Archive for November, 2016

The Supreme Court recently heard argument in Salman v. United States (No. 15-628), a case that may bring some clarity to one highly contested area of insider trading law. Whistleblowers looking to report information on insider trading to the SEC will benefit from a basic understanding of insider trading law leading up to Salman.

Prohibitions against insider trading make obvious sense to most of us. There is something intuitively wrong with trading on confidential information—and thus profiting or avoiding a loss—that is not available to the general public. Our federal prisons have among their residents both those who have traded on or tipped others with material, nonpublic information (“insiders” or “tippers”) and those who have received tips and traded accordingly (“tippees”).

There are various rationales behind the prohibition on all types of insider trading. In addition to the obvious objection that trading on insider information strikes us as fundamentally unfair, the prohibition also reflects concerns about protecting the integrity (and liquidity) of our public markets and the confidentiality of business information. Some of these concerns have led public companies to limit the periods when employees may trade in their company stock (so called “trading windows”).

In the parlance of economics, trading on information not known to the general public reflects a kind of information asymmetry, and all types of insider trading reflect that asymmetry.

Broadly speaking, there are two types of “insider trading” cases, only one of which refers to “insider” trading strictly speaking. The classic case of insider trading involves a corporate insider who trades (buys or sells) shares of his own company on the basis of material, nonpublic information that the insider learns in the course of his work activities on behalf of the corporation. The insider has an obvious informational advantage over other shareholders and traders.

The insider can profit from either negative or positive insider information. If the news is good for the corporation, the insider can trade before the price of the stock rises (immediately or with “call options”) and thereby profit from the eventual uptick in the stock price. Conversely, if the news is bad for the corporation, the insider can dump stock upon unknowing investors and thereby avoid losses, or, more aggressively, can “sell short” the stock or purchase “put options” to sell at a fixed price.

The other broad category of “insider trading” might be more accurately dubbed “outsider trading,” but is typically referred to as “misappropriation of information” trading. In these cases, an insider learns material, nonpublic information that will affect the stock value of another company. The insider learns of the information in the course of working at her own company and “misappropriates” information about another company for her personal gain.

In addition to these categories of “inside” traders are those who learn information from such insiders or those connected to insiders and trade accordingly; that is, the tippees. The scope of their liability is more complicated still, though the Supreme Court may help to clarify that scope in the Salman case this term.

Where Whistleblowers Come In

Often, whistleblowers from inside the company whose securities are being traded, or whistleblowers who are otherwise affiliated with persons receiving or providing insider information, approach the SEC with these allegations.

Last year, whistleblowers filed nearly 300 complaints about insider trading with the SEC. Sometimes these allegations result in SEC enforcement actions, but more often they do not. Despite the common intuition that trading on nonpublic information is always unlawful, the law on insider trading is not so straightforward, and many instances of trading on “nonpublic information” do not constitute unlawful insider trading.

Potential SEC whistleblowers and their counsel should familiarize themselves with the potential reach and the actual grasp of insider trading laws, laws that vary by jurisdiction and class of trading actors.

Many of the most contested areas of insider trading prosecutions concern the reach of insider trading prohibitions as they relate to the tippee, that is, the non-insider who trades upon nonpublic information. Such a circumstance is before the Supreme Court in Salman.

In Salman,[i] the defendant was convicted by a jury of securities fraud based upon an insider trading scheme involving his extended family. The defendant in Salman was not an insider. Instead, the issue in Salman concerns the “personal benefit” requirement for tippee liability under insider trading laws. Through marriages and friendships, the defendant in Salman obtained inside information from a person whose brother was an insider at Citigroup. The brother and the defendant mirrored their trading activity based upon the material, nonpublic information received from the insider at Citigroup. Through a series of transfers meant to disguise his activity, the defendant traded on material, nonpublic information several times between 2004 and 2007.

