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8/4/2019 Insider Trading.1

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Insider Trading

Todays Insider Trading Suspect

May Wear a Lab Coat-New York Times, August 9, 2005


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What is Insider Trading?

Buying or selling a security

In breach of a fiduciary duty (or otherrelationship of trust or confidence)

While in possession of material, nonpublicinformation about the security.

Includes tipping which is providing insideinformation to another who buys or sellsstock based upon this information.


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Breach of Fiduciary Duty or Duty

of Trust and Confidence Misappropriation Theory

A person commits fraud when he misappropriatesconfidential information for securities tradingpurposes, in breach of a duty owed to the source of

information. U.S. v. OHagen, 117 S.Ct. 2199, 2207 (1997) According to the SEC duty of trust or confidence

arises when: Person agrees to maintain information in confidence. Person communicating material non-public information and

person receiving it have a pattern or practice of sharingconfidences and there is an expectation of confidence.

Person receives material nonpublic information from spouse,parent, child, or sibling.

65 FR 51716, 51737


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Material Information

Material information is information which areasonable investor would view as important

in making an investment decision.

Basic Inc. v. Levinson, 485 U.S. 224 (1988)

But arent research findings speculative?

Perhaps, but information can be material even

though it concerns a speculative event. Court will

consider two factors: 1. Likelihood that event will occur

2. Magnitude of benefit to the company Basic v. Levinson


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Enforcement

Because insider trading undermines investor confidence in thefairness and integrity of the securities markets, the SEC has treatedthe detection and prosecution of insider trading violations as one ofits enforcement priorities. -U.S. Securities and Exchange Commission

Civil Penalties of 3x the profit realized or loss averted by virtue oftrade. 15 USC 78u-1

Criminal Penalties of up to 20 years imprisonment and $5,000,000 infines.

Controlling Person Liability Civil greater of $1 million and 3x profit or loss Criminal- Up to $25 million

Controlling person knew or recklessly disregarded the fact that thecontrolled person was likely to engage in the act or acts [of violating thelaw] and failed to take appropriate steps to prevent the act or actsbefore they occurred.


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Bounty Hunters

SEC is authorized to award a bounty to aperson who provides information leadingthe recovery of a civil penalty from an

inside trader. 15 USC 78u-I(e)

Award of up to 10% of civil penaltyassessed against inside trader.


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SEC v. Milton Mutchnick et al.97 CV 00709 (1997)

Mutchnick was head of gastroenterology department atWayne State University.

Lead investigator for hepatitis drug Thymosin. His research indicated the drug was ineffective.

Prior to information becoming public, Mutchnick warnedfriends and family of results of research. Mutchnick and those warned sold stock in the

sponsoring company avoiding $300,000 in losses. Mutchnick and company were charged with insider

trading. Mutchnick settled the charges by paying a $163,494 civil

penalty. His wife and the six people they had tippedpaid $105,000 in forfeitures and penalties.


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SEC v. Sanjiv S. Agarwala06 CV 0352J (S.D. Cal., 2006)

Associate Professor of medicine and associate medicaldirector of melanoma program at the University ofPittsburgh.

Consulted for Maxim Pharmaceuticals on clinical trialsfor cancer drug Cepelene.

SEC complaint alleged that Agarwala learned ofmaterial nonpublic information regarding the drug. Knew of FDA approval before it was made public. Knew test results for clinical trials.

SEC alleged that Agarwala used this information topurchase and sell Maxim stock.

Agarwala settled the case by agreeing to pay $14,784for illegal trading profits and losses avoided and a civilpenalty of $29,568.


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Conclusion

Insider trading is not limited to Wall Street Information obtained in performing medical

research is likely confidential. Duty of confidentiality owed to sponsor.

Using information obtained during the course ofmedical research to buy or sell publicly tradedstocks may constitute insider trading.

The researcher may be subject to civil and

criminal penalties. The Marshfield Clinic may be subject to civil and

criminal penalties as the controlling person.

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