The SEC Friend or Foe? Part 3
As with most complaining scenarios made by the little people, results are what are expected, however, historically consequences are what surfaces. As quoted by Plato (428 BC - 348 BC), The Republic ”Mankind condemns injustice fearing that they may be the victims of it, and not because they shrink from committing it. As with this newest Regulation FD it confirms Eleanor Roosevelt’s quote, ”Justice cannot be for one side alone, but must be for both.”
Regulation FD was an act to satisfy the screaming “will of the people” about selective disclosure and insider trading. Thus the public got what it wanted however, the public needs to understand that this rule also gives the SEC enforcement powers the right to go after individuals and companies that engaged in selective disclosure with injunctions and even monetary penalties. So much for advanced notice of meaningful future events and knocks the fire out of “Buy on rumor sell on news!”
Another words, I would expect the infamous posters that are always touting the knowledge of future events such as news releases, mergers, acquisitions, reverse splits, forward splits, dividends, or any other non public material information may end up being nailed for “Tipping” and “Inside Trading”. Why? Because “material information” is considered any information significant to cause an average investor to sell or buy stock.
Thus leveling the public information playing field by passing this general rule regarding Selective Disclosure also brought about two new insider-trading rules changes.
New Rule 10b5-1 would create insider-trading liability for anyone who traded while aware of material inside information. This rule stands in stark contrast to federal court rulings that have required proof that a person charged with insider trading "used" material insider information.
New Rule 10b5-2 expands the circle of people who are liable for insider trading when they trade on the basis of a tip received from someone else. Under the new rule, people who received material inside information from their parents, spouses, children, siblings or others with whom they have a history of sharing confidences will now be liable for insider trading if they subsequently trade on the basis of that information.
Basically, no one had better dare to know something that is not public information. That is of course, unless you are a ratings agency, the media, a customer, a supplier or a foreign issuer. All these day trading groups, news letters and emails that have put out a hot tip of an upcoming event could have a serious problem if they "Tip". This is also going to complicate the consultants, promoters & companies also, because if the event is tipped, it has to be out publicly within 24 hours.
None the less, the rule gives the SEC enforcement powers, including injunctions and monetary penalties, to go after individuals and companies that engaged in selective disclosure. Remember under the Private Securities Litigation Reform Act of 1995, the government made it more difficult for disgruntled investors to file frivolous shareholder suits against companies that made forward looking statements about their businesses. Now businesses need to think seriously of putting out timely news releases if for nothing else but disclose the doors are open and lights are on. A $100.00 news release a week could save a lot of grief for companies that like to be conservative with their news, especially if there is a leak of inside information.
I guess the real solution could be to hire an event media specialist or allow the existing communication vessels of the company to do their job informing the financial world in a timely manner. Especially, since now corporate information has to be shared promptly and fairly with the investment community as a whole. This can be summed up basically as, a simple inside leak reality comes from conservative stupidity.
Under the regime of Arthur Levitt’s “The Investor’s Advocate” the SEC has accomplished quite a bit on protecting investors. As of November 17, 2000 the SEC could account for 2360 Civil Suits in Federal Court, 67 Trading halts, 1658 Administrative proceedings, 98 Initial Decisions: Administrative Law Judges, 161 Commission opinions, and 569 News Releases. However, the SEC has made some very substantial news worthy accomplishments.
The following clearly demonstrates the statement I was once told by an SEC official in Texas, “If we find where you have broken a regulation, we will come after you like a pit bull!” Apparently, they mean it!
December 18, 1997 - filed (5) civil cases against (58) defendants for OTC microcap stock manipulation
March 17, 1998 - Files Emergency Action To Shut Down $150M Pyramid Scheme
September 24, 1998 - Charges 41 People in 13 Actions Involving More Than $25 Million in Microcap Fraud
October 28, 1998 - First Ever Nationwide Internet Securities Fraud Sweep, Charges 44 Stock Promoters in 23 Enforcement Actions; Purveyors of Fraudulent Spam, Online Newsletters, Message Board Postings, and Web Sites
January 11, 1999 - Fines 28 Brokerage Firms $26 Million and Suspends 51 Individual Traders for Fraudulent Market-Making Activities in the Nasdaq Market
February 10, 1999 – In First Case of Its Kind, SEC Charges Brokerage Firm and Its President With Aiding and Abetting Soft Dollar Fraud
February 25, 1999 – Files Four (4) More Cases Against Purveyors of Fraudulent Spam, Online Newsletters, Message Board Postings and Websites
May 12, 1999 – Charges 26 Companies and Individuals for Bogus Securities Offerings.
July 22, 1999 – Brings First Actions to Halt Unregistered Online Offerings of So-Called 'Free Stock'
August 3, 1999 - Charges 82 Individuals and Companies in 26 Actions Involving More Than $12 Million in Second Nationwide Microcap Fraud Sweep
October 20, 1999 - First Case of Its Kind Sues Three Individuals for Illegally Offering Securities Over Internet Auction Site
September 28, 1999 - Charges 68 Individuals and Entities with Fraud and/or Abuses of the Financial Reporting Process; 30 Actions Represent First Ever Coordinated Assault on Financial Reporting Misdeeds.
December 15, 1999 - SEC and U.S. Attorney File Fraud Charges Against 2 Former UCLA Students and One Other for Internet Stock Manipulation Using UCLA Computers To Spread False Information on Internet Message Boards
January 5, 2000 - Sues 'Tokyo Joe,' Internet Website Operator and Stock Picker,
March 2, 2000 - Sues [b/]City Councilwoman’s son (law student) for Internet Price Manipulation Scheme;
March 14, 2000 - SEC and US Attorney Bring Charges Against 19 Individuals, Including Wall Street Professionals, for $8 Million Insider Trading Scheme; First Case Charging Use of Internet to Pass Inside Information
May 1, 2000 - Sues Internet Stock Picker For Using Fraudulent Advertising To Lure Day Traders
June 14, 2000 - SEC, U.S. Attorney, and FBI charges Including Alleged Members of Organized Crime
September 5, 2000 - Charges 33 Companies and Individuals With Fraud For Manipulating Microcap Stocks
September 27, 2000 - and U.S. Attorney 11 enforcement actions on 6 different public companies for Cooking the Books
October 10, 2000 - Charges Former Connecticut Treasurer and 10 Others Involved in Fraudulent Scheme with Investment of State Pension Fund Money;
As of the Fourth Internet Sweep that brought the total to more than 180 of Internet cases filed. However, as far as cases go, the list is very impressive but none were more in the public eye than the first charge ever made on September 20, 2000 where the SEC brought Fraud Charges in an Internet Manipulation Scheme against 15 year old Jonathan G. Lebed. Not one public complaint brought about the investigation that led to the charges. The complaints came after the charges according to the media.
There is no bias scenario I can detect because these cases run from High School to the Big money on Wall Street. No one is outside the "Pit Bull" attack of the SEC and with the new FD Regulation, the "Pit Bull" just got even more vicious and sharper fangs. To protect the small investor.
Hey Just my opinion and I could be wrong!
Gary Swancey
