WEBVTT - Shadow Trading & 'Top Gun' Suit Thrown Out 0:00:03.200 --> 0:00:08.000 This is Bloomberg Law with June Brusso from Bloomberg Radio. 0:00:10.160 --> 0:00:14.440 The weed of crime bears bitter fruit, So like this, 0:00:15.480 --> 0:00:18.960 it sticks. Did you think you'd get away with it? 0:00:23.840 --> 0:00:31.240 Did you think I would know? But the shadow knows. 0:00:31.840 --> 0:00:35.040 Perhaps that's why a novel theory of the SEC is 0:00:35.120 --> 0:00:39.640 being called shadow trading. A corporate insider may think he 0:00:39.720 --> 0:00:42.159 got away with it, after all, the trade was in 0:00:42.200 --> 0:00:44.960 the stock of a rival company. But it seems like 0:00:45.000 --> 0:00:48.280 the SEC is trying to show that, like the shadow, 0:00:48.720 --> 0:00:54.160 it sees all. Just ask former Metivation executive Matthew Panawatt. 0:00:54.720 --> 0:00:58.880 A jury convicted him the regulator's first enforcement action targeting 0:00:59.040 --> 0:01:03.320 so called shadow trading on Friday in California. Joining me 0:01:03.360 --> 0:01:06.960 is securities law expert James Park, a professor at UCLA 0:01:07.040 --> 0:01:11.400 Law School. Jim, this case has been called groundbreaking. Do 0:01:11.480 --> 0:01:14.440 you think it's groundbreaking and if so, why it is? 0:01:14.520 --> 0:01:16.720 In some ways, but in other ways, I think it's 0:01:16.720 --> 0:01:20.760 the standard case. The reason why it's unusual is I 0:01:20.800 --> 0:01:24.080 believe it's the first time the SDC has brought and 0:01:24.600 --> 0:01:28.560 won a case involving something called shadow trading, which is 0:01:28.600 --> 0:01:34.000 a type of insider trading where you're using information that 0:01:34.360 --> 0:01:37.520 you obtained from your own company to trade in the 0:01:37.560 --> 0:01:40.399 stock of another company. This is the first time the 0:01:40.560 --> 0:01:46.119 SDC has brought such a case and pursued serious sanctions. 0:01:46.440 --> 0:01:50.600 It's not all that unusual, though, in that most of 0:01:50.640 --> 0:01:56.040 the sort of outcome hinged upon factual issues. Did you 0:01:56.120 --> 0:02:01.000 believe that this individual got and read the email from 0:02:01.000 --> 0:02:03.720 the CEO which said that the company was going to 0:02:03.760 --> 0:02:08.440 be acquired? Factual issues which are fairly routine in insider 0:02:08.480 --> 0:02:12.119 trading cases. And I think you could argue that this 0:02:12.200 --> 0:02:17.639 is a straightforward extension of existing law that has been 0:02:17.720 --> 0:02:21.720 in place since the US Supreme Court's decision in the 0:02:21.800 --> 0:02:25.440 United States versus o'hagen. But I do think that it 0:02:25.600 --> 0:02:29.280 is significant because it shows the SEC is willing to 0:02:29.320 --> 0:02:33.800 bring these types of cases and could do so in 0:02:33.840 --> 0:02:34.400 the future. 0:02:34.960 --> 0:02:38.440 What was the evidence against the defendant here? 0:02:39.120 --> 0:02:43.280 Some of the evidence was circumstantial, so they knew the 0:02:43.320 --> 0:02:48.960 CEO sent an email that included him and other individuals 0:02:48.960 --> 0:02:54.079 in the company. They didn't necessarily know though, whether or 0:02:54.120 --> 0:02:56.800 not he read the email, and he claimed the trial 0:02:56.919 --> 0:02:59.960 that he did not read the email. But what they 0:03:00.160 --> 0:03:05.080 do know is that seven minutes after the email was 0:03:05.200 --> 0:03:08.000 sent and would have been received. He spent one hundred 0:03:08.040 --> 0:03:13.720 thousand dollars in options in this company that was likely 0:03:13.840 --> 0:03:17.080 to go up in price upon the announcement that his 0:03:17.160 --> 0:03:21.320 company would be acquired, and so that is circumstantial evidence. 