Did a Washington securities research firm illegally obtain information about an imminent government health care policy change? Did hedge funds knowingly trade on such inside information? Those are the two main questions that SEC investigators are focusing on as they examine scores of emails and trading timelines in an effort to unravel the coincidence or possible regulatory violation surrounding trades that followed a 2013 investor email alert.
Federal Policy Reversal
On April 1, 2013, at 4:22 p.m., after markets had closed, the Centers for Medicare and Medicaid Services (CMS) that, among other things, allocates funding to private health insurers, issued a press release announcing that it was reversing its current policy and restoring previously cut funding to private health plans. The only problem was, at 3:42 p.m. that same day, a well-known Washington securities research firm had already sent an email to more than 150 investor clients in which it predicted the government announcement. Was this a matter of really good securities research intel or a really leaky government source?
Sharing Research Data Not Illegal
Sharing the research data with 150 clients was not in itself a violation of any securities laws. However, illegally obtaining such insider information would be a violation, and, if the clients traded on that information knowing or if they should have known that it was illegally obtained, then under that set of circumstances their use of the information would also violate securities laws.
Political Tipsters and Insider Information
At issue for SEC investigators is whether the fine line between providing political tips a flourishing industry in Washington and leaking insider information to investors had been crossed. In this case, the tip or leak boosted health insurance companies, and their stock prices took off upon dissemination of the pending policy change alert.
Defining the Insider Trading Rule
In order to prevail in an insider trading prosecution, the SEC must prove that an investor traded on the basis of nonpublic information that was obtained in violation of a duty, or that there was a reckless disregard of the substantial risk that they were trading on such information.
According to Justin Shur, a former federal prosecutor:
To pursue charges against the trader, the government would need to prove that he knew or had reason to know that the original tipper breached a duty by disclosing the information. Thus, figuring out what the trader knew about the source of the information is critical for prosecutors.
At the present time, the SEC has not determined whether information relayed by the research firm violated securities rules, and it is continuing to investigate whether anyone at the federal agency broke insider-trading rules.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI