does not identiy when thecontact occurred), Mr. Wrangellprovided truthul detailsacknowledging his own tradingand entered into a cooperationagreement that resulted in directevidence being quickly developed

against two other deendants.The other deendants consistedo a company insider who toldhis riend and business associateabout an impending merger othe company, who then told hisgolng partner Mr. Wrangell. Butthis sort o complete capitulationat the outset o the investigationseems to be an anomaly.

Most deendants, thereore, likely

may nd that their cooperation ismost signicantly gauged by thevalue and comprehensiveness othe assistance that they provide.No cooperator to date appearsto rival David Slaine in thisarea. Slaine, who rst begancooperating with the FBI in mid-2007, wired up and recordedseveral o his own conversations

with Craig Drimal, whichthemselves uncovered the ZviGofer insider trading network.Slaines taped conversations withDrimal and involving Gofer were

the basis or the Rajaratnamwiretap warrant application.Slaine thereore was credited withsecuring wiretapped conversationso Rajaratnam. Slaine alsoreceived credit or bringing inadditional cooperators, includingGautham Shankar and ThomasHardin.43 In support o Slainesbid or a lenient sentence in early2012, Assistant U.S. Attorneys

Andrew Fish and Reed Brodsky

called this cooperation nothingshort o extraordinary.44

Entities can cooperate aswell. Diamondback CapitalManagement, or example,settled with both the SEC andDOJ one week ater charges wereannounced.45 Diamondbacksecured a non-prosecutionagreement with DOJ based on,among other things, its prompt

and voluntary cooperationupon becoming aware o thegovernments investigation,its voluntary implementationo remedial measures, andprovision o a detailed Statemento Facts to the U.S. AttorneysOce setting orth the wrongulconduct o two o its employees.

As part o its settlements,Diamondback also agreed todisgorge $6 million, and paid a

penalty o one-hal that amount.The SEC praised the rmssubstantial assistance, includingconducting extensive interviewso staf, reviewing voluminouscommunications, analyzingcomplex trading patterns todetermine suspicious tradingactivity, and presenting the resultso its internal investigation to

ederal investigators. Notably,however, Diamondbacks pact

with the SEC does not includetypical language indicating thatthe rm neither admits nor

denies any wrongdoinga resulto the SECs change in policy whensettling with deendants involvedin parallel criminal matters. And

yet, cooperation was not sucientto save Diamondback rom havingto shut its doors last year.

WhAT DO DEFENDANTS GET FROm

cOOpERATING?

The possible benets or early orsignicantly helpul cooperation

are twoold: a reduced (or no)prison sentence and/or a reducedne/penalty.

prisOn (Or supervised releAse)

hAppens

In many instances, cooperatingmay provide a get out o jail card.For his extraordinary cooperation,or example, Mr. Slaine wassentenced in 2012 to probation

and no prison time. More broadly,a review o sentences over the lastthree years reveals that cooperatorsroutinely receive supervised releaserather than prison. O the 20cooperators sentenced in the lastthree years, 16 o them receivedno prison time, and only twocooperators received prison time omore than two years.

On average, cooperating insider

trading deendants received asentence o around six monthonly 26% o the average prisonterm imposed ater plea bargainsrom non-cooperating deendants(22 months) and a mere 11%o the sentences imposed ondeendants who went to trial (56months). Moreover, cooperatorsreceived lower sentences than


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others who entered pleas eventhough they aced notablyhigher sentencing guidelines.In act, non-cooperating plea

bargaining deendants met withthe longest sentences relativeto their sentencing guidelines.Specically, cooperators receivedan average sentence equal toonly approximately 12% o theminimum recommended by theGuidelines. In contrast, non-cooperating plea bargainingdeendants received sentencesequal to 73% o the minimumguideline, and deendants who

went to trial received average

sentences equal to 62% o theminimum guidelines. The graphin the middle o the page illustratesthese dramatic benets tocooperators as compared to the lack

o any clear benet rom other pleas.While there were several largeinsider trading cases and high-prole deendants over the pastthree years, they do not skew theaverages or conclusions to be drawn.The chart at the bottom o the pageillustrates the extent to which each

insider trading sentence rom2010-2012 deviated rom theaverage sentence (which was halthe minimum guideline).46 Weclearly see or cooperators (in

green) the consistently below-average sentences typicallyinvolving no prison time. Also,non-cooperators achieve mixedresults, the range o outcomes ismuch wider, or better and worse,among those who enter pleas thanit is among those who go to trial.

Cooperators Prison Sentences

(2010-2012)

Prison Sentence as a Percentage o Minimum Guideline

(as compared to 50% average sentence)

Average Prison Sentence as Compared to

Guideline Range (2010-2012)

= Guidelines Range


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penAlTies/Fines hAppen,

Or dO They?

Cooperation may also yield anancial benet or deendants,albeit perhaps not as signicantas compared to the benetsreceived in sentencing. While

cooperators are still requiredto disgorge any ill-gotten gains,many avoid civil penalties. Forexample, in the expert networkcaseSECv.Longoria commencedin 2011, numerous deendantspled guilty in their criminal casesand paid disgorgement in theirSEC cases, but none paid a civil

penalty, expressly due to theircooperation.47

Even where penalties are notavoided entirely, they arelikely to be reduced. Stressingthat Wrangells immediatecooperation saved the SEC

time and resources, theSEC nonetheless requireddisgorgement o his ill-gottengains ($42,521.55) plusprejudgment interest, and acivil penalty o approximately$11,000, roughly a quarter o

what he otherwise would havelikely owed had he paid the

standard one time penalty equalto his alleged trading prots.48The relatively small amount othe reduction in penalty begs thequestion o whether Wrangellreceived much o a benet romcooperating with the SEC.