0:03:21.360 --> 0:03:23.560 We don't know for a fact, you know, one hundred 0:03:23.600 --> 0:03:27.520 percent certainty that he actually knew of this inside information 0:03:28.120 --> 0:03:31.280 and that he read the email. But you know, that's 0:03:31.280 --> 0:03:34.320 what a jury's for. Does a jury believe his explanation 0:03:34.560 --> 0:03:36.720 for buying all of these options, which is that he 0:03:36.880 --> 0:03:41.240 read a research analyst report by Goldman Sachs and that 0:03:41.400 --> 0:03:44.800 he had been following this company for a long time. 0:03:45.120 --> 0:03:47.360 You know, that's up to the jury. And recall that 0:03:47.440 --> 0:03:50.000 this is a civil case. It's not a criminal case 0:03:50.040 --> 0:03:53.480 where the sec has to prove beyond a reasonable doubt 0:03:53.680 --> 0:03:57.520 that he violated Rule TEND five, which is the major 0:03:57.560 --> 0:04:01.160 Securities fraught provision that prohibits insider trading. They only have 0:04:01.280 --> 0:04:04.440 to prove by a preponderance of the evidence. 0:04:04.680 --> 0:04:07.960 I thought the defense phraised several good points or defenses. 0:04:08.240 --> 0:04:11.400 One that you mentioned that the trades weren't based on 0:04:11.560 --> 0:04:16.160 confidential information because the merger had been covered publicly by 0:04:16.160 --> 0:04:18.720 the press. So the jury just didn't believe that. 0:04:19.240 --> 0:04:22.320 It's a great point, and that was an argument that 0:04:22.400 --> 0:04:25.719 he made, is that you know, the market anticipated the merger. 0:04:25.839 --> 0:04:29.440 They anticipated the merger, and so this was not non 0:04:29.520 --> 0:04:33.520 public information. Now, I think the SEC's response is that 0:04:33.960 --> 0:04:37.279 sometimes there are rumors about whether mergers are going to happen, 0:04:37.720 --> 0:04:40.239 and the market sort of knows this and the price 0:04:40.279 --> 0:04:44.520 adjusts accordingly. But there's a difference between a rumor of 0:04:44.640 --> 0:04:47.400 a merger that could happen at some point in time 0:04:48.320 --> 0:04:53.600 and an email from your company CEO that says Pfizer 0:04:54.160 --> 0:04:56.640 wants to buy the company and they want to complete 0:04:56.640 --> 0:05:00.240 the deal over the weekend, which means there's a higher 0:05:00.320 --> 0:05:03.919 probability if you know that information that there's going to 0:05:03.920 --> 0:05:06.800 be a merger that will be closed over the weekend 0:05:06.839 --> 0:05:11.000 and announced on Monday before the market opens, and that 0:05:11.160 --> 0:05:14.520 is non public, and I think there's a good argument 0:05:14.560 --> 0:05:18.080 it is material important to investors. There's a difference between 0:05:18.560 --> 0:05:22.200 speculating about whether a merger might happen at some point 0:05:22.200 --> 0:05:27.560 in time and having an indication that there's a probability 0:05:28.000 --> 0:05:31.400 that it's going to happen over the weekend, and it's 0:05:31.400 --> 0:05:36.560 from your CEO, who presumably has good information and who 0:05:36.600 --> 0:05:41.000 typically would not say something this specific unless the possibility 0:05:41.000 --> 0:05:42.960 of an acquisition was fairly high. 0:05:43.200 --> 0:05:48.839 The defense also argued that the SEC hadn't proven that 0:05:49.360 --> 0:05:52.000 pan Watt had an intent to defraud because he didn't 0:05:52.000 --> 0:05:55.080 know it was illegal to trade in a company that 0:05:55.240 --> 0:05:58.640 wasn't his employer and didn't conduct business with his employer. 0:05:59.040 --> 0:06:01.919 So his attorney told the jury, the evidence will show 0:06:01.960 --> 0:06:04.840 that the entire SEC case is an attempt to put 0:06:04.880 --> 0:06:08.279 thoughts in mister Panawat's head that we're not there when 0:06:08.320 --> 0:06:09.400 he made the trades. 0:06:10.080 --> 0:06:14.520 It's a substantial argument. And you know, these cases depend 0:06:14.640 --> 0:06:18.440 on intent, and because we don't know for sure what 0:06:18.600 --> 0:06:22.200 someone's intent is, that's up for the jury to decide. 