The defendant’s conviction was sustained by the district court and again sustained last year by the Ninth Circuit. The Supreme Court will now decide whether this conviction was justified by the facts of the case. And to do that, the Court will likely wrestle with the body of insider trading law that has developed to bring us to Salman.

The prohibition on insider trading originally emanates from Section 10(b) of the Securities Exchange Act of 1934, which makes it unlawful for “any person … [t]o use or employ, in connection with the purchase or sale or any security…, any manipulative or deceptive device….” Hardly sufficient by itself to define what is or is not insider trading, the SEC’s rule-making authority empowers it to define the prohibition further.

SEC Rule 10b-5 makes it unlawful to, through interstate commerce, “employ any … scheme … to defraud … in connection with the purchase or sale of any security.” The SEC has interpreted this language broadly to prohibit what most people would consider to be trading on inside or nonpublic information.

One classic pillar of jurisprudence in this area has been the so-called “disclose or abstain” rule, dating back to the 1960s. In most respects, the rule makes perfect sense. It originally held that any person trading for his own account in the securities of a corporation who has access to nonpublic information intended only to be available for a corporate purpose may not trade on that information. As the Second Circuit held in SEC v. Texas Gulf Sulphur Co.,[ii] “anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence … must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed.”

Though the idea articulated in Texas Gulf is simple enough, the question of what class or classes of persons are bound by the disclose-or-abstain rule is not so simple. For several decades, courts have narrowed the scope of this idea with a focus on duties and obligations that attend to different types of tippers and tippees in different scenarios.

In Chiarella v. United States,[iii] the Supreme Court held that a printer working as a “markup man” at a financial print shop who gleaned information about pending corporate takeover bids from sensitive documents he was handling, and then traded based upon that information, did not violate laws against insider trading by doing so. Reversing his conviction, the Court held that the printer was under no obligation to disclose the information to the public (to the contrary, it would be improper for him to do so) and also under no obligation imposed by insider trading laws to abstain from trading on it. The Court noted that “not every instance of financial unfairness constitutes fraudulent activity under § 10(b).”[iv]

Shortly thereafter, the Court decided Dirks v. S.E.C.[v] In Dirks, an insider contacted well-known securities analyst Raymond Dirks to disclose fraudulent conduct at the insider’s company. Dirks took the information and did his own further investigation. During that investigation, however, Dirks openly discussed the insider information he obtained directly from the insider with various clients and investors, many of whom acted on that information by trading in that company’s securities. For this, he was convicted under insider trading laws.

In reversing his conviction, the Court expressed concern over “imposing a duty to disclose or abstain” on persons such as market analysts whose role in markets is considered necessary.[vi] It did, however, recognize the “need for a ban on some tippee trading,” and held that “[n]ot only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain.”[vii] This reduced to a test: does “the insider [  ] benefit, directly or indirectly, from his disclosure;”[viii] where he does, he acts in breach of his fiduciary duty to his company’s shareholders. And for the tippee: he is equally liable “if the tippee knows or should know that there has been [such] a breach.”[ix]

Much turns on the definition of “personal benefit” that constitutes the breach of the fiduciary duty that must underlie an action against either the tippee or the tipper. In Dirks, the Court defined it to include “a pecuniary gain or a reputational benefit that will translate into future earning,” but also added that “the elements of fiduciary duty and exploitation of nonpublic information also exist when an insider makes a gift of confidential information to a trading relative or friend.”[x]

The Ninth Circuit in Salman relied upon Dirks to determine that the disclosure of material, nonpublic information by the Citigroup employee to his brother, “knowing that he intended to trade on it,” was “precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.”[xi] What remains contested in many courts is to what extent the government must show that the tipper stands to receive a “personal benefit” of a “pecuniary or similarly valuable nature” and what a “similarly valuable nature” should mean.

