Article by Bruce Hiler, Tom Kuczajda, And Anne Marie Helm*

Recently, the Staff of the SEC’s Division of Enforcement has indicated a reinvigorated interest in and focus on insider trading and hedge fund activities.1 One particular scenario that the Division of Enforcement has aggressively policed over the past few years, and where it apparently continues to concentrate, is trading of securities – often by hedge funds – in connection with Private Investments in Public Equity ("PIPE offerings").2 The theories and arguments put forth by the SEC in pursuing insider trading claims against investors in PIPEs who have employed shorting strategies in anticipation of participating in a PIPE are instructive as cautionary tales.3

I. Insider Trading and PIPEs—Potential Legal Issues

Beginning in at least 2004, the SEC has brought a series of cases in which it alleged that short sales in advance of PIPE announcements may constitute illegal insider trading, in that they occur while the investor is in possession of nonpublic information that the market price for the PIPE issuer’s shares will decline as a result of the dilution caused by the PIPE. Although it is not clear that the necessary elements of insider trading can easily be proven in such situations, it is clear is that investors that participate in a PIPE offering while shorting shares of the same issuer run a significant risk of being accused of insider trading if their short sales occur prior to the public announcement of the offering.

A. Elements of Illegal Insider Trading.

Most of the recent PIPEs cases have contained allegations of insider trading, in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 and Section 17(a) of the Securities Act of 1933. Illegal insider trading generally requires:

  1. purchasing or selling securities
  2. while aware of/on the basis of
  3. material, nonpublic information
  4. in violation of a duty not to trade
  5. with scienter.4

In the context of short sales in advance of PIPE offerings, materiality, duty, scienter, and the "on the basis of" elements stand out as potentially difficult issues for the government, if it were pushed to litigate the theories it seems to be advancing.

B. The ‘Materiality’ Element.

Language in several recently settled SEC enforcement actions alleging insider trading by short selling prior to PIPEs seems to indicate that the SEC believes the announcement of a PIPE offering is almost presumptively "material" negative information. The SEC apparently bases this view on the dilutive effect on the issuer’s stock resulting from the subsequent registration of the privately offered shares.

For example, in one of the first PIPEs insider trading cases, the Commission simply alleged with respect to materiality: "A PIPE financing generally tends to have a dilutive effect on the issuer’s stock price as more shares of its stock become available in the marketplace."5 The Commission made no further specific allegations with respect to materiality.6 This and other SEC complaints appear to treat the alleged "generally" negative effect of a PIPE announcement as a basis for concluding that the PIPE announcements at issue were material.

Because the SEC actions in these cases typically have settled, it is difficult to tell what additional analysis of materiality may have been performed and whether some trades were excluded from the ultimate allegations because of such analysis. Nevertheless, the language in some of the recent SEC cases seems to indicate a tendency for the Commission to view the mere fact of a PIPE announcement as material, absent compelling evidence to the contrary. Under such circumstances, PIPE investors and issuers should carefully consider the legality of any possible short sale prior to a PIPE announcement.

1. Materiality Must Be Shown on a Case-by-Case Basis by Examining the Total Mix of Available Information

Although PIPEs eventually result in dilution assuming a successful registration, and some may even contribute to lower share price in the short term, the argument that all PIPE transactions "typically" or "generally" are material negative events because of the dilutive effect is at odds with the type of analysis that needs to be undertaken to show materiality under both Supreme Court precedent and the Commission’s own regulations. Neither the Supreme Court, nor any other court, has ever held that any one type of information or event is per se material for purposes of insider trading liability, but rather information must be examined on a case-by-case basis within the context of the "total mix" of information available. 7

Under this approach, a trier of fact must make each materiality determination through a detailed, case-by-case analysis of the unique mix of financial and economic information available at each distinct point in time at which a trade is made. If PIPE enforcement actions are litigated the Commission should not be permitted to rely on a blanket assertion regarding the "typical" or "general" effect of PIPE deals or the assertion that events which potentially dilute shareholder holdings are materially negative events for all issuers.

2. Any Post-Announcement Market Movement Must Be Shown to Be Connected to the PIPE Information and Statistically Significant

Stock price movement in response to information entering the marketplace is often considered by courts as one potential indicia of materiality. Yet, even where the issuer’s public stock price declines in the wake of an announcement of a PIPE transaction and follow-on registration, a decline alone is insufficient to ultimately prove materiality under settled case law.

Where stock price movement is relied upon in determining materiality, a trier of fact must evaluate the movement of the market in the context of all other factors that may have caused the movement. This involves examining the complex "total mix" of information that was available and affected the security that same day, in order to show a causal connection between the movement and the information.8

In at least one recent case currently being litigated, a federal district court opined that the fact of a PIPE offering was "very close" to being immaterial as a matter of law.9 The court opined that because the alleged stock price movement after the PIPE announcement was relatively insignificant, and the price allegedly recovered, the fact of the PIPE was arguably immaterial.

