May 2016U.S. Securities and Exchange Commission1 INSIDER TRADING Matthew B. Greiner Branch Chief Office of International Affairs U.S. Securities and Exchange Commission Disclaimer - The SEC as a matter of policy disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this presentation are those of the speaker and are not necessarily shared by the Commission or its staff.

May 2016U.S. Securities and Exchange Commission2 Definition: Trading securities On the basis of material, non-public information Obtained or used in breach of a duty Insider Trading

May 2016U.S. Securities and Exchange Commission3 Insider Trading is one of the most difficult market frauds to successfully investigate and prosecute, almost always requiring “circumstantial evidence” to prove. Almost all defendants have an explanation for why they traded. Investigations

May 2016U.S. Securities and Exchange Commission4 Insider Temporary Insider Material non-public information Reasonable investor would consider such information important Trades securities Possession With Scienter Mental state involving intent to deceive or defraud Elements of Classical Insider Trading

May 2016U.S. Securities and Exchange Commission5 Applied to outsiders (non-employees of issuer) who learn the material nonpublic information and who owe a duty to someone other than the issuer not to use the information for their personal benefit. Pre-existing relationship of trust and confidence. Attorneys, investment bankers, advisers, family members, contractors Misappropriation Theory

May 2016U.S. Securities and Exchange Commission6 Misappropriates confidential information Information is material For securities trading purposes In breach of a duty owed to the source of the information With Scienter Elements of a Misappropriation Case

May 2016U.S. Securities and Exchange Commission7 Insider Gives material non-public information To a friend, relative or comparable outsider In order to benefit such individual Insider personally benefits Tipper liable for tippees trades Tipper Liability

May 2016U.S. Securities and Exchange Commission8 Receives material non-public information From an insider or one who has misappropriated information Knew or should have known information relayed in breach of a duty of trust and confidence Trades based on that information Benefit to the tipper Tippee Liability

May 2016U.S. Securities and Exchange Commission9 Connect trader to source of information New means of communication Phone Apps Thumb drives Hacking Encryption Proof that the trader ‘knew’ information was illegally obtained Challenges in Proving Insider Trading

May 2016U.S. Securities and Exchange Commission10 Trading to avoid detection Small amounts, no pattern Small “contra” transactions right before event Trading through omnibus accounts Trading through multiple banks, brokers Foreign corporations, trusts, accomplices Privacy jurisdictions Quick execution Voluminous trading Hedge fund ‘trading density’ More Challenges Insider Trading

May 2016U.S. Securities and Exchange Commission11 What information affected the market? Who made money from it? Two key questions

May 2016U.S. Securities and Exchange Commission12 In most cases, the information will concern the following matters: market “valuation,” product announcements, earnings announcements, regulatory approvals or denials, mergers and acquisitions, and research reports. Identify the precise time at which the material information was made public. Assess the impact of the information on the market price of the stock. Identify the Material Information

May 2016U.S. Securities and Exchange Commission13 Prepare a time line of events (also called a chronology). Maintain a Time-Line of Events

May 2016U.S. Securities and Exchange Commission14 Obtain trading records to determine who made money. Analyze stock price and trading volume patterns in the stock over time to identify how unusual trading Check publicly available information to see if there are other explanations for the unusual trading patterns. Public sources include: newspapers, websites, chat rooms, complaints, referrals, and filings with the securities authority and exchanges. Use software to help find patterns in the noise Correlate and compare Evaluate Trading Records

May 2016U.S. Securities and Exchange Commission15 Consider cold-calling the persons who traded. These calls can be made informally at an early stage in the investigation. Ask: Why they traded? Whether they had contacts with any insiders of the companies involved? Whether they have prior trading in the stocks at issue? Did anyone else pay for all or a part of the transactions? Was there any agreement to share proceeds of the transaction with another person? Whether they had knowledge of or access to the material non-public information? Question the Traders

May 2016U.S. Securities and Exchange Commission16 1. All Documents that relate to the material non- public information including s, board minutes and business records. 2. Calendars and scheduling software of relevant individuals who may have had access to the material non-public information. 3. Policies – request copies of policies and procedures for employees that cover insider trading and “quiet periods” If stock issuing companies are not required to maintain such policies, the securities authority may want to consider requiring such a practice. Corporate Records

May 2016U.S. Securities and Exchange Commission17 Send a “ chronology ” request to the publicly traded companies whose stock was traded, or other companies associated with the traded companies in a way that relates to the material non-public information (such as merger partners). The chronology should request the company to identify all steps, negotiations, discussions, conferences leading up to the event, and who was involved prior to the news release regarding the event. This will show who was aware of the material non-public information, what they knew, and when they knew it. Request a Chronology

May 2016U.S. Securities and Exchange Commission18 Compile a list of suspicious names (can be those that conducted the trades, family, friends, associates, etc…) and attach it to a “recognition letter” that the stock issuing company is requested to circulate and identify. The issuer should identify any histories or relationships and contacts with the names on the list. The responses may indicate who may be a “tippee” of an insider who has knowledge of material non-public information. Recognition Letter

May 2016U.S. Securities and Exchange Commission19 Compel production of bank records to trace proceeds of the trading. Follow the money trail to see who benefits from the trading, whether it be gains or losses avoided from selling a stock while in possession of negative information. Obtain monthly accounts statements, checks, deposits and wire transfers to identify the transfers of money between individuals, which may show a sharing of profits or payment for a profitable tip. Bank Records

May 2016U.S. Securities and Exchange Commission20 Compel statements from broker that placed the trades regarding: Communications with client/trader Whether they have knowledge of or access to the material non-public information Whether they have any contacts and relationship with the trader or the tippee Whether they have any contacts or relationship with any company officers or those with knowledge of the material non-public information. Taking Statements and Testimony

May 2016U.S. Securities and Exchange Commission21U.S. Securities and Exchange Commission21 THANK YOU.