Potential SEC whistleblowers should apply their allegations to the body of insider trading law that has developed in their jurisdiction before assuming that the SEC has legal authority to bring an enforcement action based on the information. That means talking to an attorney familiar with the body of law. And stay tuned for the Supreme Court ruling in Salman next year.

i 792 F.3d 1087 (9th Cir. 2015).

ii 401 F.2d 833, 847 (2d Cir. 1968).

iii 455 U.S. 222 (1980).

[iv] Id. at 231.

v 463 U.S. 646 (1983).

[vi] Id. at 657.

[vii] Id. at 659.

[viii] Id. at 662.

[ix] Id. at 660.

[x] Id. at 664.

[xi] 792 F.3d at 1092. The Ninth Circuit in Salman discussed the decision by the Second Circuit in U.S. v. Newman, 773 3d. 438 (2d Cir. 2014), which overturned the insider trading convictions of two “tippees.” Newman seems to hold that a tippee can only be convicted of insider trading where it is shown that the tippee knows that the tipper is breaching a fiduciary duty and that the tipper had received a personal benefit in exchange for disclosing the nonpublic information. The Supreme Court did not grant cert. in Newman. Whether the Supreme Court will make a distinction between the facts in Salmanand Newman remains to be seen. The nature of an actionable “personal benefit” in this area of insider trading remains subject to dispute.


What SEC Whistleblowers Should Know About Insider Trading And The Salman Case

About the Author

shayne_stevensonShayne C. Stevenson is a partner at Hagens Berman LLP, one of the nation’s largest and most successful plaintiff-side law firms, where he leads its international whistleblower practice under the False Claims Act and the SEC and CFTC whistleblower programs. Mr. Stevenson, a graduate of the Yale Law School, is a frequent speaker and commentator in these areas of practice.



A Boston-based real estate entrepreneur was convicted on Monday of engaging in insider trading with two friends after learning of India-based Apollo Tyres Ltd’s planned attempt to buy Cooper Tire & Rubber Co in 2013.

Amit Kanodia, 49, was found guilty by a federal jury in Boston on 11 of the 19 counts he faced, including conspiracy and securities fraud. He was acquitted of the other eight counts of securities fraud, prosecutors said.

The verdict was confirmed by a spokeswoman for the U.S. Attorney’s Office in Boston. Kanodia, who had pleaded not guilty, is scheduled to be sentenced on Jan. 18.

Kanodia’s lawyers did not respond to requests for comment.

Prosecutors said Kanodia, of Brookline, Massachusetts, learned details about the proposed merger between Apollo and Cooper Tire from his then-wife, who was Apollo’s chief legal officer, more than two months before the deal was announced.

Prosecutors said Kanodia tipped off two of his friends, including Iftikar Ahmed, a general partner of Greenwich, Connecticut-based Oak Investment Partners.

Prosecutors said Ahmed and the other friend, Steven Watson, traded on the confidential information before the deal was announced and shared about $245,000 of their more than $1.17 million in illegal proceeds with Kanodia.Z

Those payments were made to an account Kanodia opened for a charity, Lincoln Charitable Foundation, ostensibly to raise money for flood victims in India, even though he used much of the money for his own financial investments, prosecutors said.

The merger was abandoned in December 2013 after an acrimonious legal battle between Apollo and Cooper Tire.

Both Kanodia and Ahmed were charged in connection with the insider trading scheme in April 2015, and Watson pleaded guilty that August as part of a cooperation deal with prosecutors.

Ahmed fled the United States for India in May 2015. Prosecutors have since separately accused him of embezzling $54 million from Oak Investment Partners.

The case is U.S. v. Kanodia et al, U.S. District Court, District of Massachusetts, No. 15-cr-10131. (Reporting by Nate Raymond in New York; Editing by Richard Chang)


“Finders, keepers” is not the law. In most of the United States, it is illegal to keep property that has obviously been mislaid without making a reasonable effort to return it. You can keep that $20 you found lying on the platform at Grand Central, but not the one you saw fall out of the pocket of the person walking ahead of you on a country lane.