Thus, where PIPE issuers’ stock rebounds shortly after a PIPE announcement, proof of materiality may be more difficult to establish before a trier of fact. Even if issuers who announce PIPEs "typically" experience declines in their share prices, it is important to ask whether these declines are only temporary, possibly due to market overreaction or misinterpretation. Further, such declines might be a result of those investing in the PIPE choosing to hedge their position by beginning to short immediately after the PIPE announcement. In sum, although the courts have generally looked to the rise and fall of stock prices in considering materiality, there is simply no precedent for the proposition that dilution, regardless of nature or scope, is always material negative information.

C. The ‘Duty’ Element.

Under the "misappropriation theory" of insider trading, through which liability is more typically alleged in PIPEs cases, a person violates Section 10(b) when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information.10 In the PIPEs context the SEC has advanced this theory where an investor traded on the basis of information obtained from an issuer or that issuer’s placement agent about an upcoming, still nonpublic PIPE offering.

A series of cases, primarily within the Second Circuit, have discussed factors giving rise to a duty not to trade in the misappropriation theory context. United States v. Chestman, a criminal case decided by the U.S. Court of Appeals for the Second Circuit, and other Second Circuit cases, make clear that arm’s length negotiations do not give rise to a duty of confidentiality; nor does the sharing of confidential information itself create such a duty.11

In 2000, the SEC attempted to clarify the law as to the duty requirement by issuing Exchange Act Rule 10b5-2. That rule identifies three situations in which a duty exists to keep information confidential, for purposes of the misappropriation theory: (1) an express agreement; (2) a history, pattern or practice of sharing confidences implying an agreement; and (3) certain sharing of information among family members. Rule 10b5-2 has not yet been recognized by the Supreme Court, and, as discussed below, at least one district court has questioned its characterization as a clarification of existing law as opposed to an attempt to make new law.12 Possibly because it is mindful of this disagreement, the SEC has usually included in its settled insider trading PIPEs cases allegations of a written or otherwise express agreement of confidentiality.

1. PIPE Investors and PIPE Issuers Generally Deal at Arm’s Length

Absent insider or tippee status, a person can be liable for insider trading "when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information."13 The creation of a duty sufficient to trigger insider trading liability requires a fiduciary or similar relationship of "trust and confidence between the parties."14

The key element to a relationship required for insider trading liability is that it "involves discretionary authority and dependency: One person depends on another—the fiduciary—to serve his interests."15 Where the parties by definition are beholden to different interests, there can be no fiduciary relationship between them.16 Applying these principles, the courts have made it clear that arm’s length negotiations do not give rise to a relationship of trust or confidence.17

In United States v. Cassese, the district court ruled that an unexecuted confidentiality agreement was insufficient to create a duty for insider trading purposes, and, specifically stated that "[t]he fact that information exchanged between the two parties is confidential does nothing to change their relationship from arm’s-length into a fiduciary relationship."18 In SEC v. Talbot, the district court came to the same result under comparable facts, finding neither an express or implied duty.19

In Walton, Morgan Stanley acted as the financial advisor to a potential acquirer of Olinkraft and, as such, obtained confidential information for its clients through discussions with Olinkraft about the possible deal.20 Based on this confidential information, Morgan Stanley bought shares in Olinkraft for its own account.21 The court ruled that the inarguably confidential nature of the information did nothing to change Morgan Stanley’s relationship with Olinkraft’s management.22 Thus, even where the information is clearly confidential, and even where one party makes efforts to designate the information as confidential in writing, absent other indicators of a fiduciary relationship, no duty arises under the misappropriation theory.23

Specifically in the context of PIPE transactions, investors and the placement agents are normally at arm’s length during the PIPE negotiations. These negotiations, and this arm’s length relationship often continue up to and through the date deals are signed, and even thereafter. After the signing, the relationship of the parties is generally governed by contract. Based on Walton, Cassese, and Talbot, even where PIPE deals are clearly "confidential" and the placement agents so stated verbally, such facts might not be enough to impose a duty on investors not to short the issuer’s public shares.

