FINRA Dismisses Insider Trading Charges
On March 13, 2017, Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (the “NAC”) affirmed a hearing panel’s finding that Matthew Joseph Sheerin, a trader formerly with investment firm Angelo Gordon & Co., did not engage in insider trading. Decision, Dep’t of Mkt. Regulation v. Sheerin, Compl. No. 2011027926301 (Mar. 13, 2017).
FINRA’s Department of Market Regulation (“DMR”) filed a complaint against Sheerin in 2013, alleging that he provided material non-public information to his friend (“MM”), who was an equities trader at G-2 Trading LLC. According to the DMR’s Complaint, Sheerin received a confidential, “board level” email from C&D Technologies Inc. (“C&D”), a company that was majority-owned by Sheerin’s employer, which disclosed information about a large contract C&D had won and was planning to announce in its upcoming 10-K filing. Sheerin subsequently called his friend MM and shared the information. In particular, the DMR alleged that Sheerin called MM to discuss general market developments and the topic of C&D came up, at which point Sheerin told MM the date on which C&D planned to announce earnings and said “the story should read well.” After this conversation, MM purchased 500 shares of C&D for his personal account and asked his employer for permission to purchase shares for the company’s account (which request was denied and which led to an internal investigation and, ultimately, the resignation of MM from his employer).
FINRA’s hearing panel subsequently concluded that Sheerin did not share material, nonpublic information with MM, and thus did not violate the securities laws or FINRA rules. Hearing Panel Decision, Dep’t Mkt. Regulation v. Sheerin, No. 2011027926301 (May 18, 2015). First, it acknowledged that the date of C&D’s earnings release was public and not material. Second, the hearing panel found that Sheerin’s comment that the “story should read well” was encouraging, but non-specific. Sheerin testified that the “story” to which he was referring did not relate to non-public information he received, but rather to C&D’s recent and “well known” reorganization, which C&D in fact did announce in its press release on the day of its earnings report. The hearing panel found that there was no evidence, direct or circumstantial, demonstrating that Sheerin shared any other information, and it was unwilling to infer that additional (more specific and material) information was shared or that the shared information was a “coded message,” notwithstanding that MM subsequently purchased C&D shares.
The DMR subsequently appealed the decision to the NAC, which undertook a complete review of the record. After doing so, the NAC agreed that the information Sheerin shared with MM was not material, nonpublic information—characterizing it instead as “limited”—and found that “Sheerin’s positive, but nonspecific statement was simply confirmation of a fact ‘fairly obvious to all who followed the stock.’” Therefore, NAC upheld the hearing panel’s decision, and, because only “individuals or firms” can appeal to the Securities and Exchange Commission, the decision will remain final unless FINRA’s Board of Governors elects to review it. FINRA, National Adjudicatory Council, http://www.finra.org/industry/nac.
While this FINRA decision will have no precedential effect on insider trading cases brought in federal court, it does provide an interesting view from a market self-regulatory organization on what constitutes material nonpublic information. And given that there was no parallel SEC case, the regulators presumably agreed with that assessment. This decision can be used as very persuasive authority in that narrow band of authority in which FINRA pursues insider trading claims without any parallel proceedings. The decision provides strong support for the argument that material, nonpublic information needs to be specific and tied to a non-public fact. While FINRA tried to rely on circumstantial evidence to show that the insider’s statement met these thresholds, FINRA could not rebut the insider’s testimony that his statements related to publicly available information.CATEGORY: Securities Enforcement Matters