The law of insider trading has never been grounded in this basic idea of morality. Trading on inside information, according to the American securities laws, is a form of fraud, not theft. The inside trader doesn’t steal anything. She deceives her usually faceless and fungible trading counterpart by entering the market with a corporate secret up her sleeve. Or, in a related theory, she deceives her employer by using information gleaned at work to profit without the boss’s knowledge and permission.

The fit between fraud and insider trading has always been awkward and counterintuitive, at least for non-lawyers if not also for courts. This week, for the first time since 1997, the Supreme Court confronted this difficulty when it heard arguments in the case of Bassam Salman. Salman made over $1 million trading on information about healthcare stocks he got from his sister’s fiancee, whose access to tips came through a brother working at Citigroup.

Behind Salman’s case lurks an even more substantial insider trading case that the court declined to hear earlier this year: Manhattan U.S. Attorney Preet Bharara’s prosecution of hedge fund traders Todd Newman and Anthony Chiasson. When a federal court of appeals threw out their convictions in 2014, it upset a raft of additional guilty verdicts in a highly publicized campaign against insider trading in the New York fund world. Of Bharara’s 80 convictions, 14 have been reversed or dismissed and more are under attack.

Newman and Chiasson, more or less, pocketed someone else’s dropped money. They didn’t innocently overhear anonymous whispers on a midtown elevator, something the law has never considered a basis for the crime of insider trading. The information they received — advance news about earnings results of the tech companies Dell and NVIDIA that earned over $70 million for their funds — came to them down a chain of tippers engaged in the casual passing of favors that greases the investment business.

The court freed Newman and Chiasson, and thus a number of hedge funders with similar convictions, because the prosecutors could not prove the traders knew the identity of the people who originally leaked the earnings tips or their specific motivations. The court also said that, in order to be criminal, leaks had to be intended to generate some material gain for the leakers.

The courts, not wanting to criminalize inadvertent disclosures and whistleblowing, have long said that a criminal tipper must have disclosed information for “personal benefit.” Judges have worried that at the bottom of a slippery slope lies an extreme rule barring trading unless everyone enjoys parity of knowledge, a rule which would defeat the purpose of research and the investment industry.

But the notion that Newman and Chiasson did not know they were trading on illegally disclosed information is preposterous. A well-known securities regulation prohibits companies from releasing earnings news selectively to favored audiences. Even if the rules had not made the

Dell and NVIDIA leaks illegal, it would obviously be improper for those working inside a company to tell their associates in the investment business what is coming down the pike.

In other words, Newman and Chiasson well knew who their “found money” belonged to, and that the real owner did not mean for them to use it. (The Supreme Court ruled a long time ago that nonpublic information can be a corporation’s property.) The decision in their case has created a terrible “don’t ask, don’t tell” rule for inside traders in New York’s investment industry: As long as one does not know the original source of or motivation for a lucrative leak, one is free to trade away.

The impending decision in the Salman case, which came to the Supreme Court from San Francisco, is thus exceedingly important. The court, if it can muster five votes, could affirm Salman’s conviction and reject the ruling in Newman and Chiasson’s case, holding that even inside information shared purely from the affinities of family or friendship, without any “material benefit” to the tipper, cannot be used to trade. (Under rules of criminal procedure, any convictions that the government has already lost on final appeal could not, however, be reinstated).

Judicial decisions are necessarily incremental, though. The recent oral argument at the Supreme Court was disappointingly small-bore, focusing almost entirely on the linguistic nuances of one of the court’s prior rulings on insider trading, and on the question of what sort of benefit one enjoys from giving another person a gift.

This may have been inevitable. The court is constrained to work within the cramped construct of insider trading as fraud, cobbling together a theory of deception broad enough to catch the venal traders but not too broad to implicate those who unwittingly trade on nonpublic facts.

The public would be better served if Congress, where reform of insider trading law has been discussed, were to see the connection to those old principles of found property law. Inside information, unlike a $20 bill, can’t really be returned to its rightful owner.

