SEC Patrols the Bakken: “Making” Statements about Stocks

In Legal Interpretation, Oil & Gas Investments, Securities Fraud by Joseph PullLeave a Comment

Securities fraud litigation bubbles up with the oil in the Bakken. For example, the U.S. District Court for the Southern District of New York[1] was presented with the question whether defendant Eric Dany, an established stock commentator with his own “Stock Prospector” brand and newsletter, could be held responsible under the SEC’s Rule 10b-5 as the “maker” of allegedly misleading statements about the stock of Norstra Energy Inc., a would-be Bakken player. A third party paid Dany for the use of his name in publishing a statement in promotional materials: My name is Eric Dany. I’m editor and publisher of Eric Dany’s Stock Prospector, Main Street Research . . . Now I’m predicting that NORX could be my best ever call! I believe the company’s estimated 8.5 billion barrels of oil in place could easily fetch $25 a share in a takeover! Act now, before a takeover move, and you could make a fortune! . . . Don’t wait! As you’ll see when you read on, I believe one of the majors may be reading a takeover offer that, the minute it leaks out, could send this stock flying! The SEC sued Norstra Energy, its CEO, and Dany, alleging the statement (and others) was misleading. Exchange Act Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b), prohibits making untrue statements of material fact in connection with the purchase or sale of securities. Dany argued that, as a matter of law, he could not be held responsible because he did not “make” the statement, since it was published by someone else. The Supreme Court decided in 2011 that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement.”[2] Accordingly, showing that someone else published an allegedly fraudulent statement is not enough to escape responsibility. …

Can Planning a Wedding Send You to Prison for Insider Trading?

In Securities Fraud, United States Supreme Court by Joseph PullLeave a Comment

Insider trading – in rough terms, using a company’s confidential information to make money trading its stock – is a well-known white-collar crime. In some instances, insider trading is pretty obvious. The Department of Justice alleges a doctor running a clinical trial of a drug for a company sold his stock in that company after learning (confidentially) that there were problems with the clinical trial. The doctor avoided $160,000 in losses after the clinical trial problems became public and the price of the stock declined. If the DOJ’s allegations are true, there was insider trading. Or the former chairman of a large company says he sold secret information about his company to an investor who used that information to trade the company’s stock. If that was their arrangement, it was likely an insider trading conspiracy. Other purported insider trading cases are less clear-cut. Stock analysts and investors spend a lot of time trying to find information that will help them predict whether a stock’s price will go up or down. That’s perfectly legal. They cross a red line if they obtain confidential (“non-public”) information from a company insider for the purpose of trading stocks, a practice sometimes called “tipping.” (The “tipper” gives secret information to the “tippee.”) But a grey area exists in the law when friends, colleagues, business associates, or even perfect strangers (perhaps a stock analyst) obtain information from a company employee that the employee does not intend to be used for trading. In another case, the Department of Justice prosecuted Sean Stewart, a former JPMorgan vice president, for allegedly participating in an insider trading scheme as a “tipper.” The government claimed information Sean gave his father, Bob Stewart, was used by Bob and a friend of Bob to make $1 million in the stock market. Sean testified that he did not tell his father anything for …