Last month, the Securities and Exchange Commission (SEC) awarded $1 million to a Connecticut couple for their role in providing information on insider trading that led to civil penalties being imposed. Although this amount is unprecedented, eventually it is likely to become more commonplace than it is now.
The award was made to the couple for their role in providing the SEC with "information and documentation" on insider trading. This information led to civil penalties imposed on a hedge fund adviser, its chief executive and a Microsoft employee for insider trading in Microsoft securities. Administrative proceedings are pending against the former Microsoft employee who is also charged with insider trading "on the basis of the same conduct" engaged in by the other two parties.
The SEC had investigated the matter previously, but took no action on it. Then, a key evidentiary email was found by the couple and turned over to SEC investigators who now had what they needed to file and settle an enforcement action against the hedge fund advisor and its chief executive.
The SEC found that the chief executive emailed the Microsoft employee (who had already accepted employment at the hedge fund) after rumors arose that Microsoft was not going to meet earnings estimates for the first quarter of 2001. The Microsoft employee then sought out information from internal sources and learned that the earnings estimates were going to be positive. He then communicated this information to the chief executive who purchased Microsoft options for funds within his control and provided this information to a friend who also bought options. The illegal trading resulted in millions of dollars of gains.
The award to the couple for turning over the critically important emails and resulting civil penalties, was approved under Section 21A(e) of the Securities Exchange Act of 1934 which has been superceded by a new provision. The new provision is expected to provide some big returns for information, although it is likely that payouts will take some time.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 21F has been added to the Securities Exchange Act and this provision goes beyond the former insider trading bounty provisions. It gives the SEC broader authority to reward whistleblowers that help authorities. The new provision goes beyond the former scope which limited awards to insider trading cases in which civil penalties resulted. We will provide more detailed information on what is expected under the new rules in future posts.
Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in all aspects of securities and commodities litigation and regulatory and enforcement actions. Please contact our law firm for more information on our practice.