But the law should say that if you receive non-public knowledge under circumstances in which a known corporate owner clearly does not mean you to have it, then you may not “keep” it by exchanging it for a cash windfall in the securities markets. (An exception protecting whistle-blowing would not be difficult to draft).

Such a rule has a home in enduring legal ideas and makes a lot more sense than current law. And it would have produced unassailable convictions of not only Salman, but also Newman, Chiasson and many of the sort of traders in the clubby fund industry who traffic in favors and secrets.

Buell is a professor of law at Duke University whose new book is “Capital Offenses: Business Crime and Punishment in America’s Corporate Age” (W.W. Norton & Co.).


The Securities and Exchange Board of India (Sebi) is examining whether Tata Sons Ltd violated insider trading regulations in its interactions with group operating companies, according to The Economic Times. This isn’t surprising. A letter by Cyrus Mistry, former chairman of Tata Sons, to the company’s board had mentioned possible violations of insider trading regulations. In addition, people close to Mistry have spread the word that the relationships between operating companies, Tata Sons and Tata Trusts are nebulous. According to them, price-sensitive information often goes back and forth between these entities before the board of the operating company comes to a decision.

The charges, in one sense, implicate Mistry himself, since he was a key link between the operating companies and Tata Sons. Sebi’s insider trading regulations prohibit communication of unpublished price-sensitive information.

But a pertinent question here is if communication of price-sensitive information with a large shareholder should be seen as a violation, per se. If so, perhaps every Indian company would have violated Sebi’s regulations at one time or another. For instance, when a board nominee of the government or a bank or a private equity fund receives price-sensitive information, it doesn’t remain a closely guarded secret. That information is typically taken back to the team overseeing the investment at these entities.

It then depends on how you read Sebi’s insider trading laws. They state, “No insider shall communicate, provide, or allow access to any unpublished price sensitive information… to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.” A bank’s or an investment firm’s nominee on a company’s board will argue that sharing the information with his team is in furtherance of legitimate purposes and performance of duties.

A Tata Sons nominee on the board of a Tata group company will make the same argument. Surely, it can’t be the regulator’s case that nominee directors keep all price-sensitive information close to their chests, and not take it back to the firm they represent. If it insists on doing so, it will throttle decision-making at the holding company level or at banks and investment firms, as the case may be. A former executive director at Sebi said that if such restrictions are imposed, taking normal business decisions will become impossible.

In fact, if Sebi starts examining all board nominees of large shareholders and how they handle price-sensitive information, it will clearly be a slippery slope. Where, then, does one draw the line?

Policymakers should accept the fact that large shareholders will rule the roost when it comes to decision-making at a company. A structure where the rights of large shareholders are curtailed will unduly empower the management of the company, which will result in negative outcomes.

JR Varma, professor of finance at Indian Institute of Management, Ahmedabad and a former Sebi board member says, “The central problem in Indian corporate governance is how to manage the conflicts between dominant shareholders and minority shareholders. We can’t improve corporate governance by limiting shareholder democracy, and therefore the ‘legitimate’ governance rights of the majority shareholder must be respected. In fact, the various obligations that regulators impose on dominant shareholders don’t make sense without the governance rights that underpin these obligations. That does not mean giving the majority shareholder a free hand to do whatever it likes. An important goal of corporate governance regulations is to ensure that dominant shareholders don’t abuse minority shareholders through unfair related party transactions or through insider trading.”

Sebi will surely have a case on its hands if it finds that any of the Tata Sons directors or any of trustees of Tata Trusts traded shares of operating companies, when the trading window was closed for insiders. The former Sebi official says that the operating word that should be kept in mind as far as insider trading violations go is ‘trading’. Besides, Sebi should devote its resources to areas where there is an abuse of power by dominant shareholders such as related party transactions that work against the interest of minority shareholders. The fact that Tata Sons and its principal shareholder procured price-sensitive information ahead of others is, in itself, not something to get worked up about. In fact, among other things, people close to Mistry complained how he had to hold multiple meetings with both trustees of Tata Trusts as well as directors of Tata Sons ahead of important decisions. These are matters that Tata Sons and Tata Trusts need to resolve.