0:06:22.279 --> 0:06:24.520 And the jury looked at the evidence and they believe 0:06:24.640 --> 0:06:28.320 circumstantially that he acted with bad intent. And you know, 0:06:28.400 --> 0:06:31.400 one fact in favor of the SEC is that he 0:06:31.480 --> 0:06:35.039 buys one hundred thousand dollars in option. His purchase is 0:06:35.080 --> 0:06:38.839 represented around eighty percent of the options trading in that 0:06:39.080 --> 0:06:43.920 stock on that particular day. That is very unusual. And 0:06:44.520 --> 0:06:46.640 you know, the other point I would make is that 0:06:46.760 --> 0:06:50.280 ignorance of the law is not a defense, even if 0:06:50.279 --> 0:06:52.280 you don't know all the ins and outs of insider 0:06:52.320 --> 0:06:55.839 trading law, which is complicated. That is not a defense 0:06:55.880 --> 0:06:59.320 to liability. Now he does have an argument that I 0:06:59.440 --> 0:07:02.680 just was I'm not conscious of doing anything wrong because 0:07:02.920 --> 0:07:05.599 you know, I didn't understand I couldn't trade in the 0:07:05.640 --> 0:07:09.159 stock of other companies. And you know, the fact of 0:07:09.160 --> 0:07:12.400 the matter is he signs the policy saying that you 0:07:12.480 --> 0:07:16.080 cannot use company information to trade in the securities of 0:07:16.120 --> 0:07:19.920 another publicly traded company. Now, you know, I think, mister Pano, 0:07:19.960 --> 0:07:23.120 what would say. You know, we sign all sorts of 0:07:23.120 --> 0:07:26.040 things when you join a new company. We may not 0:07:26.240 --> 0:07:29.720 read these things carefully. And I just didn't understand this. 0:07:29.840 --> 0:07:32.680 You know, I didn't read the agreement very carefully. And 0:07:33.280 --> 0:07:35.600 you know, I think they're different, you know, views as 0:07:35.640 --> 0:07:40.200 to whether you're still accountable for following that particular policy 0:07:40.320 --> 0:07:43.760 or not. And you know, I think that the jury 0:07:43.800 --> 0:07:47.040 could have decided you are accountable, and you are accountable 0:07:47.080 --> 0:07:51.120 because you signed the policy, and because you signed it, 0:07:51.240 --> 0:07:53.760 you have to follow it. And if you're not following it, 0:07:53.840 --> 0:07:57.360 you know, you're deceiving your employee. And that sort of 0:07:57.360 --> 0:08:03.280 deception is a type of misappropriation of the company's confidential information. 0:08:03.840 --> 0:08:06.160 You know, another argument he could make might be, as 0:08:06.240 --> 0:08:08.679 you know, I found a loophole and I'm gaving the system. 0:08:09.200 --> 0:08:11.200 I don't know how sympathetic the jury would be to 0:08:11.240 --> 0:08:13.360 that argument, but you know, that is the sort of 0:08:13.480 --> 0:08:16.360 argument that one could give some weights to. But the 0:08:16.440 --> 0:08:17.920 jury rejected those arguments. 0:08:18.080 --> 0:08:21.160 Was this based on you know, you mentioned the policy, 0:08:21.160 --> 0:08:25.680 the confidentiality agreement that he signed at his company. I mean, 0:08:25.720 --> 0:08:28.920 did the SEC bring this based on that? Or could 0:08:28.920 --> 0:08:32.400 they have brought this even if there wasn't a confidentiality agreement. 0:08:33.480 --> 0:08:33.959 This is the. 0:08:33.920 --> 0:08:38.480 Foundation of the case. Without this policy, the SEC would 0:08:38.480 --> 0:08:41.920 not have an insider trading case. You can only misappropriate 0:08:42.200 --> 0:08:46.160 confidential information and violate Rule ten B five based on 0:08:46.320 --> 0:08:51.080 inside information if you have a fiduciary duty to the 0:08:51.160 --> 0:08:56.240 corporation who stock your trading in, or you have agreed 0:08:56.600 --> 0:09:00.280 to keep information confidential. Those are the two mechanisms by 0:09:00.320 --> 0:09:05.560 which you can violate insider trading prohibitions. The first avenue 0:09:05.640 --> 0:09:09.000 is called the classical theory of insider trading, and that 0:09:09.040 --> 0:09:13.839 actually does not apply to this case because Panawat does 0:09:13.880 --> 0:09:17.240 not have any fiduciary duties to insight, which is the 0:09:17.280 --> 0:09:20.720 company that he traded in he might have some juduciary 0:09:20.840 --> 0:09:25.480 like duties to his company metivation. But that's why you 0:09:25.559 --> 0:09:27.720 know this is seen or was seen as a type 0:09:27.720 --> 0:09:31.880 of loophole. It gets you around the classical theory. But 0:09:32.400 --> 0:09:35.760 there's a second theory which has just as much status, 0:09:35.800 --> 0:09:39.439 has been approved by the Supreme Court called the misappropriation theory. 