3. INSIDER TRADING "Misappropriation Theory"
RE: PUBLISHING NON-PUBLIC INFO ON THE NET
there are two issues that seem to come into play when publishing info on the net: trading on public but not disseminated info, and then publishing the same non-public info.
i'm looking at the inside trading laws for info on trading non-public info; and the definitions for "manipulative conduct" with regard to manipulating markets.
this info is from from the following "Charging Order" which it should be noted is not the Final charging order.
Message 20975476
*************************FROM THE ELGINDY CHARGING ORDER
Adapted from Sand, Modern Federal Jury Instructions, Instr. 57-22
First Type of Device, Scheme or Artifice to Defraud:
Insider Trading
One type of “device, scheme or artifice to defraud” alleged in this case is called “insider trading.” Insider trading is illegal because of the belief that the integrity of the stock market depends on a fair and level playing field. It is unfair when one person takes advantage of information concerning a stock knowing it is unavailable to the person on the other side of their stock transaction.5
The government contends that the defendants ELGINDY and ROYER are guilty of insider trading under the “Misappropriation Theory” of insider trading. Under this theory, a person commits fraud in connection with a securities transaction and thus violates Rule lOb-S(a) when he or she misappropriates material and confidential information for securities trading purposes in breach of a duty owed to the source of the information. Said differently, the misappropriator’s secret use of confidential information for personal gain while pretending to be loyal to the source of the information is a “deceptive device” under the securities laws. Under the “misappropriation theory,” a person in a position of trust who uses information that person is bound to hold in trust for their own self-serving use to purchase or sell securities, or to tip another who purchases or sells securities, in breach of a duty of loyalty and confidentiality commits securities fraud.
Cady, Roberts & Co., 40 SEC 907, 911-12 (1961)
INSIDER TRADING - ROYER
The government alleges that ROYER obtained material, non-public information concerning certain companies through his position as an FBI agent in breach of his duty of loyalty and confidentiality that he owed to the FBI and, through the FBI’s relationship with the SEC, to the SEC. and then used that information to trade in the securities of those companies. In order to establish liability against ROYER for insider trading, the government must show, beyond a reasonable doubt:
a. that ROYER owed a duty of trust or confidence, directly or indirectly, to the FBI and, through the FBI’s relationship with the SEC. to the SEC;
b. that ROYER breached this duty by purchasing or selling stock of a company on the basis of material, non-public information about that company that he misappropriated from the FBI and SEC; and
c. that ROYER acted with intent.
INSIDER TRADING - ROYER and ELGINDY
The elements of the Misappropriation Theory are further split into two separate parts, “tipper” liability and “tippee” liability. I will instruct you as to the separate elements of each part.
“TIPPER” LIABILITY: ROYER
The government further alleges that ROYER is both a direct insider trader and he is also what is known as a “tipper” in the illegal insider trading scheme. That is, the government alleges that, in addition to his own insider trading, through his own accounts and through Derrick Cleveland’s accounts, ROYER unlawfully tipped ELGINDY and others by breaching his duty of trust or confidence by providing information he had received from confidential FBI and SEC databases, and from FBI and SEC personnel, and enabling ELGINDY and others to profit from certain securities trades ELGINDY and others then made in certain securities. In order to establish tipper liability against ROYER, the government must show:
a. that ROYER owed a duty of trust or confidence, directly or indirectly, to the FBI and, through the FBI’s relationship with the SEC. to the SEC;
b. that ROYER breached this duty by sharing material, nonpublic information about certain companies with ELGINDY and others that ROYER misappropriated from the FBI and SEC;
c. that ELGINDY and others purchased or sold securities of those companies on the basis of this information;
d. that ROYER acted with intent; and
e. that ROYER benefited by his disclosure of information to ELGINDY and others.
Should you find that the government proved beyond a reasonable doubt all the facts to demonstrate either that Royer was a direct insider trader or that he was a tipper, then you must find ROYER guilty of insider trading.