Moreover, while avoiding orreducing penalties, none othese cooperators was able tosave themselves rom a raudinjunction and signicantnegative publicity. It is thus notalways clear that the reduced civilpenalty itsel will be worth thecosts o cooperating.

Further analysis reveals thatvenue matters when choosingwhether to cooperate. In theSouthern District o New York,

where or decades the majorityo criminal insider trading caseshave been brought, cooperatorsreceived lower overall sentences,and in many cases no prison time.Interestingly, cooperators outsideo the Southern District o New

York ared less well than non-cooperating deendants. Andnon-cooperators ared relativelyequally both within and withoutthe Southern District o New York.

Cooperators also receivedreduced overall sentencesregardless o their role in thecases (tipper, tippee, or both).Interestingly, cooperatingdeendants who both tipped andtraded ared best comparatively,perhaps due to the valuableinsight that they could provideto DOJ. Sentences o non-cooperators appear to reect themore general viewpoint about

insider trading: tipping mightnot be good, but trading is worse,and doing both is worse still.

Prison Sentence By Role in Case

Prison Sentence in SDNY versus outside SDNY


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A more comprehensive viewo the data rom 2012 tellsa similar story. The SECcommonly seeks a civil penaltyequal to disgorgement. Becausemany deendants receivereduced penalties, however,the average penalty or 2012

was approximately 66% othe disgorged amount.49 Theollowing chart reects thedeviation rom that average oeach insider trading penaltyassessed in 2012. Again, it isclear that cooperators routinelypay substantially lower, or no,added penalty.

Venue did not signicantlyafect the civil penalty benetsreceived by cooperators in 2012.Deendants cooperating withthe SEC ared equally well, both

within and without the SouthernDistrict o New York. Nor did acooperating deendants role inthe case (tipper, tippee, or both)generally result in a diference.

Cooperators likewise, on average,received lower criminal nes.Deendants cooperating withDOJ received an average criminalne o $38,375 rom 2010 to

2012, whereas non-cooperatingdeendants received an averagene o $212,773, more than vetimes the size o the average neor a cooperator.

STILL A DIFFIcULT pATh

Cooperation is not all upside. Acivil injunction seems a given,an order o disgorgement equalto the ill-gotten gains is anabsolute, a elony conviction hasmany adverse consequences, andreputational damage may be hardto erase. Individuals may haveto nd themselves a new lineo work, since they may also be

barred by the SEC rom workingin the securities business.Likewise, it seems almost routinenow to ask cooperators to recordconversations with their riendsand colleagues. And cooperatorsshould expect that they may bedeposed in civil suits and providetrial testimony in civil andcriminal cases.

Even cooperating businesses may

sufer debilitating reputationaland business harms rominsider trading cases involvingtheir employees. Despite its

signicant cooperation, as statedabove, Diamondback inormedinvestors in December 2012that it would close in light osignicant redemption requests.

At least three other rms (LevelGlobal Investors, Barai CapitalManagement, and Loch CapitalManagement) likewise shutdown ater their employees wereimplicated in insider tradingcases.

cOOpERATION: SUmmING Up

Based on cases in the past threeyears, cooperation with theU.S. Attorneys Oce or the

Southern District o New Yorkstill yields signicant benet.Cooperators on average receivedlower overall sentences thannon-cooperatorsboth those

who pled without cooperationand those who went to trial.

As has been true or decades,cooperators were ar more likelythan non-cooperators in insidertrading cases to get a sentencethat included no prison time atall.50 The benets o cooperatingoutside o New York are less clearas non-cooperating deendantsappear to have received similar

2012 Civil Penalties as a Percentage o Disgorgement

(as compared to 66% average)


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(i not slightly lower) sentencesthan cooperators. Whether tocooperate outside o the SouthernDistrict o New York may comedown to an evaluation o the costs

o cooperation (are they seekingSlaine-type active cooperation, orsomething more manageable?)and the track record o thelocal U.S. Attorneys Oce indelivering on the cooperationagreements promise to bringthe nature and extent o thecooperation to the attention othe sentencing judge. Thereappears to be little question thatcooperating with the SEC will

result in a reduced civil penalty.Yet the civil penalties imposedthrough deault or summary

judgment are generally notdauntingly high, and the SECssuccess rate litigating is nowherenear the United States AttorneysOce or the Southern Districto New Yorks recent unbeatenstreak.

GLOBALTRADING, GLOBALENFORcEmENT

As the global economy continuesto expand, so too does thepotential or global insidertrading. Worldwide regulators roseto the challenge in 2012. In some

ways, it was a banner year andlikely a preview o eforts to come.

UNITED STATES

Domestic agencies have longpursued insider trading cases

with multi-national elements, and2102 was no diferent. Actionsinvolving Chinese (or HongKong) residents and securitiesdominated headlines. The SECroze more than $56 million o

alleged insider trading gainsmade by Chinese or Hong Kongdeendants (and entities thatthey controlled) in three cases.51The SEC extracted settlements

rom at least 14 deendants inve cases involving trading thesecurities o Chinese entities,

with disgorgement o more than$25 million and civil penaltieso more than $32 million.52 Andin at least one internationalinsider trading matter, DOJextracted a $16 million criminaloreiture agreement.53 Furthercomplicating matters, thecases involved cross-border

transactions, and witnesses anddocuments located abroad.54

Yet the SEC proclaimed that anaction against U.S. individuals oralleged insider trading in China-

based banks taught the painullesson that illegal trading ofshoreis not of-limits rom U.S. lawenorcement.55

