On July 2, 2014, FINRA announced that it barred a former equity trader from the securities industry based on its finding that he violated Japanese insider trading law by trading in the securities of a Japanese company listed on the Tokyo Stock Exchange, resulting from a tip that the trader received indirectly from an insider in Japan. While this case is framed as a violation of FINRA’s catch-all standard of “commercial honor and just and equitable principles of trade,” it demonstrates U.S. regulators’ continuing hunger for sanctioning insider trading violations, including cases outside the United States.
According to FINRA, in September 2010, the trader used his firm’s proprietary trading account to take a short position in Tokyo Electric Power Company Inc. (TEPCO), which is listed on the Tokyo Stock Exchange. The trader, who was based in New York, entered into the position based on information that TEPCO was planning a secondary offering. The information was provided by a consultant, to whom the trader paid a monthly fee in order to receive information about Japanese securities. FINRA made conclusory findings that the trader was aware that the information he had received from the consultant was material “nonpublicized” information that came from a person in the sales department at the firm that was underwriting the secondary offering.
The trader ultimately took a more than $2 million short position in TEPCO – one of the largest positions that he had ever taken in a security in his proprietary account at his then trading firm. When he covered his short position after public announcement of the secondary offering, the trader netted approximately $206,000 in profits for himself and his firm over the two-week trading period.
As the basis for the trader’s misconduct, FINRA recited Japanese law (Article 166 of Japan’s Financial Instruments and Exchange Act) that “prohibits a person who has received from a corporate insider material, nonpublicized information from selling or purchasing securities of a listed company.” By trading in TEPCO, the trader allegedly violated Article 166. FINRA does not claim that the trader violated U.S. insider trading prohibitions. Although at the time of the settlement order, the trader had been out of the industry for more than two years, FINRA based its jurisdiction on the facts that the broker’s conduct occurred while he was registered with a FINRA member firm, and that the action was being filed within two years of the last amendment to the broker’s notice of termination on Form U5. The trader settled the action, without admitting or denying FINRA’s charges, by agreeing to a bar from associating with any FINRA member. FINRA does not appear to have taken any related action against the trader’s then-firm.
Although FINRA’s role in civil and criminal insider trading enforcement typically involves generating referrals and providing support to the SEC or DOJ, in this case, FINRA took the lead role by using a violation of foreign law as a basis for asserting its regulatory interest. The enforcement action does not represent a particularly controversial application of FINRA’s “just and equitable” powers under Rule 2110. Nevertheless, this case should serve as a reminder to the industry that FINRA can and will use violations of foreign laws as a basis for its formal disciplinary proceedings. The fact that it could do so here in a case involving insider trading is just icing on the regulators’ cake.