February 14, 2019

Insider Trading: “Who Watches the Watchers?”

The Roman poet Juvenal famously asked “quis custodiet ipsos custodies” – “Who watches the watchers?” When it comes to public company gatekeepers, SEC Enforcement’s answer is “we do.” That’s clearly the message sent by the insider trading complaint that the SEC filed yesterday against a former Apple lawyer who, among other things, was responsible for overseeing compliance with the company’s insider trading program! Yes, the person responsible for insider trading compliance is alleged to have engaged in illegal insider trading!

Here’s an excerpt from the SEC’s press release that lays out the agency’s allegations:

The SEC’s complaint alleges that Gene Daniel Levoff, an attorney who previously served as Apple’s global head of corporate law and corporate secretary, received confidential information about Apple’s quarterly earnings announcements in his role on a committee of senior executives who reviewed the company’s draft earnings materials prior to their public dissemination.

Using this confidential information, Levoff traded Apple securities ahead of three quarterly earnings announcements in 2015 and 2016 and made approximately $382,000 in combined profits and losses avoided. The SEC’s complaint alleges that Levoff was responsible for securities laws compliance at Apple, including compliance with insider trading laws. As part of his responsibilities, Levoff reviewed and approved the company’s insider trading policy and notified employees of their obligations under the insider trading policy around quarterly earnings announcements.

Parallel criminal charges were also filed. Obviously, it’s up to the SEC to prove the conduct it alleges here, but this seems as good a time as any to remind you of Broc’s recent advice to anyone thinking about dabbling in insider trading – don’t do it!

In the interest of full disclosure, I confess that I’m nowhere near as erudite as the first sentence of this blog would suggest. Truth be told, I remembered the English version of the “who watches the watchers” quote from the “Watchmen” movie – and then I just got all of that Juvenal stuff by Googling it.

SEC’s Peirce Says “Lighten Up” On Howey For The Crypto

The Howey test considers “investment contracts” to be securities if they involve an investment of money in a common enterprise with an expectation of profit to be derived “solely from the efforts of others.” The SEC’s position has been that many token deals fit squarely within the definition of an “investment contract.” But in a recent speech, SEC Commissioner Hester Peirce suggested that the agency should take more flexible approach when it comes to applying the Howey test to digital assets:

While the application of the Howey test seems generally to make sense in this space, we need to tread carefully. Token offerings do not always map perfectly onto traditional securities offerings. For example, as a recent report from Coin Center noted, the decentralized nature of token offerings can mean that the capital raised through token sales may not be truly owned or controlled by a company. Functions traditionally completed by people designated as “issuers” or “promoters” under securities laws—which, importantly, bestow those roles with certain responsibilities and potential liabilities—may be performed by a number of unaffiliated people, or by no one at all.

Commissioner Peirce pointed out that since some token environments aren’t centralized & contemplate important roles for individuals “through mining, providing development services, or other tasks,” the SEC must avoid casting “the Howey net so wide that it swallows the “efforts of others” prong entirely.”

She expressed concern that some apparently legitimate projects may be made untenable by the federal securities laws, and also observed that regulators “ought not to assume that absent the application of the securities laws to the world of tokens, there would never be any order.” Well folks, they don’t call her “Crypto Mom” for nothin’!

At-the-Market Offerings: Hot! Hot! Hot!

Given how volatile the stock market was last year, it probably shouldn’t come as a big surprise that “at-the-market” offerings had a gangbuster year. This Bloomberg Law blog has the details:

An impressive 202 ATM offerings announced in 2018 were projected to raise a total of $31.75 billion, the largest amount in the last ten years. The average deal size for an ATM offering announced in 2018 was $157 million. To put things in perspective, 274 IPOs were priced in 2018 and raised $64.74 billion. Looking at industry distribution for ATM offerings in 2018, 52 percent were announced by companies in the Consumer, Non-Cyclical sector and 27 percent came from the Financial sector.

The two largest ATM offerings announced in 2018 were by: MPLX LP (announced on March 13, in the Energy sector and projected to raise $1.74 billion) and Annaly Capital Management Inc. (announced on January 3, in the Financial sector and projected to raise $1.50 billion).

ATMs were pretty popular shortly after the financial crisis, but fell out of fashion. The blog says that over the last 5 years, use of this financing tool has rebounded – along with market jitters.

John Jenkins