As discussed in the prior post, “Legal Insider Trading?” (click here), I reached out to the SEC to get its take on the significance and implications of the assertion that corporate disclosures going out over the same PR wire service are being delivered at different times to investors. To briefly recap, a recent article by IR Web Report (click here) states that

leading PR wire services used for corporate disclosure do not deliver information simultaneously to all investors, and that “some investors, mostly professionals with access to expensive subscription services, are trading in extended hours on information they receive from companies up to several minutes ahead of most other investors who rely on public sources of information, such as company websites or popular investment websites like Yahoo! Finance.”

SEC spokesman John Nester declined to discuss the facts set forth in the IR Web Report specifically, but stated that

Regulation FD requires that when a company discloses material non-public information to one of the enumerated persons, it must simultaneously either file a Form 8-K or use an alternate means of public disclosure that is dissemination of the information through a method or methods of disclosure that is reasonably designed to provide broad non-exclusionary distribution of the information to the public.

Read into that what you want.  My sense, however, is that at the SEC does not consider the scenario laid out in the IR Web Report article to be a violation of Reg FD.

What do you think?  Please offer your opinion in the Comments section below.

The insider trading laws are made up of a patchwork of judicial opinions that attempt to stretch a very vague statute (Section 10(b) of the 1934 Act) to reach most every type of trading on inside information. As a result, almost without exception, there are really no “repeatable” ways to legally trade and profit off of inside information.

However, every once in a while a scenario or idea arises that would seem to allow for what one might call “legal insider trading” on an ongoing basis.  I’ve seen this twice in the past few years. The first instance of this was brought to us (coincidentally, given his recent re-emergence in the world of SEC enforcement) by Mark Cuban, who in 2006 created a publication called Sharesleuth.com. Cuban hired a business reporter to run the publication, conduct investigations to “identify suspect companies,” and then publish reports showing all of the damning evidence. Most notably, Sharesleuth told the world right up front that Cuban was going to make personal investments based upon the information discovered, and do so prior to the publication of this information on the website.

As I wrote back in 2006,

In short, the business model for Sharesleuth.com is that Cuban takes short positions in advance of the publication of the stories published on Sharesleuth.com with the hope and expectation that the negative stories will be read by other investors. These investors will then presumably sell the stock, drive down the stock price and enrich Cuban. And repeat.

For reasons only a securities professor could love, most people agreed that Sharesleuth’s plan did not violate the law, making it, to my knowledge, the first “replicable-on-demand” business model that avoided the insider trading laws while permitting an investor to trade on nonpublic information. Sharesleuth still exists, but seems to have lost steam with just a few posts in that past year or so.

So Sharesleuth had the distinction of being the only “legal insider trading” business model I was aware of until this week, when I read a story on Dominic Jones’ IR Web Report (click here) about the uneven distribution of PR wire service information. As discussed here previously, Jones states that leading PR wire services used for corporate disclosure do not deliver information simultaneously to all investors, and that “some investors, mostly professionals with access to expensive subscription services, are trading in extended hours on information they receive from companies up to several minutes ahead of most other investors who rely on public sources of information, such as company websites or popular investment websites like Yahoo! Finance.”

The effect of this, according to Jones, is that a small group of investors who have direct access to newsfeeds (via Business Wire’s proprietary NX system or a wholesaler) receive earnings and other information ahead of most others and can profit almost at will by trading minutes before the masses.

Jones offers the example of Google Inc.’s Q3 earnings announcement which was issued by the company at at 4:01pm ET on October 16. Jones writes that some traders received Google’s news release almost two minutes before the release was posted to Yahoo! Finance at 4:03pm, by which time Google’s stock was already trading up almost 9% in the after-market.

Even more so than with Sharesleuth, it is difficult to argue that people trading based on PR wire service information they legally receive (albeit before the rest of the public) have violated the insider insider trading laws. Jones says that until the quirks in the PR wire services are eliminated, the SEC should simply instruct NIRI, the National Investor Relations Institute, to have its member corporations post corporate disclosures on their websites simultaneously with the release on the PR wire services. Until this situation is rectified one way or the other, however, those with the access described above would seem to have an opportunity to do some serious “legal insider trading” of their own.