0:09:39.840 --> 0:09:43.760 And under that theory, the deception is when you sign 0:09:43.800 --> 0:09:47.680 a policy of confidentiality with your company that commits you 0:09:47.880 --> 0:09:52.280 to complying with that policy, and if you deceptively trade 0:09:52.280 --> 0:09:55.679 and violation of that policy, you have violated Rule ten 0:09:55.760 --> 0:09:59.440 D five. So it is absolutely essential that they had 0:09:59.440 --> 0:10:02.880 a policy that specified you cannot trade them the securities 0:10:03.040 --> 0:10:06.480 of another publicly traded company. If they did not have 0:10:07.000 --> 0:10:11.079 that policy in a general policy of confidentiality, the sec 0:10:11.120 --> 0:10:13.920 would not have had a cake. Most public companies, or 0:10:13.960 --> 0:10:17.880 many public companies, are adopting these policies. There's a study 0:10:17.920 --> 0:10:23.000 by g Men of Michigan State that documents increasing adoption 0:10:23.240 --> 0:10:26.720 of these types of broad insider trading policies that cover 0:10:27.080 --> 0:10:29.520 securities of other publicly traded companies. 0:10:30.320 --> 0:10:34.880 So the SEC Enforcement Chief Gerbert Greenwall said, as we've 0:10:34.880 --> 0:10:37.839 said all along there was nothing novel about this matter, 0:10:37.920 --> 0:10:41.640 and the jury agreed this was insider trading, pure and simple. 0:10:42.040 --> 0:10:43.480 Why is he downplaying that? 0:10:44.000 --> 0:10:48.079 I think the SEC was receiving some pushback and you know, 0:10:49.000 --> 0:10:52.160 to say it's not entirely novel. It's partly true. But 0:10:52.400 --> 0:10:54.920 I think this is the first time that the SEC 0:10:55.000 --> 0:10:59.000 has pursued this shadow trading theory. I do think that 0:10:59.120 --> 0:11:03.280 it's an extent of prior laws, but to a different 0:11:03.320 --> 0:11:06.439 set of facts. And there's you know, room for disagreement 0:11:06.480 --> 0:11:09.360 about whether you think that's novel or not right. The 0:11:09.400 --> 0:11:14.079 misappropriation theory is very well established, but I think it 0:11:14.120 --> 0:11:19.000 was typically understood to apply to these confidentiality policies that 0:11:19.080 --> 0:11:22.240 might have specified you can't trade in your own company stock. 0:11:22.559 --> 0:11:25.680 But what begins to happen is companies are adopting broader 0:11:26.240 --> 0:11:30.920 policies that include other stocks. And so you know that 0:11:31.400 --> 0:11:35.680 I think is a reasonable extension of the misappropriation theory 0:11:35.720 --> 0:11:40.280 that you have deceived your employee in trading securities, and so, 0:11:40.400 --> 0:11:42.800 you know, technically, I think he's right that it's not 0:11:42.920 --> 0:11:46.640 completely novel. It's just an extension of existing doctrine to 0:11:46.840 --> 0:11:48.800 new set of facts. Now, you know, I think what 0:11:48.880 --> 0:11:53.680 the defense are and other concerned individuals might respond and say, 0:11:53.800 --> 0:11:56.760 is that, well, you've never aggressively applied the theory to 0:11:56.880 --> 0:11:59.959 this type of facts, and so the industry didn't really 0:12:00.440 --> 0:12:05.320 understands that this is a violation of insider trading law. 0:12:05.440 --> 0:12:08.839 But you know, the SEC would say that it's really 0:12:09.000 --> 0:12:11.800 your job to figure out the law and inform people 0:12:12.000 --> 0:12:14.640 that you know, this is a logical extension of this 0:12:14.880 --> 0:12:15.960 series coming up. 0:12:16.080 --> 0:12:19.720 Critics say the SEC is going beyond its jurisdiction. This 0:12:19.840 --> 0:12:25.080 is Bloomberg. The SEC won a jury verdict in its 0:12:25.120 --> 0:12:30.080 groundbreaking insider trading case that seeks to bar employees from 0:12:30.160 --> 0:12:33.959 using non public information about their own company to place 0:12:34.000 --> 0:12:37.920 bets