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FINRA's Hunt for Insider Trading Cases in Illiquid Markets
Over the last several years, the Financial Industry Regulatory Authority (FINRA) has continued to emerge as a consequential securities transaction regulator, acting in the stead of the traditional authority imposed by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Certainly, this manner of delegation of a prosecutorial function to an administrative agency has been the subject of criticism. See, e.g., Nov. 5, 2014, PLI Securities Regulation Institute Keynote Address, “Is the SEC Becoming a Law Unto Itself?” Hon. Jed S. Rakoff, U.S.D.J. Nonetheless, for various reasons beyond the scope of this article, it is a trend that is very likely to continue, with limited imposition of oversight.
Consequently, FINRA can and does pursue insider trading prosecutions that, for whatever reason, were not pursued by the SEC, the DOJ or an Article III court. Leaving aside why this is the case, including, for example, instances where said actions were deemed simply unworthy of investigation, the result is that FINRA is left to act at the margins. The article herein considers one such marginal action within the context of a case recently tried before FINRA regulators; namely, Dep't of Market Regulation v. Jack Lawrence Howard, Disciplinary Proceeding No. 20110263957-01 (RSH), June 29, 2015 Hearing Panel Decision (http://bit.ly/1M1py3S.)
The Howard case is notable on a number of levels. First, it is a rare example of alleged insider trading in a publicly traded but non-reporting shell company about which very little public information is available. Although the Panel's decision did not purport to establish a bright-line rule that the relatively small volume of information available about a non-reporting shell requires a departure from the traditional definition of materiality, the case highlights interesting issues that arise when applying insider trading principles in such circumstances.
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