Tanya Dmitronow

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The U.S. Court of Appeals for the Ninth Circuit appears to have rebuffed aspects of the Second Circuit’s recent effort to narrow liability for insider trading. The Ninth Circuit’s decision today in United States v. Salman holds that insiders can engage in insider trading if they disclose material nonpublic information with the intent to benefit a trading relative or friend, even if they do not receive a pecuniary gain or other quid pro quo type of benefit in exchange for the disclosures.

The Ninth Circuit’s opinion was written by Judge Jed Rakoff, a Senior District Judge for the Southern District of New York, who sat by designation on the Ninth Circuit panel – and whose recent opinions seem to have struggled with the Second Circuit’s decision in United States v. Newman. The Ninth Circuit’s decision might now create a circuit split – and enhance the chances that the Government will seek and perhaps obtain a writ of certiorari from the Supreme Court in Newman and/or Salman.

Yesterday, the Delaware Senate passed legislation prohibiting publicly-traded corporations from adopting bylaws that force shareholders to pay legal fees if they bring internal corporate claims against the company in court and do not win. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The bill passed on a 16-5 vote and now heads to the Delaware House of Representatives.

On April 29, 2015, Senator Bryan Townsend introduced legislation that would amend the Delaware General Corporation Law (DGCL) to ban fee-shifting bylaws for Delaware stock corporations (non-stock corporations would continue to be able to adopt fee-shifting bylaws). The bill, Senate Bill No. 75, would also confirm the Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), by amending the DGCL to permit board-adopted bylaws designating Delaware as the exclusive forum for intra-corporate litigation. However, the bill would reject the Chancery Court’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), by prohibiting Delaware corporations from designating an exclusive forum other than Delaware for such claims.

insider tradingOn March 25, 2015, U.S. Representative Jim Himes introduced the Insider Trading Prohibition Act.  The bill is the latest in a series of efforts to define insider trading following the Second Circuit’s decision last year in United States v. Newman.  We have blogged previously about similar legislation introduced by U.S. Senators Jack Reed and Bob Menendez and U.S. Representative Stephen F. Lynch.

The Himes bill would create a new Section 16A of the Securities Exchange Act.  The new section would make it illegal for a person to trade securities on the basis of material, non-public information that the person knows (or recklessly disregards) was wrongfully obtained.  The bill would also make it illegal for a person whose own trading would be illegal to wrongfully communicate material, non-public information to another person when it is reasonably foreseeable that the other person is likely to trade on it or pass it on to others.

In December, we reported on the Delaware Court of Chancery’s continued validation of board-adopted forum-selection bylaws in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), and the proposed amendment to the Delaware General Corporation Law (DGCL) that would eliminate the ability of Delaware stock corporations to impose liability for attorneys’ fees on shareholders through bylaw and charter provisions—a response to the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014).

With a new legislative proposal from the Delaware Corporation Law Council this month, legislative action may be on the horizon.  This new proposal would not only prohibit stock corporations from imposing liability on shareholders through fee-shifting but also from designating a forum other than Delaware as the exclusive forum for resolving intracorporate disputes.

Ever since the U.S. Court of Appeals for the Second Circuit issued its landmark decision in United States v. Newman, debate has raged about whether the court has sanctioned insider trading or has appropriately restrained the Government’s efforts to prosecute innocent market conduct – and whether the judiciary, rather than Congress, should be defining and outlawing insider trading in the first place. Some members of Congress have now stepped into the act.

Last week, U.S. Senators Jack Reed and Bob Menendez introduced the Stop Illegal Insider Trading Act (S.702). The Reed-Menendez bill would make it illegal to (1) trade securities on the basis of material information that a person knows or has reason to know is not publicly available or (2) knowingly or recklessly communicate material information that a person knows or has reason to know is not publicly available when it is reasonably foreseeable that such communication is likely to result in the unlawful purchase or sale of securities.

Originally published as a Proskauer Client Alert.

The U.S. Court of Appeals for the Third Circuit added its voice yesterday to the ongoing judicial effort to construe the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, concerning the extent to which the federal securities laws apply to securities transactions involving transnational elements. The Morrison decision had held that the Securities Exchange Act’s anti-fraud provisions apply only to transactions involving the purchase or sale of (i) “a security listed on an American stock exchange” and (ii) “any other security in the United States.”

In an appellate case of first impression, the Third Circuit ruled in United States v. Georgiou that the OTC Bulletin Board (the “OTCBB”) and the Pink OTC Markets Inc. (the “Pink Sheets”) are not “American stock exchanges” under Morrison‘s first prong. The court also held that transactions in “securities issued by U.S. companies through U.S. market makers acting as intermediaries for foreign entities” satisfy Morrison‘s second prong and are subject to the federal securities laws. This ruling on Morrison‘s second prong follows decisions from the Second and Eleventh Circuits concerning the locus of transactions in securities not listed on U.S. stock exchanges.