Exclusive: Regulators May Expand Definition of Insider Trading
Remarks recently delivered by a senior enforcement official at the Securities and Exchange Commission suggest that securities regulators are now looking to expand their definition of what constitutes insider trading and others types of securities fraud, the FOX Business Network has learned.
The remarks were made by David Rosenfeld, associate regional director and co-head of enforcement in the SEC's New York office, at a conference earlier this month. The comments have the legal advisers at big Wall Street firms and hedge funds scrambling to determine if their clients have been routinely violating insider trading laws as well as Regulation FD, which prohibits companies from selectively disclosing corporate information to only a handful of market participants, according to three partners at major law firms who were in attendance.
“Based on what he said it seems like the SEC is expanding the definition of insider trading and other violations,” said a senior partner at a major law firm who requested anonymity because he has cases before the commission.
SEC spokesman Jon Nester said some of Rosenfeld’s remarks have been taken out of context.
“He was basically telling people to be careful,” Nester said.
But many of the attendees interviewed by the FOX Business Network disagree, saying Rosenfeld was interpreting routine communications between investors, analysts and corporate officials as illegal because inside information could be disclosed.
“David was frankly shocked that some of this stuff was going on, which in turn shocked me,” said another attendee who is a partner at a major law firm. “You talk to your institutional investors as a regular course of business, and I can tell you from talking to people at the SEC, David is not alone at the commission holding these views.”
Rosenfeld’s remarks carry weight because his office brought one of the most high-profile insider trading cases in recent history by charging former Galleon Group chief Raj Rajaratnam with violating civil insider trading laws. In addition to the SEC’s civil case, Rajaratnam was convicted of criminal insider trading charges and has been sentenced to a lengthy prison term.
Rosenfeld made his comments at a Feb 2 conference sponsored by the Directors Roundtable Institute, titled “A New Era of Federal Prosecutions: Challenges for Main Street and Wall Street.” He appeared on the panel with five top Wall Street attorneys to discuss the current crackdown on insider trading and how regulators are broadly enforcing other securities laws. About 300 people attended, many of them senior partners at major law firms, or senior legal officials at big banks.
Rosenfeld first raised eyebrows with remarks involving how companies disclose information to investors and analysts, said one person who was in attendance. This person said Rosenfeld said he was “surprised” that Wall Street analysts and companies they cover have private conversations after earnings calls, where corporations broadly distribute their quarterly results.
Rosenfeld indicated that these private communications could violate Regulation FD, this person said, even though analysts routinely call corporate executives to get additional color and clarification on earnings; such practices have been considered legal in the past, legal experts say.
In addition, Rosenfeld called “troubling” other activities that are commonplace in the securities business, such as one-on-one meetings between analysts and corporate officials during so-called “analyst days” where companies discuss corporate issues with analysts and investors. Rosenfeld said these meetings could also violate rule FD and insider trading laws, according to another person who was in attendance.
Another controversial aspect of Rosenfeld’s remarks came during a discussion involving so-called expert networks, which provide hedge funds and other large investors with industry-specific information and data.
Expert networks -- which employ corporate executive with detailed knowledge of companies and industries such as health care and technology --have been the target of the current insider trading crackdown for allegedly providing material, non-public information to their hedge fund clients.
Rosenfeld suggested that no corporate executive should ever work with an expert network even though these outfits have long provided broad industry insight and other data that don’t violate securities laws, said one of the attendees.
“Rosenfeld said the government’s view is that no employees should be talking to expert networks even though hedge funds and public firms have been using expert networks legally for years,” said the attendee said.
Nester said in terms of the expert networks, Rosenfeld was suggesting that “he couldn’t see why corporate executives would want to talk to these networks.” As for the other issues, Rosenfeld was pointing out how Rule FD violations might occur through one-on-one meetings, not making a blanket statement that they are in of themselves problematic, Nester said.
Columbia law school professor John Coffee said that the SEC may be simply showing “an excessive level of suspiciousness.”
“I think Rosenfeld is saying that we are nervous about what companies are telling analysts when analysts make calls directly to the company after earnings calls,” Coffee said. “But it’s unrealistic to say that stuff is surprising because of the obvious need to get more information and clarification.”