Actions Prove SEC Targeting Insider Trading

A recent flurry of insider-trading cases brought by the Securities and Exchange Commission have demonstrated that the regulator has indeed stepped up its enforcement efforts in this area.

Several weeks ago, the SEC filed charges against former Oracle vice president Christopher Balkenhol. According to the Commission, Balkenhol learned about secret merger negotiations from his wife, who worked at Oracle as the lead executive assistant to the chief executive officer and two co-presidents. The SEC stressed that it has not alleged that Balkenhol’s wife knew about his illicit trades, but only that Balkenhol breached a duty not to misuse confidences obtained for his or her own gain.

The prior week, the Commission charged former Morgan Stanley employee Jennifer Xujia Wang and her husband, Ruopian Chen, a former employee of ING Investment Management Services, with insider trading for allegedly buying stocks on the basis of material, nonpublic information culled from confidential merger talks. The SEC charged that Wang and Chen obtained illegal profits of more than $600,000 by trading on the information before the public announcements of three acquisitions.

Thomsen

On the same day, another former Morgan Stanley executive, Randi Collotta, and her husband, Christopher, pleaded guilty in what SEC Enforcement Director Linda Chatman Thomsen called, “one of the most pervasive Wall Street insider trading rings since the days of Ivan Boesky and Dennis Levine.” The Commission said it charged 14 individuals and companies in what it called “a brazen insider trading scheme” that netted more than $15 million in illegal insider trading profits on thousands of trades. The alleged perpetrators used information stolen from UBS Securities and Morgan Stanley & Co., according to the SEC.

That same week, the SEC filed charges against a Hong Kong couple, Kan King Wong and Charlotte Ka On Wong Leung, for allegedly engaging in illegal insider trading before the public announcement of Rupert Murdoch’s $5 billion bid for Dow Jones. In fact, shortly after the SEC saw suspicious trading in Dow Jones’ stock, it moved quickly and obtained a freeze on the assets in the Hong Kong account.

“They have certainly been out there talking about it [insider trading] as a priority,” says Timothy Coleman, a partner at the law firm Dewey Ballantine.

“It’s the phenomenon of a hotter market,” adds Mark Radke, partner with the LeBoeuf, Lamb, Greene & MacRae law firm and a former chief of staff to the chairman of the SEC. “The asset freeze in the Hong Kong-Dow Jones case is noteworthy due to the speed with which it was brought. That was really fast.”

“A Vigorous Program”; Focus On The Family

The number of insider trading actions by the SEC has actually been flat or down from recent years. According to the SEC, last year it brought 46 cases, down from 50 the prior year, and 42 in 2004. In 2002, it filed 59 insider trading actions.

COMPLAINT

Below are excerpts of the SEC complaint against Christopher Balkenhol, a former Oracle executive charged with insider trading.

From November 2004 to September 2005, defendant Balkenhol—himself an Oracle vice president—made increasingly sizeable investments in public companies that were the subject of highly confidential merger discussions at Oracle. In each instance, Balkenhol's trades coincided with important high-level meetings involving senior Oracle executives -meetings known to Balkenhol's wife, who had access to the highest level of information at the company. Balkenhol invested in two companies—Retek Inc. and Siebel Systems Inc. —shortly before they were acquired by Oracle. The public announcements of the acquisitions significantly increased the stock prices of Retek and Siebel, allowing Balkenhol to reap $97,283 in illegal trading profits.

Balkenhol owed a duty of trust to his wife, and violated this duty by using information he obtained from her in confidence for personal profit. By trading Retek and Siebel securities based on misappropriated material nonpublic information, defendant Balkenhol violated Section 10(b) of the Securities Exchange Act ("Exchange Act"). Additionally, because the material nonpublic information relating to Retek involved a tender offer, defendant Balkenhol's trading in Retek securities also violated Section 14(e) of the Exchange Act. The Commission seeks a court order requiring that defendant Balkenhol disgorge his ill-gotten gains plus prejudgment interest, imposing civil money penalties, and enjoining defendant Balkenhol from future violations of these provisions of the securities laws …

Balkenhol's trading in Oracle acquisition targets between November 2004 and September 2005 sharply diverged fiom his previous securities trading history. Balkenhol had previously conducted highly diverse trading in much smaller share and dollar amounts. From 2001 through October 2004, Balkenho17s typical purchase of any single stock averaged only $15,000. Moreover, from 2003 through October 2004, Balkenhol bought stock in 22 different companies.

In contrast, between November 2004 and September 2005, Balkenhol invested in only Retek, Siebel, and a third public company—each of which was an Oracle acquisition target. These trades were far in excess of his prior trading history; by September, Balkenhol had invested nearly $450,000 in Siebel alone.

Prior to his illegal insider trading in Retek hnd Siebel, described below, Balkenhol made an unsuccessful attempt to profit by purchasing stock in a company under consideration for acquisition by Oracle. Although this acquisition never came to hition and these trades are not alleged as part of defendant's illegal conduct, they represent the beginning of Balkenhol's pattern of investing in confidential Oracle acquisition targets.