I am trying to get the SEC’s view on this practice, so stay tuned.

For those of you who have been out of touch with the rest of the world for the past five hours, let me be the first to tell you that the SEC sued Dallas Mavericks’ owner/billionaire Mark Cuban today for insider trading.  Oh, and depending on the length of your recent isolation, you should probably also be aware that Barack Obama won the US presidential election.

Over at Securities Docket, today has been “all Mark Cuban, all the time.”  The easiest way to catch you up and for you to stay current on this is to visit the “Mark Cuban” tag link (click here), an ongoing thread of all of the Mark Cuban stories (five and counting today) on Securities Docket.  You can also check out the series of “Tweets” on this topic and others at Securities Docket’s Twitter feed (@SecuritiesD).

As widely reported last week, Brenda Murray, the Initiating Official tasked with reviewing and acting on the disciplinary recommendations of the SEC’s Inspector General in two high-profile matters, rejected the IG’s calls that discipline be imposed on several senior Enforcement officials. In separate reports dated November 7, 2008, Murray found that the IG’s Reports of Investigation did not support his conclusions in the Pequot/Aguirre matter or the W Holding Co./Bear Stearns matter, and that there was no basis in either case for following the IG’s recommendation as to disciplinary or performance-based action.

This flat-out rejection of the IG’s recommendations in both matters immediately drew a range of public responses. SEC Inspector General H. David Kotz, whose office conducted the investigations, issued a statement that his office was “surprised and disappointed by the administrative judge’s decisions…. We believe her findings were flawed and not supported by the evidence. We also have serious concerns about the process utilized in arriving at these decisions. We stand by our comprehensive and thorough reports 100 percent.” Mr. Kotz declined to elaborate on his statement above for this article.  U.S. Senator Charles Grassley, the ranking minority member of the Senate Finance Committee who helped initiate a re-investigation of the Aguirre matter, stated that “[i]t looks like the lawyers for the wrongdoers wrote the decisions.”

Privately, people at the SEC with knowledge of the matter go even further, stating that they are “stunned” by Murray’s decisions and the process that she used. An SEC official told me that Murray did not follow the standard procedure used by Initiating Officials in disciplinary matters, which is to examine only the record laid out in the IG’s report itself and decide based on that record whether disciplinary action is appropriate. If discipline is appropriate, the standard procedure is for the Initiating Official to draft a recommendation as to the type of discipline and then (and only then) seek comments and input from the subjects of the potential discipline.

To the contrary, for the two decisions she issued last week, Murray is said to have used a process that the SEC official with whom I spoke stated he had never seen in his many years of experience with a large number of cases. According to this official, Murray went outside the report, re-opened the record, and re-examined the facts by soliciting new statements from the subjects of the disciplinary recommendations. The official stated that it appeared that Murray made her decision that discipline was not appropriate based almost exclusively on the one-sided information she received from counsel for the various subjects. Notably, this information was not subject to any cross-examination or any follow-up by the IG’s office or other parties involved, and additionally was not provided under oath. The official stated that in his experience, such re-opening of the record is simply never done.

While stocks of all types, shapes and sizes continue to get hammered week after week, two Australian companies are reporting surging earnings and bright prospects in the current economic crisis.   What industry are these stocks in?  The Australian securities class action industry.

Last week, IMF (Australia) Ltd., the dominant class action litigation funder in Australia, told shareholders at its annual general meeting that net profit in fiscal 2009 was expected to come in at $20 million, following $17.16 million the prior year.  Class actions in Australia are growing in popularity and because there is no contingent fee model in Australia, IMF has emerged as the leading source of funding for these suits.  Among IMF’s recent successes is the Aristocrat case (discussed here), in which it was awarded $37 million of the $144 million settlement (with the law firm Maurice Blackburn getting about $8.5 million of IMF’s take).

