Securing Integrity: The SEC and DOJ’s Unified Front and Pursuit of Novel Legal Tactics Against Insider Trading and Corporate Wrongdoing

On May 23, 2024, the Securities Enforcement Forum West 2024 brought together numerous SEC enforcement and DOJ officials with leading industry experts, private white-collar attorneys, and in-house counsel, to discuss pressing issues and upcoming trends in securities regulation and enforcement. Speakers, including SEC Enforcement Director Gurbir Grewal and U.S. Attorney Ismail Ramsey, discussed the SEC’s and DOJ’s increased use of a wider variety of statutes to enforce securities law violations. This signals both agencies’ intent to broaden the enforcement landscape, allowing for more comprehensive and flexible actions against both entity and individual violators. Among the various panels at the event, the Insider Trading discussion stood out, featuring Rahul Kolhatkar, Assistant Regional Director of Enforcement in the San Francisco Regional Office of the SEC, and Benjamin Kingsley, Chief of the Oakland Branch of the U.S. Attorney’s Office. The panel delved into recent trends in enforcement and strategic insights for both regulators and market participants.

The SEC Emphasizes Strict Handling of Material Non-Public Information (“MNPI”)

Kolhatkar emphasized the SEC’s ongoing concerns about the handling of MNPI to ensure market integrity, highlighting key cases from the past year that illustrate the agency’s approach to tackling market manipulation-related securities violations. In one matter, filed on June 29, 2023, the SEC charged 13 defendants involved in four separate illegal schemes, which collectively accrued over $40 million in illicit profits.¹ The facts of these cases are distinct, but all involve traditional tipper-tippee relationships among friends and family members. In the first complaint, the SEC alleged that a special purpose acquisition company (“SPAC”) board member shared MNPI about his company’s upcoming merger with the owner of another company where he was separately employed. The owner then shared this information with his brother. Each of the three individuals purchased shares of the SPAC based on the MNPI and later sold their positions shortly after the merger agreement was announced.² In the second case, the SEC alleged that the lead of a COVID-19 drug trial and his close friend traded pharmaceutical stock based on MNPI about the success of the trial, one day before the positive outcome was publicly announced.³ In the third complaint, the SEC charged five individuals, including a police chief, with trading on MNPI obtained directly or indirectly from a vice president involved in a pharmaceutical merger.⁴ Finally, in the last complaint, the SEC alleged that a broker-dealer and his friend traded on MNPI about possible upcoming mergers and acquisitions of public companies that the friend had stolen from the laptop of his girlfriend, who was employed at a prominent New York-based investment bank.⁵ The SEC’s announcement highlighted the collaboration with the DOJ, which announced its parallel criminal charges on the same day.⁶ “These matters demonstrate how our two agencies can work cooperatively to police the securities markets and protect investors,” said Grewal.

In another recent case, the SEC and the DOJ charged an individual with insider trading prior to the announcement of a planned merger between the London-based oil and gas company BP p.l.c. and TravelCenters of America Inc.⁷ The SEC complaint alleged that the individual misappropriated MNPI about the proposed acquisition from his wife, a BP mergers and acquisitions manager who worked from home on the planned deal, and purchased TravelCenters stock before the merger was announced. As a result of the announcement, TravelCenters stock rose nearly 71 percent. The individual allegedly sold all his TravelCenters shares immediately, resulting in an ill-gotten profit of $1.76 million. These cases demonstrate that the SEC and the DOJ continue to prioritize enforcement against insider trading ahead of significant announcements or transactions.

DOJ’s Strategy on Insider Trading: Emphasizing Criminal Intent and Deterrence

On the DOJ side, Kingsley emphasized the importance of setting precedents to discourage future violations and offered an in-depth look into the DOJ’s enforcement strategy. He outlined two critical criteria for deciding whether to pursue a criminal case for insider trading: (1) the government’s burden to prove criminal intent; and (2) the impact of the prosecution.

In criminal cases, the government must prove each element beyond a reasonable doubt, whereas civil cases only require proof by a preponderance of the evidence. For a criminal insider trading case, the DOJ must demonstrate that the trader acted willfully, with knowledge that their conduct was unlawful. Given the DOJ’s limited resources, Kingsley noted that the potential for a case to serve as a deterrent is a major consideration in deciding whether to pursue criminal prosecution. The DOJ focuses on the severity and impact of the alleged insider trading activity, including factors such as the amount of illicit profit gained or loss incurred by investors. Kingsley also highlighted the agency’s commitment to holding gatekeepers, such as corporate directors and officers, accountants, and advisors, accountable.