While China cases generatedheadlines, U.S. regulators looked

beyond Asia. For example,the SEC charged two Braziliancitizens (one living in Miami)or trades in advance o aprivate equity buyout o a astood company.56 In a separatecase, a Swiss individual, and aBritish Virgin Islands companycontrolled by the Swiss deendantthrough a Cyprus trust, settledcharges relating to optionspurchased in a Swiss account

beore the public announcemento European Union approvalor a medicine.57 And in a thirdcase, a Paris-based doctor who

worked in an expert network,and who tipped a und managerabout clinical trials (allegedlyavoiding $30 million o losses),

was sentenced to time served andthree years supervised release, as

well as monetary sanctions.58

Yet U.S. regulators globalenorcement eforts did notproceed without their challenges.Gathering evidence abroad is

dicult, slow, and sometimesunsuccessul. In addition, courtsmay not consistently sanctionalleged spoliation. Both the SECand DOJ sufered dismissals dueto these issues.59 One voluntarydismissal motion explained that[d]espite submitting more than30 requests to oreign regulatorsand prosecutors in ve diferentcountries, the SEC has been

unable to speak to Swiss-based insiders. Coupled withdeendants allegedly incompleteproductions, the SEC was unableto connect the traders to aninsider.60 Indeed, in a similarcase only a ew months earlier, acourt granted summary judgmentto a Spanish insider tradingdeendant because the SEC couldnot show either a connection toan insider or spoliation rom the

loss o a laptop.61

UNITED kINGDOm

Inormation sharing amongregulators on both sides othe Pond is established andcommon. Yet in 2012, DOJreported that or the rsttime, it coordinated a criminalinvestigation with both theSEC and the Financial Services

Authority in London (FSA).62In this case, the U.S.-based wieo a U.S.-based partner in a U.S.accounting rm allegedly passedinsider inormation about U.S.securities to her sister in theUK. The sister, her UK-basedhusband, and his UK-based

business partner all traded inthe U.S. securities. The SEC and


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DOJ both pursued the tipper (theaccountants wie), obtaining an11-month prison sentence anda $1 million ne.63 The FSApursued the sister and partner,

obtaining prison sentences o 10months each. The FSA obtaineda prison sentence o our years,as well as additional sanctions,against the husband.64

The FSA was busy on its own aswell. It won eight insider dealingconvictions in 2012 (or a totalo twenty since March 2009).This is an impressive record oran island one-th as populousas the U.S., albeit nowherenear the level o enorcementactivity as compared to the U.S.65Nevertheless, this was a yearo insider dealing enorcementsuperlatives or the FSA: Theagency secured its largestconscation (disgorgement)orders (total o approximately2.2 million against threeindividuals),66 its longest prisonsentence (three years and six

months),67

and its second-largestne (3,638,000 against a U.S.hedge und trader, and another3,650,795 against his rm).68

The FSA also brought multipleactions against insider dealingrings, any one o which might layclaim to the FSAs most complexcase ever. One involved tradersplacing spread bets on pricemovements based on inormation

obtained rom the printing roomso large investment banks.69And multiple charges aroseout o Operation Tabermula,the largest and most complexinsider dealing investigationto date, jointly run by the FSAand Serious Organized Crime

Agency.70

Nor did the FSA shy awayrom asserting aggressiveliability theories. One case,or example, involved allegedinside inormation learned

during a telephone call abouta contemplated undraising.Yet the deendant expresslyreused to sign a condentialityagreement and participated inthe call on a non-wall crossed

basis.71 The FSA struggledto identiy specic insideinormation communicatedduring the call, accepted that[the deendants] trading wasnot deliberate, because he did

not believe that it was insideinormation, ound that thedeendant did not deliberatelyor recklessly contravene theregulatory requirements,and agreed that the deendantcooperated with the investigationand had no prior disciplinaryhistory.72 Similarly, the FSAconcluded that the banker whospoke during the call did notdeliberately or recklessly disclose

inside inormation, and that thebanker did not stand to gainany nancial benet rom adisclosure.73 Nevertheless, theFSA imposed its second-largestne ever against the trader (andhis rm), and sanctioned the

banker as a tipper. Similarly,in an unrelated case, the FSAaggressively sanctioned adeendant despite nding thathe did not act without honesty

or integrity in making thedisclosure and that he did notintend or expect that the tippedinormation would be misused.74

EUROpEAN UNION

Other European countriesalso actively pursued insidertrading this year. Multiple

agencies opened new cases in2012. Prosecutors in Munichconducted 53 raids in Germanyas part o a stock raud, marketmanipulation, and insider trading

probe. They also coordinatedwith other authorities to conductan additional 33 raids in othercountries, or a grand total o 86raids in one case.75 And Frenchprosecutors announced the starto a preliminary investigationinto insider trading and sharemanipulation by LVMH Groupregarding its acquisition o sharesin Hermes International SCA.76

Several notable cases wereresolved this year in the EU. InSwitzerland, or example, thereport o an internal investigationinto potential insider trading byhigh-ranking ocials at the SwissNational Bank ound no evidenceo wrongdoing.77 Separately,French authorities issued neso more than 6 million euros ($8million) against six individualsand several rms (ranging rom

60,000 euros to 2 million euros)or trading in a French companysshares based on knowledge aboutan impending ofer by a Britishcompany.78 And perhaps endinga decade-long ght to overturnGeorge Soros French insidertrading conviction, the EU GrandChamber reused to hear anappeal rom a 4-3 decision o theEuropean Court o Human Rightsupholding the conviction.79

EU insider trading enorcementmay well intensiy. In April,the European Securities andMarkets Authority reported oninsider trading enorcementdisparities among memberstates.80 Among other things,the report highlighted signicantdisparities in the nes imposed


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on individuals (which rangedrom $83 to $7.8 million), thenes imposed on companies(which ranged rom $3,333 to$2.35 million), and the length

o imprisonment (which rangedrom one year to three years). Asa result, a bill introduced in theEuropean Parliament in October

would impose conormity inprison terms or insider trading(requiring maximum terms ono less than two or ve years,depending on the charge).81

ASIA

Regulators in Asia also ocused on

insider trading in 2012. In July,a Japanese nancial services rmannounced that its employeesmay have provided clients withcondential inormation aboutthree separate share oferings.