on rival stocks. The closely watched two week San 0:12:37.960 --> 0:12:42.920 Francisco civil trial was the SEC's first enforcement action targeting 0:12:43.040 --> 0:12:46.959 so called shadow trading. In the case, the regulator argued 0:12:47.000 --> 0:12:51.400 that former Metivation executive Matthew Panawatt broke the law when 0:12:51.400 --> 0:12:54.360 he learned that his company would soon be acquired, and, 0:12:54.440 --> 0:12:57.559 believing the news would benefit other companies in the industry, 0:12:57.960 --> 0:13:03.120 traded another biotech company call options. His attorneys countered that 0:13:03.160 --> 0:13:07.320 the trades weren't based on confidential information because the merger 0:13:07.320 --> 0:13:10.600 had been covered publicly by the press, and they argued 0:13:10.600 --> 0:13:14.680 that the SEC couldn't prove that Panawat hadn't intend to defraud. 0:13:15.160 --> 0:13:18.680 I've been talking to Professor James Park of UCLA Law School. 0:13:19.120 --> 0:13:23.000 The SEC and its enforcement chief have brought cases that 0:13:23.040 --> 0:13:26.120 have pushed it into new territory, for example, a case 0:13:26.160 --> 0:13:30.520 over McDonald's CEO's relationship with an employee and the workplace 0:13:30.640 --> 0:13:33.880 culture at a video game developer. And it's also bringing 0:13:33.920 --> 0:13:38.280 several cutting edge cases to gain greater control over cryptocurrency. 0:13:38.760 --> 0:13:41.200 And the criticism is that it's going too far, that 0:13:41.280 --> 0:13:44.960 it's stretching its enforcement power, is beyond its jurisdiction. 0:13:46.240 --> 0:13:49.960 That is the criticism. And you know, I think one 0:13:50.000 --> 0:13:54.080 response the SEC might have is that these are novel problems. 0:13:54.120 --> 0:13:57.760 These are novel problems, the novel issues, and the reason 0:13:57.800 --> 0:14:00.880 we were not addressing them before is the SEC was 0:14:00.920 --> 0:14:03.360 too passive. We need to get out there. We need 0:14:03.400 --> 0:14:08.000 to enforce the laws to novel situations and educate people 0:14:08.000 --> 0:14:11.360 about what the law is. You can't simply ignore these 0:14:11.559 --> 0:14:15.080 broader standards and principles. You know, they're there for people 0:14:15.160 --> 0:14:18.200 to read and interpret and apply in good faith. And 0:14:18.679 --> 0:14:21.320 I think the SEC would say is, if you're applying, 0:14:21.840 --> 0:14:24.720 you know, the definition of insider trading in this appropriation, 0:14:24.800 --> 0:14:27.480 if you're applying the definition of security and good faith, 0:14:28.040 --> 0:14:30.680 you would know that in some cases that there are 0:14:30.800 --> 0:14:34.440 violations of securities laws. Now, the argument on the other side, 0:14:34.480 --> 0:14:37.400 I think is that you know, certainly, I think the 0:14:37.440 --> 0:14:40.880 SEC has become more aggressive, and I would say more 0:14:41.080 --> 0:14:44.720 entrepreneurial in certain ways. I have an article coming out 0:14:45.000 --> 0:14:47.960 in the Northwestern Law Review later this fall that says 0:14:48.000 --> 0:14:51.840 the SEC is acting more as an entrepreneurial enforcer, and 0:14:51.960 --> 0:14:55.120 part of that is that you have a more expansive, 0:14:55.160 --> 0:14:59.280 aggressive regulatory policy, and enforcement is a way to develop 0:14:59.400 --> 0:15:03.320 that policy. And you know, they're positives and negatives I 0:15:03.320 --> 0:15:07.800 think to the SEC being more aggressive and entrepreneurial, but 0:15:07.960 --> 0:15:10.640 recall that there are times when the SEC is criticized 0:15:10.640 --> 0:15:14.240 as too passive, too much of a bureaucracy captured by 0:15:14.280 --> 0:15:17.760 the industry because the lawyers want to get good jobs 0:15:17.760 --> 0:15:20.920 with law firms, and so, you know, I think, either way, 0:15:20.960 --> 0:15:23.560 if you're too passive, if you're too aggressive, the SEC 0:15:23.640 --> 0:15:27.160 is going to face some criticism for its enforcement policies. 