Federal Ruling May Make Insider Trading Cases Harder to Prosecute
By Mitchell S. Ostwald
A recent ruling by a U.S. District Court in California dealt a major set back to the Security and Exchange Commission's (SEC) effort to prosecute insider trading cases at high tech companies.
On April 12, 2000, U.S. District Judge, Spencer Williams, threw out before trial most of the civil SEC lawsuit alleging insider trading by Hanh Truong, a former software engineer at Molecular Dynamics, Inc. and a group of his family and friends. The SEC reasoned that the Silicon Valley's work environment, including its office layout of open cubicles and casual work environment amongst its rank and file, fostered insider trading at Molecular Dynamics. But the Federal Court judge noted that the open cubical, free-flowing atmosphere of the Silicon Valley doesn't mean traditional standards of proof will be relaxed in insider cases.
The SEC had alleged that Mr. Truong discovered in advance that his employer was about to report poor quarterly results in early 1994. Mr. Truong and other defendants traded heavily in the company's stock in 1994, and the timing of their trades made the SEC suspicious. The SEC noted that Mr. Truong sold his entire stake of 33,000 Molecular shares only weeks before the company announced poor quarterly results that pushed the stock price down by 38% to $6.125 a share from $10.00. Mr. Truong avoided a loss of about $160,000.00, the SEC alleged, by selling at prices from $10.50 to $11.00 a share.
While this court ruling against the SEC doesn't necessarily bind other judges, observers agree that this decision is very important to the Silicon Valley and for other industries where employees have close contact with management. Whether this ruling will have a long-term effect by either curtailing SEC investigations (and filing of new actions) or whether new insider trading cases will continue to be brought by the government, only time will tell. It is clear, however, that as the traditional "close door" management style gives way to a more casual working environment, information type cases will be more difficult to prosecute and defend.
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