Sebi has a model code of conduct as far as handling price-sensitive information by a listed company goes. The code doesn’t envisage sharing of information with a dominant shareholder. Even so, the Tata group can adapt best practices so that leakage of information is kept to the minimum



India’s markets regulator Securities and Exchange Board of India (SEBI) is investigating possiblee instances of insider trading at salt-to-software conglomerate Tata Sons and its group companies.

According to an Economic Times report, Sebi is studying the group’s corporate structure and its subsidiary companies to see if they were in compliance with the country’s insider trading rules. Under insider trading laws, which are punishable offenses, family and non-board company executives should not be made privy to strategic information that can significantly impact the stock price of the company such as an acquisition or a sale before such information has been made public and approved by the board.

Specifically, Sebi is said to be examining if strategic information was leaked to Tata Sons directors and Tata Trusts nominees before the information was approved by the companies’ boards, said the ET report.

Tata Sons Former Chairman Cyrus Mistry has alleged that key certain Tata Trusts trustees were present when Tata Power’s CEO made presentations to Tata Sons board on its proposed acquisition of Welspun Renewables.


A former SAP SE executive and two Indiana car wash owners have been indicted on charges that they engaged in an insider trading scheme that resulted in hundreds of thousands of dollars in profits.

Christopher Salis, a former global vice president at the software company’s SAP America sap unit, was charged along with brothers Douglas Miller and Edward Miller in an indictment filed in federal court in Hammond, Indiana made public on Thursday.

The criminal charges followed a civil lawsuit filed by the U.S. Securities and Exchange Commission in June against the trio and a fourth man over trades the regulator said were placed ahead of SAP’s acquisition of Concur Technologies in 2014.

Salis, who was representing himself in the SEC lawsuit, did not immediately respond to a request for comment. Thomas Kirsch, a lawyer for the Millers, said his clients will plead not guilty and deny the charges.

“They did not engage in any insider trading or commit any crimes at all,” Kirsch said. “The allegations are meritless, and the Millers look forward to fighting these allegations in court and to a full acquittal.”

Prosecutors said while employed at SAP in Palo Alto, California, Salis, 39, before the Concur deal was announced tipped his friend Douglas Miller of Dyer, Indiana, off to information about the acquisition so Miller could make trades.


Ex-SAP Executive, Two Others Indicted in U.S. for Insider Trading

David H. Brooks, a former military contractor who was found guilty of insider trading and fraudulently enriching himself through company funds, died on Thursday in prison in Danbury, Conn. He was 61.

A spokesman for the Federal Bureau of Prisons confirmed the death. A lawyer for Mr. Brooks’s children, Judd Burstein, said the cause was being investigated.

Mr. Brooks was the founder and former chief executive of DHB Industries, one of the largest makers of bullet-resistant vests and other body armor used by the military and law enforcement. The company originally had its headquarters in Westbury, N.Y. It now operates as Point Blank Enterprises and is based in Pompano Beach, Fla.

Mr. Brooks was serving a 17-year sentence after being convicted in 2010 for his role in what prosecutors described as a $200 million fraud.

During an eight-month trial, spectators were riveted by testimony detailing Mr. Brooks’s lavish lifestyle, which had captured the attention of the tabloids when he threw what was rumored to be a $10 million bat mitzvah party for his daughter featuring the rapper 50 Cent and the rock group Aerosmith.

His company was said to have paid him more than $6 million in personal expenses, some of it used to pay for prostitutes for his employees, plastic surgery for his wife, a burial plot for his mother and a $100,000 jewel-encrusted belt buckle.

Prosecutors also accused him of funneling money from the company to support a thoroughbred horse-racing business.