0:15:27.440 --> 0:15:30.359 But I would say that I do think that this administration, 0:15:30.480 --> 0:15:34.640 for better or worse, has implemented a more entrepreneurial or 0:15:34.920 --> 0:15:36.960 aggressive approach to enforcement. 0:15:37.520 --> 0:15:40.840 Do you think that this case will survive and appeal 0:15:40.920 --> 0:15:41.680 this theory. 0:15:42.440 --> 0:15:44.880 It's always hard to say. I think, on the facts, 0:15:44.920 --> 0:15:48.760 on the factual determinations, I think that there's not much 0:15:48.840 --> 0:15:52.520 of a basis for overturning the case. The vulnerable point 0:15:52.600 --> 0:15:55.160 to me, I think is on the enter. I think 0:15:55.200 --> 0:15:58.040 that is the one argument that a judge on the 0:15:58.160 --> 0:16:01.560 Ninth Circuit or perhaps the Supreme Court could look at 0:16:01.680 --> 0:16:05.320 very closely on these facts. And you know, that's the 0:16:05.320 --> 0:16:08.640 place where I think a appellate court could be a 0:16:08.680 --> 0:16:12.440 little bit skeptical of the SEC theory of the case. 0:16:12.920 --> 0:16:14.880 On the other hand, I think that you know, these 0:16:14.920 --> 0:16:18.960 are typically factual matters. The enter is fraudulent intent is 0:16:19.160 --> 0:16:22.440 a matter for the jury, and many appellate courts will 0:16:22.480 --> 0:16:25.320 defer to that, And the Supreme Court may not think 0:16:25.360 --> 0:16:28.440 of this as a good vessel for clarifying the boundaries 0:16:28.480 --> 0:16:29.640 of insider trading law. 0:16:29.800 --> 0:16:32.400 Do you know how widespread shadowed trading is? I mean, 0:16:32.440 --> 0:16:36.360 I'm not sure how the SEC even discovered this trade. 0:16:36.920 --> 0:16:41.040 Well, I think in this case they do monitor trading activity, 0:16:41.200 --> 0:16:43.640 and so if you see a big spike in trading, 0:16:43.960 --> 0:16:46.440 you know, eighty percent of the options activity can be 0:16:46.480 --> 0:16:49.680 traced to one person who made one hundred thousand dollars 0:16:49.720 --> 0:16:53.960 in a few weeks from the SEC. Self regulatory organizations 0:16:54.000 --> 0:16:58.040 like FINRA, they monitor these trading patterns. My guess is 0:16:58.080 --> 0:17:02.480 that's how they discovered this case. As to how extensive 0:17:02.520 --> 0:17:05.760 shadow trading is, that is difficult to measure. I've you know, 0:17:05.880 --> 0:17:09.680 seen some studies here and there that have tried to 0:17:09.720 --> 0:17:12.960 measure it, and you know whether or not it's extensive, 0:17:13.000 --> 0:17:17.239 but it's always hard to conclusively determine whether or not 0:17:17.600 --> 0:17:20.680 it is extensive. My guess is it will become less 0:17:20.720 --> 0:17:24.439 extensive after this case, and given how it has been publicized. 0:17:24.600 --> 0:17:27.520 You know, these sorts of decisions matter. My colleague for 0:17:27.600 --> 0:17:31.439 Nonstreppo has a nice paper on the impact of O'Hagan 0:17:31.880 --> 0:17:34.639 in the late nineteen nineties and how that might have 0:17:34.720 --> 0:17:38.320 affected insider trading on merger agreements that he finds it 0:17:38.359 --> 0:17:39.440 did have an impact. 0:17:39.720 --> 0:17:41.919 So then you know, considering all that, how big a 0:17:42.000 --> 0:17:44.840 victory is this for the SEC? A ten on a 0:17:44.880 --> 0:17:46.200 ten scale or. 0:17:46.320 --> 0:17:49.520 Five, it's a big victory, every trial win is a 0:17:49.600 --> 0:17:52.479 big thing and a good thing for the SEC because 0:17:52.520 --> 0:17:55.840 you're not just settling cases. That's the criticism of the 0:17:55.880 --> 0:17:59.240 SEC is that too often they just settle cases. The 0:17:59.400 --> 0:18:03.320 defendant doesn't admit to wrongdoing or deny it, and the 0:18:03.400 --> 0:18:06.199 SEC has been afraid or doesn't have the resources to 0:18:06.280 --> 0:18:09.280 actually go in front of judges and juries and test 0:18:09.359 --> 0:18:13.720 their theory. So I think this is very significant, and 0:18:14.320 --> 0:18:18.639 you know, along with their win in the Coinbase motion 0:18:18.840 --> 0:18:22.240 to dismiss, it's been a good few weeks for the 0:18:22.320 --> 0:18:26.680 SEC and these are needed wins because when you're getting criticized 0:18:26.760 --> 0:18:31.280 for stretching the law regulating by enforcement, the shortst response 0:18:31.400 --> 0:18:34.600 is winning cases in courts. And you know they have 0:18:34.720 --> 0:18:38.359 won these cases. They need to keep litigating cases and 0:18:38.400 --> 0:18:43.240 winning them fairly consistently in order to enhance the legitimacy 0:18:43.240 --> 0:18:44.439 of their enforcement efforts. 