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Market Abuse: A US Perspective Mark S. Bergman Partner and Head of Global Capital Markets

Market Abuse: A US Perspective Mark S. Bergman Partner and Head of Global Capital Markets. Overview. US does not have concepts of "market abuse" per se or "close periods" The US does have a broad range of rules and regulations that serve as a basis for addressing:.

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Market Abuse: A US Perspective Mark S. Bergman Partner and Head of Global Capital Markets

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  1. Market Abuse: A US PerspectiveMark S. BergmanPartner and Head of Global Capital Markets BIICL - Market Abuse Program

  2. Overview US does not have concepts of "market abuse" per se or "close periods" The US does have a broad range of rules and regulations that serve as a basis for addressing: • Corporate disclosure obligations • Insider trading • Selective disclosure • Market manipulation BIICL - Market Abuse Program

  3. Disclosure Obligations in the US What do US companies worry about when they issue public statements? • Disclosure duties generally • Duty to correct • Duty to update • Duty to comment on rumors • Protection for forward-looking statements • Selective disclosure • Rules on use of pro formas • Filing obligations for earnings releases • Insider trading issues • Responsibility for analyst reports • Rules for analysts BIICL - Market Abuse Program

  4. When Must One Speak? • Silence absent a duty to disclose is not misleading (includes “no comment”) • When a company does speak it must do so in a truthful manner (anti-fraud rules) • Key is whether there is a duty to disclose: • Voluntarily statement that is misleading • SEC filings • Trading in own stock • Live statement becomes misleading • Rumors from the company • Stock exchange rules stricter, but not controlling BIICL - Market Abuse Program

  5. No Comment • “No comment” inappropriate if company issues prior inaccurate statements (no merger talks at a time when there are) • “No comment” may be inappropriate if company’s prior correct statements later become misleading at a later date (no merger talks followed by talks) BIICL - Market Abuse Program

  6. When One Does Speak • SEC filings must cover mandated disclosure items, which include forward-looking statements • Public statements will be subject to the anti-fraud rules as well • Press releases • Earnings calls • Conference participation • RSA Security: “achieved analyst expectations in a difficult economic environment” -- misleading BIICL - Market Abuse Program

  7. Regulation FD Selective Disclosure BIICL - Market Abuse Program

  8. Selective Disclosure • Intentional vs unintentional disclosure • Can cure unintentional disclosure (SEC filing) • Applies to statements made by senior officials and regular spokespersons • Applies to material information • Applies to statements made to broker-dealers, other investment professionals, securityholders • Exceptions: NDAs, insiders, rating agencies, registered public offerings • Guidance is “material” BIICL - Market Abuse Program

  9. Enforcement Actions • SEC serious about monitoring compliance and will enforce • Individuals risk liability if active role in violation • Non-intentional disclosure must be remedied right away and no further disclosure other than a press release • Senior officers must be vigilant in monitoring disclosure and acting on violations • Issues can arise from release of positive news as well as bad news BIICL - Market Abuse Program

  10. Enforcement Actions • Guidance remains a dangerous area • Selective after-the-fact communications to clarify statements that were misunderstood is a problem • Cannot use code words to convey guidance BIICL - Market Abuse Program

  11. Trading on Basis of Inside Information Rule 10b-5 Violation BIICL - Market Abuse Program

  12. Insider Trading • No specific statutory prohibition; no statutory definition – instead regulators rely on Rule 10b-5 • 1980: Supreme Court holds that Rule 10b-5 imposes duty to disclose or refrain from trading on inside information only when trading is a breach of duty • 1983: Supreme Court restated rejection of “possession” theory and extended fiduciary duty theory to tippee liability; tipper had to breach fiduciary duty unless could show “personal gain” • SEC tries to advance position that CEO that disclosed information to analyst did so to enhance reputation, to establish “personal gain” BIICL - Market Abuse Program

  13. Insider Trading • 1997: Supreme Court establishes misappropriation theory – need to find duty of trust and confidence • SEC adopts Rule 10b5-2 to facilitate actions based on misappropriation: • Agree to keep information confidential • History, practice or pattern of sharing confidences resulting in reasonable expectation of confidentiality • Family relationship • Resolution of “possession” vs “use” – evolution of 10b5-1 plans BIICL - Market Abuse Program

  14. Possession vs. Use – Rule 10b5-1 • SEC rejected a straightforward “use” test as well as more balanced “use” test with a strong inference of use from “possession.” Instead, adopted “knowing possession” standard, balanced with affirmative defenses • As a general principle, insider trading liability will arise when a person trades while “aware” of material nonpublic information. • Several exceptions from liability where person is not likely to have used the inside information: namely, where trade resulted from a pre-existing plan, contract or instruction that was made in good faith. • Affirmative defenses intended to cover situations where defendant can show that information possessed was not a factor in a trading decision BIICL - Market Abuse Program

  15. Short Swing Profits Rules • Officers, directors and 10% shareholders subject to reporting of ownership and trades and liability for profits made on "sales and purchasers" or "sales and purchases" within six months • 5% shareholders subject to reporting obligations – intended to address tender offer abuses not insider trading BIICL - Market Abuse Program

  16. Other Aspects of Manipulation BIICL - Market Abuse Program

  17. Market Manipulation • Section 9(a)(2) – creating appearance of a trading market • Rule 10b-5: basis for insider trading actions; actions in respect of inadequate disclosure (including misleading the market) • Regulation M – proscribes purchases at the time of a "distribution" • Regulation SHO – regulates short sales • Rule 10b-18 – safe harbor for corporate repurchases BIICL - Market Abuse Program

  18. Areas of Concern/Focus • PIPES Market – trading ahead of deals • Criminal action against head trader at investment bank (April 2005) • Civil action against manager of hedge fund (May 2005) • Toxic converts and "naked" shorts • Grant of options had of release of positive earnings • Number of financial fraud actions have also had an element of profiting through insider trading BIICL - Market Abuse Program

  19. Analyst Conflicts • SRO rules (round I) • SRO rules (round II) • Global Settlement with 10 firms • Regulation AC • SRO rules on IPO allocation practices BIICL - Market Abuse Program

  20. Mark S. Bergman 7367-1601 mbergman@paulweiss.com Contact www.paulweiss.com BIICL - Market Abuse Program

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