Amidst criticism about theentitys internal controls byJapans Financial Services Agency(JFSA), the rms CEO resignedand the Tokyo Stock Exchangeassessed a 200 million yen($2.5 million) penaltythecountrys highest securitiesne ever. The rm has alsodisclosed there is a separate JFSAinvestigation in connection withthe rms relationship with ahedge und that may have tradedon condential inormationinadvertently provided to it bythe rm.

And more stringent actions inJapan may be orthcoming. InMay, the JFSA announced that itis considering enhancing existinginsider trading laws. Currently,Japans laws penalize those whotrade on inside inormation, butnot tippers. Ot criticized asoverly lax, the JFSA is reportedlynow considering penalizing

tippers, as well as raising thenes imposed or insider trading

violations.82

In 2012, the Securities andFutures Commission (SFC) in

Hong Kong vowed to pursueinsider dealing using the ullspectrum o remedies availableto us.83 But sending mixedmessages, the Hong Kong Courto Appeal shaved one year of

what had been the longest prisonterm imposed since the countrycriminalized insider dealing in2003.84 Regardless, the banker,

who tipped his wie about a Hong

Kong companys stock whenhelping to advise the companyabout acquiring oil-eld assetsin China, still received a six-

year prison sentence, as well asa HK$1.7 million ne (reducedrom HK$23.3 million).

Separately, and on a lighter note,a Hong Kong court dealt a atal

blow to the potential deensiveuse o a poor memory and aliquid lunch. A ormer directorreceived ve months in prisonor purchasing shares in his owncompany ater hearing about anurgent board meeting to discussa potential takeover.85 The Courtspecically rejected the directorsdeenses that he had orgottenhe was an independent non-executive director and that he

was intoxicated.86

Finally, Monetary Authority oSingapore (MAS) sanctioned anemployee who, when workingon a proposed acquisition by hisemployers subsidiary, purchasedover-the-counter contracts ordiference (CFDs) relating tothe potential target companysshares, which traded on theToronto Stock Exchange and the

Australian Securities Exchange,as well as CFDs relating to theacquiring companys shares,

which traded on the Hong KongStock Exchange. MAS declared

that the case demonstrates theresolve o MAS in pursuing insidertrading perpetrators, includingthose residing overseas, or whotrade in over-the-counter CFDs.87

While SEC and DOJ activelypursue insider trading caseshere in the United States, globalcompanies and individualsresiding outside the U.S. alsoneed to be aware that agencies

worldwide are ollowing the U.S.regulators lead in policing andprosecuting insider trading.

LEGISLATIVE REFORm

STOck AcT

As we reported in last yearsReview, in 2011 trading bymembers o Congress attracteda great amount o attention,particularly ater 60 Minutesaired an expos titled Insiderson members o Congress whomade protable securitiestrades based on inormationlearned on the job on CapitolHill.88 Insiders ocused onthen pending bill H.R. 1148, theStop Trading on CongressionalKnowledge Act (the Stock Act),

which was rst introduced in2006. Ater 60 Minutes called

attention to trading by memberso Congress, the Stock Act,which had languished or yearswith only nine sponsors, all oa sudden had more than 140sponsors.89

Last year, President Obamajoined the growing supportor the Stock Act. At the 2012


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State o the Union Address, Mr.Obama declared: Send me a

bill that bans insider trading bymembers o Congress, I will signit tomorrow.90 The Stock Act

was signed into law on April 4,2012.91

The Stock Act, in part, makesit illegal or members oCongress and staf to buy orsell securities based on certainnonpublic inormation. Itrequires members o Congressand government employeesto report certain investmenttransactions within 45 days atera trade and mandates that theinormation in public nancialdisclosure reports be madeavailable online. The law alsomakes clear that members oCongress and staf owe a duty tothe citizens o the United Statesnot to misappropriate nonpublicinormation to make a prot.

Ater another news expos,the Stock Act was amended in

August 2012 to close a loopholein the law. In June, the SenateEthics Committee released shortguidelines requiring memberso Congress and their spousesand dependent children to lereports o certain investmenttransactions. The House EthicsCommittee disagreed, ndingthat, while members o Congressand their staf were covered bythe Stock Act, their spouses and

children were not. According toCNN, both o the lead sponsorso the Senate bill didnt realize thediscrepancy until CNN broughtit to their attention. . . .92 The

August amendment ensures thatthe same restrictions that applyto members o Congress andtheir staf apply to their spousesand children. Commenting

on the unanimously passedamendment, New York SenatorKirsten Gillibrand stated: Theintent o this important reorm

bill was clear rom the start, to

restore peoples aith in theirelected leaders by ensuring weplay by the exact same set orules as every other American.Including amily members in ourmonthly disclosure requirements

was an integral piece o restoringthat aith, and I am pleased theHouse will nally join the Senatein conorming to these importantnew rules.93

In August, the Stock Act alsoaced its rst legal challenge. The

American Civil Liberties Unionled a lawsuit in ederal courtchallenging the constitutionalityo the laws requirement oronline posting o personalnancial inormation as it appliesto nearly 30,000 ederal workersother than members o Congress.The ACLU contends that underthe Stock Act, any internet user

would have unprecedentedaccess to the employees (andtheir spouses and childrens)personal nancial data. As thelawsuit explains, the onlineposting o this nancial data willcause ederal employees andtheir amilies an immediate andirretrievable loss o their mostprivate and condential nancialinormation, simply because theyare public servants.94

The case is still pending, butU.S. District Judge Alexander

Williams issued a preliminaryinjunction in Septemberprohibiting the government romimplementing Section 11 o theSTOCK Act to make nancialdisclosure orms o coveredExecutive Branch employees or

the inormation contained inthem available on the websiteso any agency o the UnitedStates or otherwise available onthe Internet.95 In December,

President Obama signed into lawa bill extending the deadline orInternet publication o plaintifspersonal nancial inormationunder the Stock Act to April 15,2013.96

SENTENcING GUIDELINES

As we reported in last yearsReview, on January 19, 2012,the U.S. Sentencing Commission(the Commission) proposed

and sought comments onamendments to the ederalSentencing Guidelines (theGuidelines) that includedtougher penalties or insidertrading and other nancialinstitution raud. TheCommission proposed theseamendments in response to adirective in the Dodd-Frank WallStreet Reorm and ConsumerProtection Act to review andamend guidelines applicable tocertain raud ofenses to ensurethat penalties reected theserious nature o the crimes,the need or deterrence andprevention, and the efectivenesso prison terms.

The originally proposedamendments to the insidertrading guidelines included:(i) a 2-level enhancementor insider trading involvingespecially complex or intricateofense conduct pertaining tothe execution or concealmento the ofense, and (ii) a 4-levelenhancement or sophisticatedinsider traders who held aposition o trust, including, orexample, ocers and directors o


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public companies, and registeredbrokers, dealers, and investmentadvisers.97 These enhancements

were meant to increase penaltiesor deendants who participatedin sophisticated and seriousinsider trading ofenses, but didnot necessarily realize high gains.The Commission explainedthe concern that in such cases,the existing guidelines maynot adequately account or theseriousness o the conduct andthe actual and potential harmsto individuals and markets,

because [it] uses gain alone as themeasure o harm.98

On April 13, 2012, theCommission promulgated thenal amendments. While thenal amendments are diferentrom the original proposals,the nal guidelines nonethelessaccomplish the objectiveso the originally proposedamendments and reect thesame inclination toward tougherpenalties or insider trading.These amendments took efect

on November 1, 2012 and do notapply retroactively.

First, the Commission created anew minimum ofense level o 14(15 to 21 months or deendants

without a criminal record) to beused when an ofense involvesany organized scheme to engagein insider trading and theexisting gain-based ofense level,

which starts at 8 (0 to 6 months

or deendants without a criminalrecord), is less than 14. The newminimum ofense level will applyto deendants who participate inan insider trading scheme thatinvolves considered, calculated,systemic, or repeated efortsto obtain and trade on insideinormation, as distinguishedrom ortuitous or opportunistic

instances o insider trading.99This means that all participantsin an organized schemeregardless o gain will haveto contend with an automaticincrease o 6 levels rom the pre-amendment minimum ofenselevel or insider trading.

Second, the Commissionbroadened application othe 2-level abuse o trustenhancement to includedeendants whose jobs involveregular participation orproessional assistance increating, issuing, buying,selling, or trading securities orcommodities and were usedto acilitate signicantly thecommission or concealmento the ofense.100 Prior tothe amendments, the abuseo trust enhancement applied

where the deendantsjobs involved substantialdiscretionary judgment that isordinarily given considerabledeerence. Deendants wholack discretionary trading

or investment authorityincluding, or example, certaingatekeepers such as hedgeund proessionals, investmentmanagers, and lawyerswill now

be subject to this enhancement.

It remains to be seen howthese amendmentswhichtrigger higher ofense levels andrecommended prison terms

will afect actual sentences,

especially given that judgesalmost uniormly imposesentences in insider tradingcases that are well below theGuidelines range. Given that theGuidelines are not mandatory,the Sentencing Commission maysimply be swimming againstthe tide in making the insidertrading Guidelines still harsher.

Judge Rakof noted at the NewYork City Bar Associations whitecollar summit in May 2012 thatthe Guidelines were irrational,overly punitive, and too blunt,explaining that [the Guidelines]

are based on the strange notionthat a human being and acrime can be broken down toarithmetic.101

The new minimum ofenselevel or organized schemes,in particular, has the potentialto signicantlyand perhapsarbitrarilyincrease sentencesor deendants who playedminor roles in more modestor unsuccessul schemes. Theincreased exposure or theseand other deendants accusedo insider trading might alsoresult in more leverage or thegovernment, possibly puttingmore pressure on deendants tocooperate or work out a plea deal.

10b5-1 pLANS: NOTNEcESSARILY AN

EFFEcTIVE DEFENSEAGAINST INSIDERTRADING cLAImS

Akin to its 2006 Pulitzer Prize-winning article Perect Payday,which started the investigationsinto the practice o stock options

backdating, the Wall StreetJournal at the end o last year

published an explosive story thatwill likely increase regulatoryscrutiny in 2013 on insidertrading and executives use o10b5-1 trading plans.102

Since the SECs adoption o Rule10b5-1 more than a decadeago, it has been best practiceor executives to enter into


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pre-arranged trading plansunder Rule 10b5-1(c), becausethese plans create a built-in protection against insidertrading allegations. UnderRule 10b5-1(c), provided thatthe plan is adopted at a time

when the seller has no materialnonpublic inormation, theseller is protected rom insidertrading liability even i the sellercomes into possession o materialnonpublic inormation by thetime sales actually occur. Rule10b5-1 has a general good aithrequirementthat is, a plan must

be entered into in good aith andnot as part o a plan or scheme to

evade the prohibitions o Rule10b5-1(c).