0:18:44.840 --> 0:18:48.720 And just hours before this jury verdict came in a 0:18:48.800 --> 0:18:53.440 jury in New York found Terraform Labs co founder Libel 0:18:53.520 --> 0:18:56.520 for fraud over the firm's twenty twenty two collapse. Was 0:18:56.520 --> 0:18:57.680 that a big win as well? 0:18:58.119 --> 0:19:00.760 Also a big win in my you a much more 0:19:00.880 --> 0:19:05.639 straightforward case of fraud there with aspect to the crypto assets, 0:19:05.720 --> 0:19:09.960 where you know, you're claiming that these crypto assets are 0:19:10.440 --> 0:19:13.280 this project is you know, being used in the real world, 0:19:13.280 --> 0:19:18.120 that merchants are actually using this digital coin to effectuate transactions. 0:19:18.400 --> 0:19:18.879 They are not. 0:19:19.119 --> 0:19:23.240 You are literally making up fake transactions that to create 0:19:23.320 --> 0:19:26.280 the impression that something's happening in the real world. That 0:19:26.560 --> 0:19:30.760 strikes me as a fairly straightforward fraud. And Judge Raycoff, 0:19:30.800 --> 0:19:32.800 I think, you know, my view got it right that 0:19:32.920 --> 0:19:36.920 these particular digital assets were securities, and so that's a 0:19:37.000 --> 0:19:41.560 securities fraud, but another big win for the sec And. 0:19:41.480 --> 0:19:45.399 Just to clarify whether cryptos a security hasn't been decided 0:19:45.440 --> 0:19:48.960 by an appellate court yet and the district court judges 0:19:49.040 --> 0:19:50.639 like Raycoff are split on that. 0:19:51.640 --> 0:19:54.800 They are split, although it seems like the trend seems 0:19:54.840 --> 0:19:58.280 to be in favor of at least some and in 0:19:58.320 --> 0:20:00.600 fact actually all of the judge is it said, some 0:20:00.720 --> 0:20:03.679 digital assets can be securities under the Howie test. The 0:20:03.760 --> 0:20:06.960 difference is whether you think that, you know, are the 0:20:07.040 --> 0:20:11.560 tokens when they're trading in secondary markets can they be security? 0:20:11.680 --> 0:20:13.919 So there is a bit of a split there, and 0:20:14.400 --> 0:20:18.000 you know, with pre form, you know, producing a jury 0:20:18.080 --> 0:20:22.199 verdict once Judge Raycoff determines the damages, I would expect 0:20:22.240 --> 0:20:25.000 there's a chance that that could be appealed to this 0:20:25.200 --> 0:20:28.000 US Court of Appeals for the Second Circuit, So that 0:20:28.440 --> 0:20:31.160 could be the first case where we get some guidance 0:20:31.160 --> 0:20:32.320 from the Court of Appeals. 0:20:32.640 --> 0:20:35.560 Now, a lot of people might not realize that Congress 0:20:35.600 --> 0:20:40.439 has never defined insider trading. It's all judge created law. 0:20:40.960 --> 0:20:43.520 You know, it is insider trading law. You know, has 0:20:43.560 --> 0:20:47.439 been developed by judges, and you know, there's an argument 0:20:47.560 --> 0:20:51.000 that for non lawyers it can be difficult to understand 0:20:51.960 --> 0:20:55.280 these cases and the boundaries of the law. So you know, 0:20:55.320 --> 0:20:59.560 it's really up to in House Council to do a 0:20:59.640 --> 0:21:03.560 better job of explaining the boundaries of insider trading and 0:21:03.600 --> 0:21:07.040 doing it in a way so people are not tuning 0:21:07.080 --> 0:21:10.159 it out, and you know, this is important stuff. You know, 0:21:10.280 --> 0:21:13.880 if you have a compliance meeting, you know, maybe mister 0:21:13.920 --> 0:21:17.720 panowatt attended one and maybe you know, maybe they explained 0:21:17.960 --> 0:21:21.639 the policy to him, but he was not paying attention something. 