On May 24, 2023, Edward A. Imperatore, a partner in Morrison Foerster’s Investigations + White-Collar Defense group and former Assistant U.S. Attorney for the Southern District of New York, moderated a panel, entitled “Market Abuse and Trading Related Prosecutions – Recent Developments and What Comes Next,” at the New York City Bar’s White-Collar Crime Institute. The panel featured high-ranking officials from the Securities Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) and addressed trends, developments, and priorities in insider trading and market manipulation. Assistant Attorney General (AAG) for the Criminal Division at the U.S. Department of Justice (DOJ), Kenneth Polite, delivered a keynote address.
According to statements made at the Institute, the government’s enforcement priorities and trends include the following:
- Rule 10b5-1 Insider Trading Actions
The DOJ and SEC recently brought insider trading charges against Terren Peizer, a senior executive of a public company, for trading pursuant to Rule 10b5-1 trading plans that were established while he was allegedly in possession of material non-public information (MNPI). U.S. v. Peizer marked the first time the DOJ has filed a criminal insider trading case in this area. AAG Polite confirmed that the DOJ intends to bring additional criminal cases against corporate executives for insider trading pursuant to Rule 10b5-1 plans. Rule 10b5-1 trading likewise remains a high priority for the SEC and an area in which the SEC is expected to bring additional enforcement actions.
- Use of Data Analytics to Originate and Conduct Investigations
The SEC and CFTC are increasingly using data analytics to identify and initiate new investigations of suspicious trading, including both potential insider trading and market manipulation. The SEC has done so, for example, to originate Rule 10b5-1 insider trading investigations. The SEC confirmed that it is increasingly relying on trade data to analyze trading patterns over periods of months or years. Through data analytics, the SEC has originated and conducted investigations of three types of alleged schemes: (1) front-running (in which a trader trades on advance knowledge of trades by a large-asset manager), (2) data breaches involving MNPI, and (3) “cherry-picking” schemes, in which an investment advisor places profitable trades in its own account and unprofitable trades in client accounts. The CFTC is likewise using transaction data and order message data to identify patterns in trading activity, including, for example, order cancellations that could be indicative of an alleged spoofing scheme or other form of market manipulation. According to both the SEC and CFTC, trade data allows the agencies to identify patterns in trading or market activity over lengthy periods of time and to share that information with prosecutors when potentially criminal conduct is identified. The CFTC also noted that it is using market data in litigated cases to respond to defense arguments about intent and “hedged” trades.
- Commodities Insider Trading
Although the CFTC’s first insider trading trial recently ended in a partial acquittal, insider trading, including in block trades, remains a high priority for the CFTC. In its insider trading enforcement actions, the CFTC has adopted an expansive position that a duty of trust and confidence between a commodities broker and a customer can arise from the parties’ course of dealing and in the absence of an express agreement, rule, or policy.
- Open Market Manipulation
Recent months have seen increasingly aggressive and novel theories of market manipulation advanced by the government. A central question in today’s enforcement actions is what constitutes market manipulation in the absence of affirmative misrepresentations to the market or a duty to disclose. Both the SEC and CFTC are pursuing theories that trading activity is actionable under the securities and commodities laws where it establishes stock prices that are not set by ordinary market forces of supply and demand, even when the trades in question are fully executed.
- Market Manipulation Involving Social Media and Digital Currency
The SEC is increasingly focused on alleged fraud and market manipulation using social media. For example, in SEC v. Constantin, the SEC brought securities fraud charges against several individuals for allegedly using social media to promote securities and engage in a pump‑and‑dump scheme. The CFTC confirmed that investigating market manipulation involving digital assets (such as pump-and-dump schemes and swaps involving digital assets) is a significant priority. Litigated cases comprise an increasing portion of the CFTC’s enforcement docket, suggesting that defendants are seeking to challenge the CFTC’s enforcement authority and theories.