CNBC reports:
Rep. Chris Collins, R-N.Y. pleaded not guilty Wednesday afternoon to federal insider trading charges, according to NBC News.
The congressman was arrested earlier in the day on charges that he shared non-public information with family and friends related to Australian biotech company Innate Immunotherapeutics, on which Collins served as a board member.
An indictment released Wednesday alleges that Collins, 68, scrambled to call his son from the White House lawn and share information with him about a failed drug trial, and that his son and others then sold stock based on that tip before the trial results became public.
Collins' son, Cameron Collins, 25, as well as the father of his fiancee, Stephen Zarsky, 66, were also charged, according to the court filing.
(1) This is not the long awaited enforcement action under The Stock Act (about which I have written often). Instead, it appears that Collins is the largest shareholder and a member of the board of directors of Innate. So it's just standard classical insider trading. (See my treatise on insider trading for more information.)
(2) House Of Representatives Rule 25, clause 2, states that a Member may not "serve for compensation as an officer or member of the board of an association, corporation, or other entity." Was Collins serving on an uncompensated basis?
(3) Do the House conflict of interest rules really allow a Member to serve on a committee with oversight jurisdiction over a company for whom s/he is the largest shareholder and/or a board member? if so, why? Seems like a huge conflict of interest.
(4) On what basis is the personal benefit requirement for imposing tipping liability satisfied with respect to Zarsky (I've also written often about that requirement)? In Salman v. US, the Supreme Court recently held that:
Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b–5 prohibit undisclosed trading on inside corporate infor- mation by individuals who are under a duty of trust and confidence that prohibits them from secretly using such information for their personal advantage. ...
These persons also may not tip inside information to others for trading. The tippee acquires the tipper’s duty to disclose or abstain from trading if the tippee knows the information was disclosed in breach of the tipper’s duty, and the tippee may commit securities fraud by trading in disregard of that knowledge. In Dirks v. SEC, 463 U. S. 646 (1983), this Court explained that a tippee’s liability for trading on inside information hinges on whether the tip- per breached a fiduciary duty by disclosing the information. A tipper breaches such a fiduciary duty, we held, when the tipper discloses the inside information for a personal benefit. And, we went on to say, a jury can infer a personal benefit—and thus a breach of the tipper’s duty—where the tipper receives something of value in exchange for the tip or “makes a gift of confidential information to a trading relative or friend.” ...
Making a gift of inside information to a relative ... is little different from trading on the information, obtaining the profits, and doling them out to the trading relative. The tipper benefits either way.
So this picks up Collins' tip to his son. But Zarsky is not yet a relative. At most, he is a future potential relative by marriage. There is also the problem that Zarsky is (somewhat of) a remote tippee (ditto re having written about it), which is always problematic.
(5) Socialist (and nominal Democrat) Congressional candidate Alexandria Ocasio-Cortez claims she is being attacked by "the right" to distract people from the Collins indictment. Um, no. She's being attacked because she's a socialist and that's a bad thing to be.
(6) Did Collins et al. learn nothing from the Sam Waksal/Martha Stewart debacle? The SEC and the stock markets are very, very good at picking up major stock transactions by large shareholders, directors, and officers of companies that suffer bad news. As Josh Barro wrote:
Perhaps it is sometimes possible to trade on insider information and have those trades go unnoticed amid a sea of non-insider trades. But if the non-public information you’re trading on is likely to tank the stock price by more than 90%, and your trades are going to make up about 15 times the stock’s typical daily trading volume, and your close associate sits on the company’s board of directors, it is probably not best to assume that your trades will get lost in the shuffle.
I would thus agree with the CNN analyst who said "It's the dumbest insider trading crime I've ever seen," except for the fact that the Waksal/Stewart case still strikes me as dumber.