From late October to early November 2004, Oracle's top executives held confidential discussions with their attorneys and investment bankers regarding a potential acquisition. Soon after his wife scheduled these meetings, Balkenhol made two purchases of stock in the targe company. On October 25, 2004, Balkenhol purchased 1,000 shares for approximately $8,000. Two weeks later, as talks became more serious, Balkenhol bought an additional 5,000 shares for approximately 13. $43,000 -his largest one-day purchase of a publicly traded stock since 2000. However, Oracle did not pursue the planned acquisition, and Balkenhol ultimately liquidated his position for a near net-zero change in price …

Each of Balkenhol's purchases of Retek and Siebel stock alleged herein was made based on inside information misappropriated fiom his wife in violation of duties of trust and confidence owed to his wife and to his employer.

Balkenhol knew, or was reckless in not knowing, that the information he received fiom his wife regarding the Siebel and Retek acquisitions was material and nonpublic. Based on his relationship with his wife, his senior position at Oracle, and his training regarding Oracle's insider trading policy, Balkenhol knew, or was reckless in not knowing, that he had a duty to refrain fiom trading on material; nonpublic information. Moreover, Balkenhol knew or had reason to know that the inside information regarding the Retek acquisition came from Oracle, the offering company in a potential tender offer.

Source

SEC (May 14, 2007)

As a result, in each of the past four years, insider trading cases accounted for only 7 to 8 percent of the SEC’s enforcement actions, compared with 10 to 12 percent earlier in the decade, according to the SEC. Radke, however, believes the recent cases might signal that the Commission may begin moving closer to its historic norm of 15 to 20 percent of total enforcement cases. “They have a vigorous program at the SEC,” he contends.

Coleman

Insider trading may become a bigger source of enforcement actions for several reasons. Market activity and volatility is greater these days than a few years ago, and mergers and acquisitions activity is setting records each year. “The single biggest source of insider trading is learning about an impending transaction,” Coleman says.

In the recent cases, the SEC also seemed especially focused on the link between illegal trading and married couples as well as other family members. “Spouses and close family members of highly placed corporate employees will sometimes learn important information about the company that they know is confidential,” says Helane Morrison, regional director of the Commission’s San Francisco office, regarding the Balkenhol case. “In these situations, the family members have a duty to refrain from using the information for personal gain in the stock market.”

The SEC also showed it can catch these family webs in far-flung places, even as technology and tactics evolve. For example, it charged Wang and Chen with using online brokerage accounts in Wang’s mother’s name, Zhiling Feng, who lives in Beijing, to purchase securities of three companies on the verge of announcing they would be acquired. When Feng’s first brokerage account was opened, it was funded with money from a checking account in Wang and Chen’s name, according to the SEC.

“We continue to sharpen the techniques we use to identify and investigate suspected insider trading,” Daniel Hawke, regional director of the SEC’s Philadelphia office, said in a statement. “People should understand that when they misuse online brokerage accounts to commit federal securities law violations, they will be identified and caught.”

A Daunting Task

For the SEC, however, there is the need to keep up with an evolving marketplace that continues to grow more sophisticated. Enforcement agents can no longer just monitor trading in common stocks; they must closely watch option activity and other diverse and innovative globally traded investment products. For example, in the United Kingdom, there is “spread betting,” where investors can wager simply on the price change in a security. “There are derivative ways to trade that don’t appear obvious,” says Andrew Kaizer of the law firm McDermott Will & Emery. “This makes it a more daunting task for regulators.”

One new product that has gained popularity in recent years is the PIPE, or “private investment in public equity.” Kaizer explains that how PIPEs are often created—where the financier approaches potential investors to gauge investor appetite—makes trading in them prone to abuse, since sensitive information about the issuer frequently lands in many hands. Then, hedge funds or others with sensitive information may frequently short the stock of the company doing the PIPE transactions. “This makes it difficult to control information,” Kaizer explains.

What can companies do to guard against insiders trading their own stock with material, nonpublic information? Experts say companies should keep tighter controls on information, have better, more effective monitoring of those who have access to sensitive information, and make sure they are appropriately trained.

Companies should also review their policies regarding trading blackout periods and the blocks of time during which insiders—especially executives—are permitted to buy and sell their stock, say experts. Usually, this takes place around the time a company reports quarterly results. “Companies should go for pre-clearance of trading,” recommends Radke of LeBoeuf.

“Everyone knows it is illegal, but it is not something they have thought about,” Coleman says.

In fact, Coleman stresses that in many cases, insider trading is a crime of opportunity rather than something elaborately planned in advance. Typically, an individual is taking advantage of an unexpected slip in internal control. “It is not usually done by someone who needs the money,” he insists.

As a result, it is especially important to remind employees about the definition of “insider trading,” as well as the potential penalties if caught. “Every 10 years,” Radke says, “you must remind a generation of Wall Streeters that insider trading is against the law.”