Similarly, it was reported today in the Australian press that law firm Slater & Gordon, which is actually publicly traded in Australia, expects strong growth in fiscal 2009 as it beefs up resources to meet demand for its services amid fallout from the economic crisis.   The firm is a leader in Australia in the plaintiffs’ securities class action area.

Seinfeld introduced us to the “low talker” (the woman whose almost inaudible voice led to Jerry wearing the puffy shirt (seen here) on the Today Show); the “high talker” (a man who talks with a really high-pitched voice); and even the “close talker” (seen here), the memorable character played by Judge Reinhold who invaded Jerry’s personal space.

Seinfeld seemed to exhaust the range of “talkers” but now, thanks to the SEC, we could have a new entrant: the “loud talker” supervisors at McKesson Corp. whose volume levels appear to have led to multiple insider trading cases.

The SEC filed not one but two insider trading cases today against employees of McKesson who are alleged to have separately “overheard” their supervisors discussing matters related to McKesson’s plans to acquire a company called D&K through a tender offer. Both employees allegedly then purchased shares of D&K prior to the announcement, and profited when the stock price shot from $8.50 to $14.30 per share after the deal was announced. Notably, it appears from the job descriptions of the supervisors included in the SEC’s two Litigation Releases (SEC v. Wilson; SEC v. Gallahair) that these were two different “loud talker” supervisors.

Its not clear to me what the lesson of these cases might be.  Use only low-talkers in supervisory roles, maybe?

After an investigation by the SEC Inspector General concerning allegations by Gary Aguirre that his supervisors in the Enforcement Division gave preferential treatment to the Chairman and CEO of Morgan Stanley in an investigation, the IG concluded in a report dated September 30, 2008 that senior Enforcement officials including Director Linda Thomsen should be disciplined. The IG investigation took eight months; involved the testimony or memoranda from 51 separate witnesses including five separate testimony sessions of Aguirre; involved the review of thousands if not hundreds of thousands of emails and documents; and ultimately resulted in a 191-page report.

In another IG investigation that resulted in a separate report also dated September 30, the IG concluded after an extensive investigation that SEC Regional Director David Nelson failed to vigorously enforce compliance with securities laws in connection with the W Holding Company, Inc. and Bear Stearns investigation.  The IG recommended that Nelson be subject to disciplinary and/or performance-based action.

On Friday of last week, SEC Administrative Law Judge Brenda Murray rejected any and all disciplinary action in either of the cases.  In the Bear Stearns case, Judge Murray wrote in a 9-page decision that “the IG’s Report of Investigation does not support his conclusions,” and that there was “no basis for following the IG’s recommendation as to disciplinary or performance-based action.”  Similarly in the separate Pequot/Aguirre matter, Murray found that the record did not support any disciplinary or performance-action against SEC Enforcement Director Linda Chatman Thomsen or Robert Hanson.

Kotz stated in an interview prior to the ALJ’s rejection of his recommendations that things had not gotten “icy” in the SEC building his office shares with the Enforcement Division despite his critical reports. This latest development essentially tossing out his disciplinary recommendations against his SEC colleagues may drop the temperature down a few more degrees, however.

Following the judge’s ruling, Kotz stated:

“We are surprised and disappointed by administrative judge’s decisions. We believe her findings were flawed and not supported by the evidence. We also have serious concerns about the process utilized in arriving at these decisions,” Kotz said in a statement. “We stand by our comprehensive and thorough reports 100 percent.”

Sen. Charles Grassley, R-Iowa, whose Senate committee requested the investigations, also expressed frustration:

“It looks like the lawyers for the wrongdoers wrote the decisions. It’s hard to believe that after everything that’s happened over the last two years, the Securities and Exchange Commission is refusing to hold anyone accountable for the misconduct exposed by two independent inquiries,” Grassley said in a statement.

Frankly, it’s all starting to remind me a bit of the cartoon below, with the IG being Sam the Sheepdog and the Enforcement Division being Ralph Wolf.  They head into the building together, grab some coffee and chat about the Redskins as they head to their offices.  Then they battle each other all day, every day, until the whistle blows and they carpool home together.