TIPPEE LIABILITY - ELGINDY
The government alleges that ELGINDY is what is known as a “tippee” in the illegal insider trading scheme. That is, the government alleges that ELGINDY and others unlawfully received tips from ROYER in breach of ROYER’S duty of trust or confidence to the FBI and, through the FBI’s relationship with the SEC, to the SEC by obtaining material, non-public information about certain companies, enabling ELGINDY and others to profit from certain securities trades they then made in those companies. In order to establish liability against ELGINDY, the government must show, beyond a reasonable doubt:
a. that ROYER owed a duty of trust or confidence, directly or indirectly, to the FBI and, through the FBI’s relationship with the SEC, to the SEC;
b. that ROYER breached this duty by sharing material, non-public information about certain companies with ELGINDY that ROYER misappropriated from the FBI and SEC;
c. that ELGINDY purchased or sold securities of those companies on the basis of this information;
d. that ELGINDY knew that ROYER had breached his duty by disclosing the information; and
e. that ROYER benefited by the disclosure to ELGINDY. Let me explain the theory behind the law on this point.6 Should you find that the government proved these elements, beyond a reasonable doubt, then you must find ELGINDY guilty of insider trading. To be clear, all five of these things are part of the first element of the insider trading violation. The government must show each and all of them in order to satisfy that first element of the securities law violation charge. You may have noticed that there is overlap between what the government must prove as to Mr. Royer and what it must prove as to Mr. Elgindy. This is because, as I mentioned, Mr. Elgindy’s liability as a tippee results from the transfer of a duty from Mr. Royer to himself. Accordingly, I will first explain to you what the government must prove in order to find that Mr. Royer is liable as a tipper. I will then explain to you the additional elements the government must prove to show that Mr. Elgindy was liable as a tippee. To be clear, then, you must find beyond a reasonable doubt that Mr. Royer was liable as a tipper before you can find that Mr. Elgindy was liable as a tippee.
Fiduciary Duty Or Similar Duty Of Trust And Confidence
To prove Insider Trading under the Misappropriation Theory, the government must establish, beyond a reasonable doubt, that a fiduciary duty, or similar duty of trust and confidence, existed between ROYER and the FBI and, through the FBI’s relationship to the SEC, to SEC. There are no hard and fast rules for determining whether a duty to maintain a confidence exists. The duty may be
6 Mr. Elgindy asks that additional language, included in a separate document, be inserted here. See Request No. 2.
expressed directly, or it may be inferred from a continuing relationship between the parties. This duty arises from a communication involving matters that are confidential, and an expectation, explicit or inferred, by those persons, that the communication is meant to remain confidential. The duty can exist, for.example, when a person explicitly agrees to maintain information in confidence. It can also exist, for example, when the history or practice of the relationship demonstrates an implicit understanding between the parties that the information will be held in confidence.
In order for you to find that ROYER unlawfully misused information he obtained through his position as an FBI agent, you must find that he had a duty not to disclose the information he possessed. In this case, that duty must have arisen out of his status as an FBI agent.7 The question for you to resolve is whether ROYER was under a duty to hold the particular non-public FBI and SEC information that he disclosed in confidence [he obtained] in his role as an FBI agent in confidence.8 For the acts of insider trading alleged by the government after Royer left the FBI, the government must show,
~Mr. Elgindy objects to this language as repetitive.
8 Mr. Elgindy objects to this language as repetitive.
beyond a reasonable doubt, that Royer took the information or that he willfully caused another person to pass material, nonpublic information to him in breach of their duty of trust or confidence.
United States v. O’Hagan, 521 U.S. 642 (1997); United States v. Chestman, 947 F. 2d 551 (2d Cir. 1991); United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986) (“trading on the basis of improperly obtained information is fundamentally unfair”) ; United States v. Ruffin, 613 F.2d 408 (2d Cir. 1979) (who causes an innocent agent meeting the capacity requirements to engage in the proscribed conduct may be punished as a principal); 18 U.S.C. §2. Non-Public Information
To prove Insider Trading under the Misappropriation Theory, the government must also establish, beyond a reasonable doubt, that the information ROYER obtained through his position as an FBI agent, and used or shared for an improper purposed, was “non-public.”
Non-public information is that information which is not generally available to the investing public. The fact that some piece of information is posted on an investment website does not necessarily make it public. Even if there are public rumors or widespread speculation as to a fact, additional information as to that fact is non-public if it is more reliable or specific than the public rumors.
The fact that some criminal records are “publicly” available in the sense that they can be found in a public place if a person is looking for them, knows where they are being kept, and has the information required as a practical matter to link the records to specific individuals connected to particular companies, does not mean that these records are “public” for the purposes of the insider trading laws.9
There is no general prohibition against trading on material, non-public information, and no general duty for an investor with such information to disclose it. However, when such information is obtained in violation of a duty of trust and confidence, an investor with such information is obligated, under the law, to either disclose the information to make it public, or to abstain from trading. When an investor with such information chooses to disclose it, the non-public information remains non-public for purposes of the insider trading laws until it has been effectively disseminated in a manner sufficient to insure its availability to the investing public
DISCLAIMER - this is not legal advice and this information may be incomplete or incorrect. these comments are for discussion purposes only. do your own homework. |
