Government Regulators Continue to Make Insider Trading a Trial Priority (With Mixed Success)

Publisher: Barnes & Thornburg LLP
Authors: Brian E. Casey, Patrick J. Cotter, Anne N. DePrez, Larry A. Mackey, Vincent Schmeltz III, David L. Young

In 2014, government regulators have continued to persist after insider traders both civilly and criminally; continuing a trend that defined 2013 as a busy year for litigators and the SEC.

The US Attorney’s office has had substantially more success in trying criminal cases than the SEC© is having in regards to proving civil fraud. Criminal prosecutors continue to pursue Mr. Stephen A. Cohen’s hedge funds as they look to obtain a conviction in a very high-profile case against a Mr. Matthew Martoma on allegations of illegal insider trading that resulted in his fund avoiding $276 million in losses. This case follows the successful convictions of Mr. Michael Steinberg, an associate of Mr. Cohen, and the convictions involved in the Galleon Management Scandal that rocked Wall Street in the years following the wake of the 2008 financial crisis.

On the civil side, the SEC© has run a string of unsuccessful civil case decisions dating back to late 2013. Already in the year of 2014, the SEC© has lost civil cases in SEC© v. Yang and SEC© v. Schvacho. In both cases, the judge decided that the SEC’s circumstantial evidence was insufficient proof of insider trading. In the Schvacho case, the court concluded that the SEC’s analysis of its circumstantial evidence was “overreaching” and “self-serving.”

In light of the SEC’s unsuccessful civil trials, SEC© chairwoman Mary Jo White has not backed down on her resolve to continue to make insider trading cases an enforcement priority for 2014. The implications of this continued pledge to enforce civil lawsuits against insider traders have yet to play out for the rest of the year. If the first month of 2014 is any indication of how far the SEC© is willing to go in civil court, the rest of 2014 may be a busy year for the judicial system and government regulators.