To paraphrase Martin Landau’s character on Entourage, “If I told you that Deloitte had filed a lawsuit against its own vice chairman for allegedly engaging in insider trading in options with respect to 12 Deloitte clients … would that be something that would interest you?”

Well, yeah.  Of course it would.  But until yesterday, despite the fact that this lawsuit was filed way back on October 29 and apparently well-known throughout Deloitte, the only places in the entire world that this story was available for the last week-plus has been the Twitter feed of accountant Francine McKenna, a little-known legal publication called Courthouse News, and my publication (Securities Docket).

Finally, yesterday, the Huffington Post blog wrote a story about it (click here), as well, so now we are up to the “major blog” level of coverage after eight days (and I guess by virtue of this blog post, the “major trade journal” level).  I keep waiting to see this in the WSJ or NY Times, but so far nothing.  Maybe next week?

UPDATE: Friday, November 7 seems to have been the tipping point for coverage on this story.  Reuters, Chicago Tribune, and Crain’s Business filed stories on Friday.  More to come, I’m sure.

A recent announcement by Mannatech Inc. concerning the termination of an SEC investigation against it and certain individuals shows the power of the SEC’s “Wells process.”

On September 5, 2008, Mannatech disclosed in a Form 8-K that the company, its CFO, and the Chairman of its Audit Committee had received “Wells notices” from the Staff of the SEC relating to the timing and completeness of Mannatech’s October 2007 Form 8-K disclosure regarding its dismissal of Grant Thornton LLP as its independent registered public accountants. For those unfamiliar with the term, a Wells notice is not something you want to receive from the SEC. As recently documented by the SEC’s new enforcement manual, the function of a Wells notice is to tell a person involved in an investigation that

1) the Division is considering recommending or intends to recommend that the Commission file an action or proceeding against them; 2) the potential violations at the heart of the recommendation; and 3) the person may submit arguments or evidence to the Division and the Commission regarding the recommendation and evidence.

A key part of the Wells process is the opportunity for the person or entity involved to present their arguments and evidence to the SEC with the goal of persuading the SEC not to proceed with the contemplated enforcement action. Although it is unusual for “Wells submissions,” as they are called, to convince the SEC to terminate an investigation and not proceed with an enforcement action, that result is achieved in some matters, including the recent Mannatech investigation.

Indeed, on November 4, Mannatech announced that following its receipt of the Wells notices in early September, it submitted a response to the SEC through the Wells process on October 3, 2008. Less than a month later, by letter dated October 31, 2008, the SEC wrote back with the good news that it had decided to conclude its investigation related to Mannatech and had determined not to recommend enforcement action against Mannatech, its any of the individuals.

These developments in the Mannatech investigation show the power of the Wells process, and the willingness of the SEC to back off of an investigation and a planned enforcement action when the person or entity involved can convince the SEC that doing so is appropriate.

Read the Mannatech announcement

We’ve already covered using Twitter as a tool to learn about developments at the SEC and elsewhere in an earlier post (here), and since then I’ve created this entire list of “Twitter Feeds for Securities Counsel” (click here) that I’d like to share that will help you even further.

Next up on our Web 2.0 tour? LinkedIn.com

LinkedIn is fairly well-known and used by professionals as a networking tool, and it is excellent for that purpose. At the end of September, however, LinkedIn added a very useful “News” feature to its “Groups” function that should provide lawyers and others with an interest in a particular subject matter (such as securities litigation and enforcement) with a new way to stay on top of important news and events.

Here is what you do:

1. After registering for LinkedIn (which is free), search for a group that matches your interests. Securities Docket’s “Securities Litigation and Enforcement Group” (click here) was formed in early September 2008, and is already up to over 160 members.

2. Go to the News tab, as highlighted below.

3. From the News tab, you can add links to articles, events or other materials that you believe will be of interest to the group, including materials that you personally may have written that you want to publicize. Or, you can simply use the collection of news and information provided by the group as a quick way to keep abreast of developments in your field.

With the addition of this News tab, LinkedIn has gone beyond being just a networking tool. It is now also an excellent information gathering and distribution tool.

Visit Securities Docket’s “Securities Litigation and Enforcement Group