The Journal analyzed the tradingactivity o more than 20,000executives since 2004 whotraded their own companysstock during the week beoretheir companies made a newsannouncement and ound 1,418executives recorded average stockgains o 10% (or avoided 10%

losses) within a week ater theirtrades.103 The Journal concludedthat, despite the extensiveregulatory ramework to preventinsider trading, executives dosuspiciously well on their tradesin the aggregate.104

O the executives who did wellin trading their own companysstock, the Journal determinedthat the majority o the trades

were executed pursuant to 10b5-1plans. For example, the ChieExecutive Ocer o VeriFoneSystems Inc. set up a tradingplan in January 2011 and soldnearly $14 million worth o stockpursuant to the plan in March2011. In April, the stock startedto decline in large part due toDOJs announcement that it

would block an acquisition thecompany was contemplating.Likewise the co-ounder andgeneral counsel o CobaltInternational Energy sold morethan $13 million o company

stock pursuant to a plan daysbeore the company announcedit was abandoning an exploratory

well it was drilling in Arica,news that caused the stock totumble close to 40%. Accordingto the company, the generalcounsel amended his 10b5-1 plansometime beore the sale wasexecuted.

The SEC, DOJ, and manycompanies themselves havelaunched investigations inorder to determine whetherthe 10b5-1 plans at issue wereimproperly modied or amended

when the executives were inpossession o material nonpublicinormation. Depending on whatthe investigations uncover, it may

be that 2013 brings a number oinsider trading cases arising romtrades executed under 10b5-1

plans.

Even i enorcement actionsare not orthcoming, the recentscrutiny has sparked callsor regulatory reorm. Forexample, in response to theJournals article, the Councilo Institutional Investors, anonpartisan group o public andprivate pension unds, wrotea letter to the SEC demanding

interpretative guidance oramendments to Rule 10b5-1 in order to restor[e] publiccondence with respect topurchases and sales o acompanys securities by itsinsiders.105 The Council askedthe SEC to consider a numbero new guidelines, including:(i) restricting the use o 10b5-1

plans only during company-adopted trading windows; (ii)prohibiting executives romhaving overlapping 10b5-1plans; (iii) implementing timerestrictions or trading rom thedate o adoption or modicationo plan; and (iv) curtailing theability to modiy, amend or cancelan existing plan.

cONcLUSION

As has been the trend or the lastew years, 2012 was another big

year or insider trading cases.The government continuedto make insider trading a top

enorcement priority andcontinued its unbroken record otrial victories. The investigationsand actions started in 2012 arelikely to make 2013 yet anothernotable year or insider tradingenorcement.


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AppendixA

2012: Penalties Imposed in Insider TradingProsecutions

Date Defendant Role Trial or Plea Sentence1/11/2012 Drew Bo

Brownstein

(United Statesv. Brownstein,S.D.N.Y. 2011)

Tippee Plea 1 year and 1 day

imprisonment plus 3years supervised release(including 6 months home

connement)

Guidelines Calculation:

Oense level 21 (37-46months):

+8 base level+16 gain-3 acceptance o

responsibility

$2,445,856 oreiture $7,500 ne

$100 special assessment

500 hours o communityservice

1/20/2012 David Slaine

(United States v.

Slaine, S.D.N.Y.2009)

Tippee Plea (Cooperate) 3 years supervisedrelease

Guidelines Calculation:Oense level 23 (46 to 57months)*

$532, 287 oreiture

$500,000 ne $200 special assessment

300 hours o community

service

3/5/2012 Cheng Yi Liang

(United States

v. Liang, D. Md.2011)

Tippee Plea 60 months imprisonment

plus 3 years supervisedrelease

Guidelines Calculation:Oense level 25 (57 to 71

months):+8 base level

+18 gain

+2 abuse o trust-3 acceptance o

responsibility

$2,757,188 oreiture


* Precise calculation unknown; it was publicly reported that Slaine aced up to 57 months in prison under the Guidelines.


22/52

Date Defendant Role Trial or Plea Sentence

3/23/2012 Matthew Devlin

(United States v.

Devlin, S.D.N.Y.2008)

Tipper Plea (Cooperate) 3 years supervisedrelease


Oense level 21 (37 to 46months)*

$23,000 oreiture

$10,000 ne


4/11/2012 Drew Peterson

(United States

v. Peterson,S.D.N.Y. 2011)



Oense level 23 (46 to 57months)**

$205,416 oreiture

$10,000 ne

$200 special assessment 200 hours o community

service

4/12/2012 Son Ngoc

Sonny Nguyen

(United States

v. Jiau, et al.,S.D.N.Y. 2011)

Tippee/ Tipper Plea (Cooperate) 1 year supervised release


months):+8 base level+2 gain

+2 abuse o trust-2 acceptance o

responsibility $6,464 oreiture


4/16/2012 James Turner II

(United States

v. Turner, D.N.J.2011)

Tippee Plea 12 months imprisonment




+18 gain+2 obstruction

-3 acceptance oresponsibility

$25,000 ne


CRIMINAL PROSECUTIONS (contd)AppendixA

* Precise calculation unknown; it was publicly reported that Devlin aced up to 46 months in prison under the Guidelines.

** Precise calculation unknown; it was publicly reported that Peterson aced between 46 and 57 months in prison under the Guidelines.


23/52



4/18/2012 GauthamShankar

(United States v.Shankar, S.D.N.Y.

2009)

Tippee/ Tipper Plea (Cooperate) 3 years supervisedrelease (including6 months home

connement) Guidelines Calculation:


$448,437 oreiture $25,000 ne


5/9/2012 Stanley Ng

(United Statesv. Jiau, et al.,S.D.N.Y. 2011)

Tipper Plea 2 years supervised

release


Oense level 10 (6 to 12months)**

$6,464 oreiture $2,000 ne


400 hours o communityservice

5/14/2012 Scott Vollmar

(United States v.Vollmar, D.N.J.

2011)


release Guidelines Calculation:

Oense level 23 (46 to 57


+16 gain+2 obstruction


$15,000 ne


6/1/2012 Franz Tudor

(United States v.

Tudor, S.D.N.Y.

2009)



months):+8 base

+8 gain-3 acceptance oresponsibility

$86,119 oreiture

$20,000 ne



* Precise calculation unknown; it was publicly reported that Shankar aced up to 37 months in prison under the Guidelines.