Mr. Brooks was accused of misleading investors about the company’s finances. He made $185 million by selling his shares when they were at a record high, prosecutors said.

The case attracted a great deal of publicity, leading Mr. Brooks’s lawyers press, unsuccessfully, for a mistrial. “The accumulation of titillating and scandalous evidence has become a centerpiece of the trial and has incurably prejudiced the jury,” they argued.

Mr. Brooks was found guilty by a federal jury on 17 counts, including insider trading and securities fraud. He was sentenced in 2013 and was appealing his sentence at the time of his death, Mr. Burstein said.

Mr. Brooks resigned from the company in 2006. Born in Brooklyn, he graduated from New York University with a business degree.


Many of us have had their afternoons ruined by dry compliance seminars packed with legalese about insider trading.

David Smyth, a North Carolina lawyer and a former Securities and Exchange Commission lawyer, offers guidance in a different way.

Inspired by a case now before the U.S. Supreme Court, Smyth has created “The Insider Trading Cartoon Series,” available on YouTube.

With the help of computer animation software, he’s made about a dozen shorts to explain the thicket of insider-trading laws, although without the dry legalities of the high court case. There are workplace scenarios about potential traps, what’s legal, and what could send you to prison.

“Insider trading is a mess,” Smyth said in an interview. “It’s like somebody built a living room somewhere and said, ‘Gosh, we need a kitchen, and we need a laundry room.’ Now all these rooms have gotten tacked onto this living room, but the construction of the house doesn’t make sense.”

His two- to three-minute shorts try to make the complexities of material, non-public information easy for even a child to grasp.

“Usually I’m sitting on my sofa at home with my 6-year-old daughter leaning on me looking at it and asking me, ‘Who’s that guy?”’ said Smyth. “I’m trying to explain it to relatively educated novices.”

So someone legally prohibited from trading is shown with a padlock over the head, while volatile inside information is depicted by an exploding mushroom cloud. A worker who steals a company secret and trades on it eventually ends up with his pants on fire.

Pixar hasn’t come calling, but Smyth is building a fan base. An ex-SEC official now working as a consultant asked to use a segment during a compliance seminar, and a lawyer who argued a 1983 case before the Supreme Court offered praise after being featured in a cartoon.

“He was known as being a thoughtful, almost professorial type, as opposed to a bohemian artist,” said Jordan Thomas, an ex-colleague. He’s impressed by Smyth’s approach. “It educates in a way that goes down easier than a dry presentation.”

A partner at Brooks, Pierce, McLendon, Humphrey & Leonard LLP in Raleigh, North Carolina, Smyth previously worked as an assistant director in SEC enforcement division. From 2005 to 2011, he led insider-trading and foreign-bribery investigations and helped establish the agency’s Office of Market Intelligence.

There’s an undercurrent of lawyerly humor to the work. When two executives discuss a pending deal, they’re dining at a cafe called “Chiarella’s,” a reference to the Supreme Court’s decision in Chiarella v. U.S. In that case, a printer was convicted of using illicit information about takeover bids he learned on the job. He was cleared after the high court found he didn’t owe a legal duty to the company whose shares were traded.

In another, a female figure with short hair and glasses named “Mary Jo” waves an American flag while she and a male figure named “Andrew” stand before a broken window. It’s a nod to SEC Chair Mary Jo White and enforcement chief Andrew Ceresney, and a reference to the agency’s “broken windows”strategy, under which the SEC goes after all infractions, no matter how small.

Smyth also takes on the 2014 appeals court ruling that lawyers call “Newman,” which made it harder for the U.S. to prosecute insider cases. An SEC lawyer battles a trader until a bomb labeled “Newman” appears and explodes.



Norway’s prosecutor for economic crimes said Ola Rollen, chief executive of Hexagon, was arrested in Sweden last Wednesday and will be held in custody until next Saturday.

Hexagon, which makes technology used to design, measure and position objects, has a market capitalisation of $14bn on the Stockholm stock exchange. Its shares fell 5 per cent on Monday morning after news of the arrest of Mr Rollen, who has been chief executive for the past 16 years.

