Executives Settle SEC Insider Trading Charges with Two-Time Penalties
Two executives, in unrelated cases, settled SEC charges with for their involvement in inside trading with "two-time penalties"; i.e., penalties that were twice the amount of their improper gains.
In a Commission Order and a Complaint filed in the U.S. District Court for the Eastern District of New York, the SEC stated that the executives each made trades in the stock of their respective former employers on the basis of material nonpublic information, in violation of Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") of the Securities Exchange Act and SEA Rule 10b-5 ("Employment of manipulative and deceptive devices") thereunder. As a result, one of the executives made unrealized gains of $58,096 and the other executive avoided losses of $85,000.
To settle the charges, the first executive agreed to (i) cease and desist from future violations and (ii) pay a civil money penalty that is double the amount of his unrealized gains ($116,192). The second executive agreed to the entry of a final judgment (i) enjoining him from future violations, (ii) barring him from serving as an officer or director, and (iii) imposing a civil money penalty of $170,228.
Commentary
The penalty amounts in these cases are noteworthy because they are examples of how the SEC is dealing with the ramifications of the Supreme Court’s decision in Liu v. SEC (covered here). Traditionally, the SEC would typically settle insider trading cases on a “one and one” basis, which meant it would require the defendant to pay disgorgement equal to the gains or losses avoided on the illegal trading plus a civil money penalty equal to the amount of disgorgement. These financial remedies would go to the U.S. Treasury because it is impractical for the SEC to return money to injured investors in insider trading cases where the defendants made their trades on the open market. In Liu, the Supreme Court affirmed the SEC’s authority to obtain disgorgement in appropriate circumstances. However, as we discussed here and here, it cast serious doubt on what the SEC could do in situations where disgorgement is sent to the Treasury rather than returned to injured investors. These cases suggest that in response, the SEC is instead insisting on "two-time penalties" in insider trading cases which allows the SEC to obtain the same amount of total financial remedies without having to press this aspect of the Liu decision in the courts. While this approach is particularly effective in insider trading cases, where the SEC has specific statutory authority to seek penalties up to three times the amount of a defendant’s ill-gotten gains or losses avoided, the SEC is likely to seek higher penalties in a wide range of cases where its ability to obtain full disgorgement amounts has been cast into doubt by the Liu decision.