Murking Dirks: Personal Benefits in Insider Trading Violations

Author: Dan Stroh, Associate Member, University of Cincinnati Law Review

The phrase “insider trading” does not have a positive connotation. Despite the lack of an express provision prohibiting trading on insider information, insider trading has long been prosecuted under anti-fraud provisions found in securities law regulations.[1] A recent focus by the U.S. Attorney for the Southern District of New York, Preet Bharara, coupled with the conviction of a billionaire hedge fund manager, has brought renewed attention to this area of law.[2] Mr. Bharara’s presence in the press, combined with his record in policing insider trading, have so far been largely successful in policing conduct harmful to the general public.[3]

A recent ruling by the Second Circuit, however, threatens to undermine much of the work done by Mr. Bharara’s office. In United States v. Newman, a judge reversed the insider trading convictions of two traders with prejudice, declaring the guilty verdict unsupportable and barring the United States from retrying the defendants.[4] By departing from prior case law interpreting certain elements of fraudulent insider trading, the court put an abrupt stop to many of the prosecutions of insider trading, which has reverberated throughout the legal community. Because the decision affects not only the ability of the government to prosecute insider trading in the future but also threatens to undercut much of the work done by Mr. Bharara, whether this decision will stand as is or be reheard will have a significant impact on the landscape of securities law.[5]

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Secure Currency or Security? The SEC and Bitcoin Regulation

Author: Dan Stroh, Associate Member, University of Cincinnati Law Review

The Securities and Exchange Commission (SEC) took a bold step in the regulation of virtual currencies on July 23, 2013, when it charged Trendon Shavers and his company, Bitcoin Savings and Trust (BTCST), with defrauding customers in a Ponzi scheme.[1] The defense offered by Shavers in the motions leading up to the judgment was that bitcoin[2] is not a real currency or money recognized by the U.S. government.[3] Because securities fraud law requires an “investment of money”[4] to form an investment contract, Shavers argued that because the SEC could not show this investment, the statutes did not apply to Bitcoin and the SEC’s prosecution must be dismissed.[5] However, on September 18, 2014, a Texas court granted the SEC’s motion for summary judgment on the violations of anti-fraud and registration provisions of several securities laws and imposed fines of over $40 million on Shavers and BTCST. Because Shavers admitted most of the factual basis of the SEC’s argument, once the court held that an investment contract existed, he had no defense to the charges.[6] This ruling was one of the first to determine the status of bitcoin as a security in a United States court. Although Bitcoin may be a newcomer to the securities industry, defining bitcoin as a security gives regulators at the SEC significant and necessary power to combat fraud in this developing area of finance.

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