The Future's Best Predictor: What Can FY2021 Insider Trading Actions Tell Us About FY2022?

• Published date: 19 January 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Securities
• Law Firm: Holland & Knight
• Author: Scott Mascianica, Jessica B. Magee, Sydne K. Collier and Danny Athenour

Last month, Holland & Knight published an alert that broke down the U.S. Securities and Exchange Commission's (SEC) Division of Enforcement (Division) Annual Report for the fiscal year (FY) 2021. Highlights from the report included, among other things, 1) a decrease in total enforcement actions but an increase in newly filed standalone actions, 2) a record-breaking year for the whistleblower program and 3) a continued decrease in admissions of wrongdoing by public company and subsidiary defendants.

In the insider trading space, the agency filed 28 total insider trading actions in FY 2021 - 19 civil actions and nine standalone administrative proceedings - down from 33 total actions in FY 2020.¹ Although the insider trading numbers were down year over year, looking at numbers alone is a misguided approach to assessing the Division's focus on insider trading, or any particular case classification for that matter. That is because a lag exists between the time it takes to open an investigation and ultimately file an enforcement action, typically multiple years. A better predictor is to assess whether the Division "pushed the envelope" in any of its matters and whether the frequently evolving case law in the space materially changed during the course of the year. In FY 2021, it did.

Although the agency continued to bring "bread and butter" insider trading actions in FY 2021 against insider trading rings, corporate insiders and individuals perpetuating front running schemes, two of the SEC's enforcement actions prove instructive on how the Division is seeking out new and creative ways to charge individuals with insider trading. This blog post explores these matters below and considers how a recent directed verdict dismissing one of the agency's insider trading actions mid-trial could impact prosecutions going forward.

Pushing the Bounds of Insider Trading

In July 2021, the SEC charged Apostolos Trovias with violating Section 10(b) of the Exchange Act and Rule 10b-5² by perpetrating a scheme to sell "insider trading tips" on the dark web, a part of the internet that requires specialized software to access and is designed to obscure users' identities. According to the SEC's complaint, Trovias told dark web users that his tips consisted of material, nonpublic information (MNPI) from a securities trading firm.³ Though presented as an "insider trading case," the SEC's complaint essentially alleges two alternative theories under Section 10(b): 1) the advertisements...