The company said that Robert Belkic, Hexagon’s chief finance officer, would become acting chief executive during Mr Rollen’s detention.


Mark Lyttleton, who previously ran a £2bn fund for the asset manager’s UK unit, pleaded guilty on Wednesday to using inside information to trade in the securities of EnCore Oil and Cairn Energy, as alleged in an indictment at Southwark Crown Court.

A third count with which he was charged in September was dropped by the Financial Conduct Authority.

He used inside information on a proposed takeover of EnCore, an Aim-listed North Sea explorer, to deal in 175,000 of its shares in October 2011, according to the indictment. A month later, he found out about Cairn’s discovery of oil in Greenland and dealt in call options, the indictment added.

Wearing a dark suit, Lyttleton, 45, was bailed until his sentencing in December. While the maximum sentence for insider trading is seven years, Judge Anthony Leonard said his early plea would be taken into account. Paddy Gibbs QC, Lyttelton’s barrister, also said a psychological evaluation would be submitted.

His guilty plea comes after a three-year investigation by the FCA that spanned the UK and Switzerland. Lyttleton was first arrested in 2013, along with his wife Delphine. Swiss authorities also searched properties in Switzerland at the time. No other individual was charged and Mrs Lyttleton was dropped from the FCA’s inquiries early last year.

The Financial Times previously reported that the FCA was examining whether Lyttleton gleaned confidential information on energy stocks from his job at the asset manager that he then used to trade on his own account through a broker in Switzerland.

Premier Oil made a £221m offer for EnCore in October 2011. Cairn meanwhile said in late November 2011 that a $600m exploration campaign to find oil and gas in the waters off Greenland had ended in failure, causing its shares to drop 1 per cent.

“Lyttleton was able to use the inside information to inform his purchase of shares a short time before any public announcement was made about the stocks concerned,” the FCA said in a statement. “The trading was conducted by Mr Lyttleton through an overseas asset manager trading on behalf of a Panamanian registered company.”

Monty Raphael QC, of the law firm representing Lyttleton, declined to comment on behalf of his client outside court.

It is a sharp fall from grace for Lyttleton, one of BlackRock’s biggest stars in the last decade, winning kudos for managing its UK Dynamic and Absolute Alpha portfolios. The latter topped the Cofunds’ bestseller list for June 2008 and its assets swelled from £300m to £1.4bn in just over a year.

A former colleague of his told the FT: “He was definitely considered a rising star at the firm and when he was first arrested it caused a massive stir within the company. It was strange because he was very understated and quiet, not flashy like some other fund managers at the company, and so it was a real shock.”

But the funds struggled after the financial crisis, and UK Dynamic was singled out as a “dog” by financial advisers Bestinvest in 2011.

He had left BlackRock before his arrest in 2013 for reasons unrelated to the investigation, the asset manager said at the time.

BlackRock said on Wednesday that the offences related to “actions carried out in 2011 for his personal gain, while off our premises, and that neither BlackRock nor any employee was under investigation. There was no impact to any of BlackRock’s clients as a result of the alleged actions. The alleged behaviour is totally contrary to the firm’s principles and values, and we strongly support aggressive enforcement of the law in these matters”.

The FCA has now secured 30 convictions for insider trading, a crime it had never prosecuted before 2008. Earlier this year a £14m case resulted in four convictions — including of former senior employees at Deutsche Bank and Moore Capital — and three acquittals.

That case, dubbed Tabernula, was the first big trial of insider trading in nearly four years, as the regulator’s resources were diverted away from such investigations to the sprawling probes into the rigging of Libor and foreign-exchange benchmarks.

Earlier this summer, the FCA revealed that abnormal movements in share prices ahead of public takeover announcements were at their highest level in five years — a possible side-effect of a dearth of big cases, which the regulator has said have a deterrent effect on would-be insider traders.


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