** Precise calculation unknown; it was publicly reported that Ng aced between 6 and 12 months in prison under the Guidelines.


24/52


6/4/2012 Scott Robarge

(United States v.

Robarge, D.N.J.2011)

Tippee Plea 1 year supervised release Guidelines Calculation:



+14 gain-3 acceptance o

responsibility $5,000 ne


6/4/2012 Matthew Kluger

(United Statesv. Kluger, D.N.J.2011)

Tipper Plea 12 years imprisonment


Guidelines Calculation:Oense level 33 (135 to

168 months)*

$415,000 oreiture


6/4/2012 Garrett Bauer

(United Statesv. Bauer, D.N.J.2011)

Tippee Plea 9 years imprisonment


Guidelines Calculation:Oense level 31 (108 to135 months):

+8 base level+22 gain

+2 money laundering+2 obstruction o justice


Foreiture o specied

assets and real property


6/5/2012 Kenneth

Robinson

(United States v.

Robinson, D.N.J.

2011)

Tippee Plea (Cooperate) 27 months imprisonment



months)**

$175,000 oreiture



* Precise calculation unknown; it was publicly reported that Kluger aced between 135 and 168 months in prison under the Guidelines.

** Precise calculation unknown; it was publicly reported that Robinson aced between 70 and 87 months in prison under the Guidelines


25/52



6/26/2012 Adam Smith

(United States

v. Rajaratnam,et al., S.D.N.Y.

2009)

Tipper/ Tippee Plea (Cooperate) 2 years supervisedrelease



$105,300 oreiture

$15,000 ne


7/19/2012 Anil Kumar

(United States v.

Kumar, S.D.N.Y.2009)

Tipper/ Tippee Plea (Cooperate) 2 years supervisedrelease


Oense level 21 (37 to 46months):

+8 base level+16 gain


$2,260,000 oreiture

$25,000 ne


8/2/2012 Anthony Scolaro

(United States v.Scolaro, S.D.N.Y.

2011)

Tippee Plea (Cooperate) 3 years supervised



months)**

$125,890 oreiture


8/10/2012 Sheri Mityas

(United States v.Mityas, E.D.N.Y.

2012)

Tippee Plea 3 years supervisedrelease


months)***

$25,800 oreiture


9/24/2012 Rajiv Goel

(United Statesv. Goel, S.D.N.Y.2010)

Tipper Plea (Cooperate) 2 years supervisedrelease

Guidelines Calculation:Oense level 23 (46 to 57months)****

$266,649 oreiture

$10,000 ne



* Precise calculation unknown; it was publicly reported that Smith aced between 57 and 71 months in prison under the Guidelines.

** Precise calculation unknown; it was publicly reported that Scolaro aced between 30 and 37 months in prison under the Guidelines.

*** Precise calculation unknown; it was publicly reported that Mityas aced between 10 and 16 months in prison under the Guidelines.

**** Precise calculation unknown; it was publicly reported that Goel aced between 46 and 57 months in prison under the Guidelines.


26/52


10/17/2012 Robert Kwok

(United States v.

Kwok, S.D.N.Y.2012)

Tipper Plea 2 years supervisedrelease


Oense level 8 (0 to 6months)

+8 base level

$4,754 oreiture


10/24/2012 Rajat Gupta

(United States v.Gupta, S.D.N.Y.

2011)

Tipper Trial 24 months imprisonmentplus 1 year supervised

release


Oense level 28 (78 to 97months):

+8 base level+18 gain+2 abuse o trust

$5,000,000 ne


Restitution to bedetermined at uture date

10/25/2012 Michael Cardillo

(United States v.Cardillo, S.D.N.Y.

2011)


Guidelines Calculation*

$291,189 oreiture


10/25/2012 Alnoor Ebrahim

(United States v.

Ebrahim, S.D.N.Y.2012)

Tipper Plea 1 year and 1 dayimprisonment plus 2years supervised release


months):+8 base

+10 gain-3 acceptance o

responsibility $189,893 oreiture

$10,000 ne



* Precise calculation unknown.


27/52



10/26/2012 ThomasFlanagan

(United States v.Flanagan, N.D.

Ill. 2010)

Tippee Plea 21 months imprisonmentplus 1 year supervisedrelease


months)*

$100,000 ne

12/17/2012 George Holley

(United Statesv. Holley, D.N.J.

2011)




months)**

$260,000 ne



* Precise calculation unknown; it was publicly reported that Flanagan aced between 37 and 46 months in prison under the Guidelines.

** Precise calculation unknown; it was publicly reported that Holley aced between 33 and 41 months in prison under the Guidelines.


28/52


AppendixB

2012: Penalties Imposed in Insider TradingSEC Enforcement Actions

Date Defendant RoleTrial or

SettlementOutcome

1/12/2012 Thomas Chow

(SEC v. Li, et al.,D. Ariz. 2011)

Tippee Deault Judgment Permanent injunction $10,370,317

disgorgement $2,567,484 prejudgment

interest $30,849,951 civil penalty

1/13/2012 FarzinBazshushtari

(SEC v.Bazshushtari,C.D. Cal. 2012)

Tippee Settlement Permanent injunction $76,677 disgorgement

$7,090 prejudgment

interest $76,677 civil penalty

1/23/2012 Barai Capital

Management

(SEC v. Longoria,

et al., S.D.N.Y.

2011)

Tippee Settlement Permanent injunction

$3,000,000 disgorgement $434,225 prejudgment

interest

1/23/2012 Samir Barai

(SEC v. Longoria,

et al., S.D.N.Y.2011)


$3,000,000 disgorgement(credited by disgorgement

paid by Barai CapitalManagement)

$434,225 prejudgmentinterest (credited byprejudgment interest

paid by Barai CapitalManagement)

No civil penalty based oncooperation agreement

1/23/2012 Bob Nguyen

(SEC v. Longoria,et al., S.D.N.Y.