The SEC’s and DOJ’s Innovative Legal Tactics

A common theme prevalent throughout the Conference panels was the expansion of both agencies’ utilization of non-securities statutes to pursue novel securities fraud theories to address insider trading. This broadening of the legal framework enables more flexible and encompassing enforcement actions.

One case extensively discussed in nearly every panel is the SEC’s groundbreaking enforcement action utilizing the “shadow trading” theory of insider trading liability, whereby individuals trade stock in companies they are not affiliated with based on MNPI obtained during their course of employment. On April 5, 2024, following an eight-day jury trial in the U.S. District Court for the Northern District of California, the SEC secured a victory in its case against Matthew Panuwat for insider trading.⁸ The SEC alleged that Panuwat, then an employee of Medivation, Inc., utilized confidential information regarding Pfizer’s impending acquisition of his company to purchase call options in the similarly sized Incyte Corporation, mere minutes after receiving MNPI about the  acquisition by Pfizer. Panuwat illicitly profited over $100,000 when Incyte’s stock surged by 8% following the public announcement of the acquisition. In a new take on the misappropriation theory of liability, the SEC asserted that Panuwat breached both his fiduciary duty to his employer and his duty to the source of the information under the confidentiality or nondisclosure agreement. The panelists also discussed Medivation’s insider trading policy, which included trading in “the securities of another publicly traded company” as part of its insider trading definition,⁹ and cautioned that companies should educate employees through training programs about their obligation not to utilize MNPI acquired at work to trade in any stock.

The SEC’s Ongoing Utilization of Analytical Tools

Similarly to what was discussed at last year’s Forum West Conference, Kohlhatkar once again underscored the pivotal role of the SEC’s data analytics in identifying suspicious trading patterns and streamlining investigations, leading to quicker and more decisive enforcement actions.

For example, on August 23, 2023, the SEC brought insider trading charges against a visiting attorney from Brazil for using confidential information obtained from his law firm’s representation of its clients.¹⁰ The SEC alleges that the attorney accessed information about one company’s acquisition of another and purchased over 10,000 shares of the target the day before the deal was announced, profiting more than $42,000 by selling those shares on the day of the announcement. Notably, the SEC detected this suspicious trading within three months of the alleged insider trading, thanks to its Market Abuse Unit’s Analysis and Detection Center. The SEC subsequently referred the case to the DOJ, which has filed parallel criminal charges.

Key Takeaways: Gurbir Grewal’s Five Principles for Effective Corporate Cooperation

During his Keynote Remarks, Grewal outlined five mutually beneficial principles that corporations should follow to effectively cooperate with the SEC in SEC investigations to mitigate potential charges, avoid public action altogether, or reduce or remove civil penalties:

• Self-Policing: Taking a proactive approach to compliance demonstrates a corporation’s commitment to upholding ethical and legal standards and adhering to regulatory requirements before the SEC becomes involved. The SEC evaluates whether a company’s leaders and executives actively support compliance efforts through their words, actions, and the allocation of resources. Additionally, self-policing involves continuously updating and implementing new rules and policies to keep pace with legal developments and technological advancements.
• Self-Reporting: Promptly disclosing any potential violations or misconduct, even before all facts are fully known or internal investigations are concluded, allows a company to demonstrate a commitment to integrity and ethical conduct, signaling to regulators and stakeholders a willingness to address issues proactively.
• Remediation: Director Grewal emphasized that remediation is a pivotal step in the aftermath of regulatory breaches or internal misconduct within corporations. Beyond mere self-reporting, companies must engage in “timely, voluntary, and meaningful” remedial actions to address underlying issues and prevent recurrence. While the specific remedial measures may vary depending on the nature and severity of the violation, Grewal provided several universally applicable forms remediation might take, including: the dismissal of responsible actors, initiating comprehensive training, and the engagement of external experts for guidance and counsel. Additionally, remediation efforts may entail the clawback of problematic transactions or policies and the repayment of harmed investors to restore trust and rectify damages. The remediation process can also often lead to the identification of further violations, facilitating a comprehensive approach to compliance and risk management within organizations.
• Effective Cooperation: Grewal stressed that cooperation that goes above and beyond the legal requirements to facilitate the swift progression of proceedings is paramount for corporations facing SEC inquiries or investigations. This includes proactive measures such as promptly producing documents and identifying individuals possessing relevant information, thereby preventing the SEC from issuing overly broad document requests. Additionally, corporations should flag key documents and provide translations of foreign languages as necessary to streamline the review process. Proactive efforts to identify and locate witnesses and facilitate interviews and testimonies, as well as presenting findings and summaries of internal investigations to the SEC, are also crucial for ensuring transparency and expediting the resolution of inquiries. Importantly, cooperating with the SEC also involves leveraging attorney-client privileges effectively, with the SEC often assisting in applying such privileges appropriately to protect sensitive information.
• Collaboration/Communication with the SEC Enforcers: The timing, frequency, and quality of communication with staff plays a significant role in cooperation, as regular updates and clear, transparent exchanges of information enable both parties to address concerns promptly. It is important to note that cooperation with the SEC does not imply agreement with the merits of the investigation; rather, it signifies a willingness to collaborate in determining whether a violation occurred. While corporations can still advocate for their positions, Grewal noted that genuine cooperation entails honesty and transparency, avoiding gamesmanship and focusing on constructive dialogue aimed at resolving the matter efficiently and fairly.