0:21:21.840 --> 0:21:24.600 You know, that's possible, or it's possible that the compliance 0:21:24.680 --> 0:21:28.359 meeting was not thorough enough. These are things that compliance. 0:21:28.520 --> 0:21:32.400 These are decisions. Compliance divisions need to be looking at 0:21:32.520 --> 0:21:35.359 very seriously. They have to also think about how do 0:21:35.440 --> 0:21:39.479 we understand or how do we explain these rules in 0:21:39.520 --> 0:21:43.399 a clear, comprehensible way so that our employees understand what 0:21:43.480 --> 0:21:44.119 the law is. 0:21:44.480 --> 0:21:46.439 And let's see how long it takes for the sec 0:21:46.600 --> 0:21:49.880 to bring the next shadow trading case. Thanks so much 0:21:49.920 --> 0:21:53.400 for your insights, Jim. As always, that's Professor James Park 0:21:53.520 --> 0:21:57.320 of UCLA Law School. In other legal news today, Donald 0:21:57.359 --> 0:22:00.720 Trump is now all in three in his last attempts 0:22:00.760 --> 0:22:03.639 to get his hush money criminal trial, scheduled to start 0:22:03.680 --> 0:22:08.200 on Monday delayed. An appeals court judge rejected the latest 0:22:08.200 --> 0:22:11.040 salvo from the former president, who argued he should be 0:22:11.119 --> 0:22:15.200 on the campaign trail rather than in a courtroom defending himself. 0:22:15.560 --> 0:22:19.280 Trump's lawyers had asked the state's mid level appeals court 0:22:19.359 --> 0:22:22.879 to halt the case indefinitely while they fight to remove 0:22:22.920 --> 0:22:26.560 the trial judge and challenge several of his pre trial rulings. 0:22:27.119 --> 0:22:31.480 After three straight days of emergency hearings on Trump's delay requests, 0:22:31.840 --> 0:22:34.639 it appears the way is cleared for jury selection to 0:22:34.680 --> 0:22:38.520 begin on Monday. Trump's hush money case is the first 0:22:38.560 --> 0:22:41.640 of his four criminal indictments slated to go to trial 0:22:41.960 --> 0:22:44.679 and would be the first criminal trial ever of a 0:22:44.680 --> 0:22:48.080 former president. Coming up next, on the Bloomberg Lan Show, 0:22:48.720 --> 0:22:52.280 Top Gun the Sequel, a judge throws out the case 0:22:52.320 --> 0:22:56.439 against Paramount for copyright infringement. I'm June Grasso, and you're 0:22:56.520 --> 0:22:57.639 listening to Bloomberg. 0:23:05.520 --> 0:23:07.480 What attention? Taking me? 0:23:07.520 --> 0:23:08.200 An attention? 0:23:08.440 --> 0:23:08.600 Good? 0:23:21.440 --> 0:23:24.879 Paramount has come out on top of a copyright lawsuit 0:23:24.960 --> 0:23:28.240 over Top Gun, Maverick. There's a lot at stake. The 0:23:28.320 --> 0:23:31.399 sequel grows nearly one point five billion dollars at the 0:23:31.440 --> 0:23:35.560 box office worldwide, and a federal judge in California has 0:23:35.600 --> 0:23:38.960 found that the sequel, set decades after the article that 0:23:39.080 --> 0:23:43.080 inspired the original Top Gun movie, does not infringe the 0:23:43.119 --> 0:23:47.240 copyright of the article. Very good news for Paramount, since 0:23:47.280 --> 0:23:50.800 another sequel is in the wings, so to speak. Joining 0:23:50.800 --> 0:23:54.159 me is intellectual property litigator Terrence Ross, a partner at 0:23:54.200 --> 0:23:58.280 Katain Yutchen Rosenmuan over So, the writer of this nonfiction 0:23:58.760 --> 0:24:04.360 magazine article about real life F fourteen fighter pilots how 0:24:04.400 --> 0:24:07.600 to sign the movie rights to Paramount for the first movie. 0:24:07.920 --> 0:24:08.840 So then what happened? 0:24:09.119 --> 0:24:12.200 So, if you remember way back in nineteen eighty three, 0:24:12.359 --> 0:24:17.399 wod June wrote this article in California Magazine on the 0:24:17.440 --> 0:24:21.560 top gun program down at the QS Navy Fighter Weapons School, 0:24:21.960 --> 0:24:23.520 but wrote it in a sort of an interesting way 0:24:23.560 --> 0:24:26.440 where he wrote it from the perspective of a pilot 0:24:26.480 --> 0:24:29.320 in his backseat going through the program, and it caught 0:24:29.400 --> 0:24:34.560 somebody's eye in Hollywood, and Baramount went out and got 0:24:34.600 --> 0:24:37.679