2011)

Tippee/

Tipper

Settlement Permanent injunction

$190,890 judgmentrepresenting wagesearned while employed by

Primary Global Research $11,449 prejudgment

interest No civil penalty based on

cooperation agreement


29/52


SettlementOutcome

1/23/2012 Diamondback Capital

ManagementLLC

(SEC v.Adondakis, et al.,S.D.N.Y. 2012)

Tippee Settlement Permanent injunction $5,173,000 disgorgement

$832,751 prejudgmentinterest

$3,000,000 civil penalty

1/24/2012 Robert Ward

(SEC v. Ward,

et al., S.D. Ohio

2012)

Tipper Settlement Permanent injunction $108,413 disgorgement

(jointly and severallyliable with B. Lewis, S.

Lewis, and J. Lewis) $12,625 prejudgment

interest (jointly and

severally liable with B.Lewis, S. Lewis, and J.

Lewis) Civil penalty waived

based on demonstratedinability to pay

1/24/2012 Benjamin Lewis

(SEC v. Ward,

et al., S.D. Ohio2012)

Tippee/

Tipper

Settlement Permanent injunction

$44,575 disgorgement(jointly and severally

liable with R. Ward) $5,635 prejudgment

interest (jointly andseverally liable with R.Ward)

$44,575 civil penalty

1/24/2012 Stanley Lewis

(SEC v. Ward,

et al., S.D. Ohio

2012)

Tippee/Tipper

Settlement Permanent injunction $48,843 disgorgement

(jointly and severallyliable with R. Ward)

$5,873 prejudgmentinterest (jointly andseverally liable with R.

Ward)


SEC ENfORCEMENT ACTIONS (contd)AppendixB


30/52



SettlementOutcome

1/24/2012 Jamie Lewis

(SEC v. Ward,et al., S.D. Ohio

2012)


$14,996 disgorgement

(jointly and severallyliable with R. Ward)

$2,569 prejudgmentinterest (jointly and

severally liable with R.Ward)


1/24/2012 Dale Shaer

(SEC v. Shafer,

et al., S.D. Ohio2012)

Tipper Settlement Permanent injunction $33,484 disgorgement

(jointly and severally

liable with J. Gonski) $5,474 prejudgment

interest (jointly andseverally liable with J.

Gonski) $33,484 civil penalty 5 year ocer/director bar

1/24/2012 Jason Gonski

(SEC v. Shafer,et al., S.D. Ohio2012)

Tippee/ Tipper Settlement Permanent injunction

$43,226 disgorgement(portions jointly and

severally liable with D.Shaer and J. Mroz)

$7,572 prejudgment

interest (portions jointlyand severally liable with

D. Shaer and J. Mroz) $50,686 civil penalty

1/24/2012 Joseph Mroz

(SEC v. Shafer,et al., S.D. Ohio

2012)


$7,460 disgorgement(jointly and severallyliable with J. Gonski)


severally liable with J.Gonski)




31/52


SettlementOutcome

1/30/2012 Todd Treadway

(SEC v.Treadway,

S.D.N.Y. 2011)





1/31/2012 Daniel Burns

(SEC v. CytoCore,

Inc., et al., N.D.Ill. 2011)

Tippee Deault Judgment Permanent injunction $804,100 disgorgement


Ocer/director bar

1/31/2012 Craig Drimal

(SEC v. Cutillo,et al., S.D.N.Y.2009)


$6,711,805 disgorgement $970,481 prejudgment

interest Civil penalty waived

in light o judgment in

parallel criminal action

1/31/2012 David Plate

(SEC v. Cutillo,

et al., S.D.N.Y.

2009)



Civil penalty waivedin light o judgment inparallel criminal action

2/8/2012 Joseph

Contorinis

(SEC v.

Contorinis,S.D.N.Y. 2009)

Tippee Summary

Judgment

Permanent injunction

$7,260,604 disgorgement $2,485,202 prejudgment

interest $1,000,000 civil penalty

2/9/2012 Brent Bankosky

(SEC v.Bankosky,S.D.N.Y. 2012)


$63,000 disgorgement $10,076 prejudgment

interest $63,000 civil penalty

10 year ocer/directorbar



32/52



SettlementOutcome

2/21/2012 Jason Pfaum


2011)





2/24/2012 Walter Shimoon


2011)

Tipper Settlement Permanent injunction

$44,175 disgorgement $6,099 prejudgment

interest


2/28/2012 Marleen Jantzen

(SEC v. Jantzen,et al., W.D. Tex.

2010)

Tipper Summary

Judgment

Permanent injunction

$26,921 disgorgement(jointly and severallyliable with J. Jantzen)


severally liable with J.Jantzen)


2/28/2012 John Jantzen

(SEC v. Jantzen,

et al., W.D. Tex.2010)

Tippee SummaryJudgment

Permanent injunction $26,921 disgorgement

(jointly and severally

liable with M. Jantzen) $2,454 prejudgment

interest (jointly andseverally liable with M.

Jantzen) $26,921 civil penalty

3/5/2012 John Williams

(SEC v. Williams,E.D. Pa. 2012)


$620 prejudgmentinterest


3/5/2012 William Duncan

(SEC v. Duncan,C.D. Cal. 2012)

Tippee Settlement Permanent injunction $85,525 disgorgement $4,599 prejudgment

interest




33/52


SettlementOutcome

3/9/2012 Alissa Kueng

(SEC v. Kueng,S.D.N.Y. 2009)

Tippee/ Tipper Settlement Permanent injunction




3/13/2012 Marianna Sze

Wan Ho

(SEC v. McGee,

et al., E.D. Pa.

2012)


$110,580 disgorgement $16,317 pre

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