Conclusion

The Securities Enforcement Forum West 2024 provided invaluable insights into the current and future landscape of insider trading enforcement. The SEC’s ongoing commitment to finding and charging securities violations and promoting market integrity remains steadfast, as highlighted by Kolhatkar’s emphasis on the handling of MNPI and the agency’s approach to tackling insider trading in recent cases. Furthermore, the DOJ’s enforcement strategy, outlined by Kingsley, is focused on setting precedents to deter future violations. Additionally, both agencies’ innovative legal tactics and the SEC’s continued utilization of analytical tools underscore its adaptability in addressing evolving challenges. The key principles outlined by Grewal for corporate cooperation with the SEC serve as a roadmap for navigating regulatory inquiries and investigations. By adhering to these principles and fostering a culture of compliance and transparency, corporations can mitigate risks, uphold integrity, and ultimately contribute to a more robust and trustworthy financial market ecosystem.

¹ Securities and Exchange Commission, Statement on Insider Trading Enforcement Actions Announced on June 29, 2023 (June 29, 2023), https://tinyurl.com/ycbkpn9y. 

² Press Release, Securities and Exchange Commission, SEC Charges Former DWAC Board Member and Others for Insider Trading in DWAC Securities (June 29, 2023), https://www.sec.gov/news/press-release/2023-121.

³ Press Release, Securities and Exchange Commission, SEC Charges Former Pfizer Statistician with Insider Trading Ahead of COVID-19 Announcement (June 29, 2023), https://www.sec.gov/news/press-release/2023-123.

⁴ Press Release, Securities and Exchange Commission, SEC Charges Police Chief, Four Others in Connection with Insider Trading Before Pharmaceutical Merger (June 29, 2023), https://www.sec.gov/news/press-release/2023-122.

⁵ Press Release, Securities and Exchange Commission, SEC Charges Stockbroker and Friend with Insider Trading (June 29, 2023), https://www.sec.gov/news/press-release/2023-124.

⁶ Press Release, Department of Justice, U.S. Attorney Announces Charges In Four Separate Insider Trading Cases Against 10 Individuals, Including Drug Company Employees, Investment Firm Executive Director, And SPAC Investors (June 29, 2023), https://www.justice.gov/usao-sdny/pr/us-attorney-announces-charges-four-separate-insider-trading-cases-against-10 (highlighting the U.S. Attorney Damian Williams’ statement that, “Insider trading is not a quick buck. It’s not easy money. It’s not a sure thing. It’s cheating. It’s a bad bet. It’s a ticket to prison. Because my Office, the Southern District of New York, is watching. And we’re working quickly to investigate and prosecute anyone who corrupts our financial markets. And we’ll keep at it as long as it takes. You can bet on that.”).

⁷ Press Release, Securities and Exchange Commission, SEC Charges Husband of Energy Company Manager with Insider Trading (February 22, 2024), https://www.sec.gov/news/press-release/2024-24.

⁸ Litigation Release, Securities and Exchange Commission, Matthew Panuwat (April 8, 2024), https://www.sec.gov/litigation/litreleases/lr-25970.

⁹ Complaint at ¶ 20, SEC v. Matthew Panuwat, 4:21-cv-06322 (N.D. Cal. filed Aug. 17, 2021), https://www.sec.gov/files/litigation/complaints/2021/comp-pr2021-155.pdf.

¹⁰ Press Release, Securities and Exchange Commission, SEC Charges Former Attorney at U.S.-Based Global Law Firm with Insider Trading (August 23, 2023), https://www.sec.gov/news/press-release/2023-158.