U.S. Supreme Court Rules Omissions Alone on Material Trends Not Actionable

Corporate silence on impactful trends not securities fraud, US Supreme Court rules

Shareholders cannot sue companies for fraud if they flout a rule requiring disclosure of trends expected to affect their bottom line unless the omission makes another statement misleading, the U.S. Supreme Court ruled on Friday.

The 9-0 ruling authored by liberal Justice Sonia Sotomayor handed a victory to Macquarie Infrastructure in a proposed shareholder class action accusing the company of failing to disclose that its revenues were vulnerable to an international phase-out of high-sulfur fuel oil between 2016 and 2018.

The justices reversed a decision by the New York-based 2nd U.S. Circuit Court of Appeals to allow the class action brought by Hedge fund Moab Partners to proceed. A federal judge earlier had dismissed the litigation.

The rise of the chief AI officer

As boards grapple with the opportunity and risk of generative artificial intelligence, companies are leaning into a new role: the chief AI officer.

The number of companies with a designated head of AI position has almost tripled globally in the past five years, according to social network LinkedIn. Fawad Bajwa, AI lead at recruiters Russell Reynolds Associates, has “seen the landscape shift” since the launch of ChatGPT.

***

CAIOs oversee the deployment of AI and generative AI within an organisation: improving workforce efficiency, identifying new revenue streams, and mitigating ethical and security risks. The role requires a “deep understanding of AI tech, machine learning, data science and analytics,” says David Mathison, who founded the first Chief AI Officer Summit last year. Yet candidates also “need to understand legal” and change management well; many come from leadership roles in data, risk management and compliance.

The SEC’s Expedient “Follow-On” Rubber Stamp

Think about it. First the SEC sues you as an alleged lawbreaker and brands you as such in public news releases. The agency then pursues years of contentious litigation trying to prove its allegations against you—all in a fiduciary attorney-client alliance with its staff prosecutors. If it succeeds, it then seeks (and likely gets) a court injunction against you, insisting you will repeat your wrongdoing unless restrained. And after issuing a self-congratulatory press release further demonizing you, it then cites the court injunction as predicate to launch a follow-on proceeding to bar or suspend you from the securities industry, assigning the same staff lawyers to prosecute the follow-on case and itself as the judge and jury that will decide the case.

And you’re then supposed to trust the SEC to magically pivot from being your years-long nemesis to becoming the neutral and objective adjudicator of your follow-on proceeding? Right.

Guess how often the SEC ultimately decides that a follow-on bar or suspension is not in the public interest? If you said rarely or never, go to the head of the class.

These sham proceedings violate core principles of due process, the most basic of which is a fair trial in a unbiased tribunal….

“Shadow” Insider Trading – SEC Wins Jury Trial in Closely Watched Insider Trading Case

It seems certain that the Court’s rulings upholding the SEC’s legal theory, and the jury’s validation of the SEC’s circumstantial case, will embolden the SEC to continue bringing shadow trading cases. Traders therefore need to consider shadow trading in their compliance programs. One of the main challenges shadow trading will present for market participants is the sometimes difficult assessment of materiality. At what point does information “about” one company become material to a different company? If one has MNPI about one company, does that mean they have material nonpublic information about all the companies in the same sector? ….

***

The jury verdict may not be the final word in this case. Mr. Panuwat may appeal the outcome and bring the question of the SEC’s legal theory before the Ninth Circuit. If so, the odds are that the Ninth Circuit upholds the trial court’s legal conclusions and also views shadow trading as within established law. In any case, the jury’s verdict means that shadow trading is now more firmly established as a type of insider trading – it is no longer “novel” and the SEC will continue to bring shadow trading cases. Investment advisers should assume that SEC examiners will want to see compliance policies and procedures aimed specifically at preventing shadow trading. More broadly, all market participants need to take note of this case to ensure they understand that shadow trading is a form of insider trading.

Coinbase Seeks to Take Core Question in U.S. SEC Case to Higher Court

Coinbase is seeking to rip the bandage off of a legal impasse at the center of the crypto industry’s fight with the U.S. Securities and Exchange Commission (SEC), filing for an interim appeal on Friday that would ask a higher federal court to drill into the heart of the regulator’s stance on digital assets, even as the broader SEC case proceeds through the judicial system.

The U.S. exchange filed for what’s known as an interlocutory appeal that raises a narrow point of legal disagreement and seeks to get it considered on its own, in this case by the U.S. Court of Appeals for the Second Circuit. Recently, a federal judge had denied Coinbase’s effort to get the SEC case against the company thrown out before trial, and now Coinbase is formally asking the court to weigh whether the SEC can treat a digital asset transaction as an investment contract if it’s not connected to any legal obligation from the asset’s original issuer.

US biotech executive sentenced to 7 years in jail for COVID test fraud

The chief executive of a U.S. biotechnology company that falsely promised investors it could produce a quick and accurate COVID-19 test was sentenced to seven years’ in jail on Friday, the Justice Department said.

Keith Berman, 70, of Westlake Village, California, pleaded guilty last December to securities fraud totaling around $28 million.

The Justice Department said that from February through December 2020, Berman falsely claimed his Decision Diagnostics company had developed a 15-second test to detect COVID-19 in a finger prick sample of blood when, in reality, no such test existed.

Mango Markets Trader Eisenberg Searched Web for ‘Fraud’ Before $110 Million Haul

A trader accused of stealing $110 million from the Mango Markets cryptocurrency exchange searched the web for terms like “elements of fraud” and “statute of limitations market manipulation,” evidence presented at his criminal trial showed.

***

Before and after his alleged theft, Eisenberg, 28, searched the web for terms like “market manipulation criminal” and “FBI surveillance,” as well as information about extradition from Israel, according to documents shown Friday to jurors in New York federal court. He was arrested on Dec. 26, 2022, after flying from Tel Aviv to Puerto Rico.

Crypto Hacker Sentenced to 3 Years in Prison for Stealing Over $12M From Solana-Based Exchanges

Shakeeb Ahmed, a security engineer who stole over $12 million from two different decentralized cryptocurrency exchanges (DEXs) built on Solana, was sentenced to three years in prison and three years of supervised release by a federal judge on Friday.

Ahmed was arrested last year on wire fraud and money laundering charges, after federal officials alleged he stole $9 million from a DEX built on Solana – which appears to be Crema Finance. He pleaded guilty to one count of computer fraud in December.

Pourquoi Pas? Securities Regulation and the American Dream: Speech by SEC Commissioner Hester Peirce

We should modulate our regulations to ensure that we are doing our part to keep America open to innovators, entrepreneurs, and upstart competitors. Some basic principles can guide that new regulatory approach. First, foster regulatory predictability so people have the space to make reliable educated assessments of regulatory risk. Second, take a prudent, humble, and iterative approach to regulation that can respond nimbly to innovation and that can identify and correct regulatory missteps. Third, relish the intellectual challenge of dealing with novel legal questions raised by innovative companies and products. Fourth, explore ways in which new technologies can make us a better regulator. You, as academics, can hold us accountable to regulating according to these and other sensible regulatory principles.