2. Issuers Cannot Unilaterally Impose a Duty on Investors.

Even oral statements made by issuers or their placement agents during negotiations that express the confidential nature of the PIPE may be insufficient to impose a duty on subsequent PIPE investors not to trade in the context of Section 10(b) liability. Generally, a fiduciary duty cannot be imposed unilaterally by one party on the other.24

3. Effect of an Agreement to Maintain Confidentiality

Even where a PIPE investor agrees (orally or in writing) to keep the information "confidential," in the circumstances of negotiating a potential PIPE deal, there would be every reason to understand such an agreement to be limited to nondisclosure. In the context of a PIPE deal, a listener could reasonably assume that statements regarding "confidentiality" would relate to an agreement not to disclose or share the information with third parties. Quite simply, especially in the context of a private placement, even an agreement that the deal must be kept confidential does not equate with a duty not to trade in the issuer’s securities.

Although, pursuant to Rule 10b5-2, it is the SEC’s position that a duty not to trade is created "[w]henever a person agrees to maintain information in confidence,"25 the Commission found it necessary to "modify the scope of insider trading law" in order to attempt to establish a duty under such circumstances.26 Until this position is fully challenged in the courts, these arguments remain as potentially valid legal hurdles to enforcement and prosecution in some instances.27

4. The Duty Element In Recent PIPE-Related Insider Trading Cases

Notwithstanding these potential legal hurdles, the settled PIPEs cases to date suggest that the SEC will, in some instances, continue to press its interpretation of the duty element—as espoused in Rule 10b5-2—until successfully challenged in court. But at least some cases suggest that the Commission may decline to pursue charges of insider trading where the evidence reveals something less than an explicit agreement to maintain confidence or to abstain from trading.

For example, in SEC v. Pollet, the Commission alleged merely that the defendant "understood the information about the upcoming or contemplated PIPE transaction was material and non-public, and [only] in several instances expressly agreed to keep the transactions confidential."28 The complaint also finds support for a breach of duty in two instances in which Pollet orally agreed to keep information about a transaction confidential and another two instances in which Pollet allegedly received term sheets containing, respectively, a no-trading clause and a confidentiality clause. It is unclear what other evidence of confidentiality or no-trading agreements existed in these specific deals.

In contrast, in both SEC v. Langley Partners and SEC v. Lyon, the SEC appears to have alleged insider trading only where the SEC had written evidence of an agreement to keep information about a PIPE confidential and/or to refrain from trading prior to a deal’s public announcement.29 Despite the potential uncertainty of liability in certain circumstances in light of the relatively untested theories pressed by the SEC in some of these cases, the settlements make clear the SEC’s aggressive enforcement position and resultant significant risk PIPE investors face if they consider shorting the issuer’s shares prior to announcement of the PIPE.

D. The ‘on the Basis’ of Element.

Violation of Section 10(b) and Rule 10b-5 requires proof that the putative defendant traded in securities on the basis of material, nonpublic information.30 The Supreme Court has suggested that fraud in the form of insider trading occurs only when one uses material, nonpublic, information for personal gain.31 Where a PIPE participant’s predefined investment strategy includes hedging its portfolio, it might be argued that a short sale executed to accomplish that hedge in the context of a pending PIPE offering is not "on the basis of" knowledge of the PIPE.

1. ‘Knowing Possession’ and the Element of Scienter

Following O’Hagan, the Ninth and Eleventh Circuits have suggested that trading while in "knowing possession" of material nonpublic information is insufficient to establish a violation of the antifraud provisions. These courts have allowed that a defendant must actually use or exploit the relevant information in making the trades, intending to gain an advantage based on the informational edge.32

In United States v. Smith, the Ninth Circuit dealt with a criminal allegation of insider trading and held that in the context of criminal intent, "the SEC’s ‘knowing possession’ standard would not be—indeed, could not be—strictly limited to those situations actually involving intentional fraud [sufficient for criminal liability]. For instance, an investor who has a preexisting plan to trade, and who carries through with that plan after coming into possession of material nonpublic information, does not intend to defraud or deceive; he simply intends to implement his pre-possession financial strategy."33

Following Smith, the Eleventh Circuit in SEC v. Adler faced the question of whether the necessary scienter element within the civil context likewise acts as a limitation to a broad application of a "knowing possession" standard. The Adler court answered in the affirmative, acknowledging that possession of material, nonpublic information created a "strong inference" of a defendant’s "use" of that information when trading, but adopting a standard that permitted factual rebuttal of such an inference.34

The holdings in Smith and Adler were based on the core premise, from Chiarella, Dirks, and O’Hagan, that one should not be held liable for fraud by trading even in "knowing possession" of material nonpublic information, because the language of Section 10(b) of the Exchange Act requires fraud or deception. Arguably, a "knowing possession" standard could improperly impose liability without the required intent to defraud.

In 2000, the SEC promulgated Rule 10b5-1, in an apparent attempt to counter the holdings in Smith and Adler. The rule states that a purchase is made on the basis of information when the person making the purchase or sale was "aware of" the information at the time of the purchase or sale.35 Given this rule, the Commission might be inclined to argue that it is no longer required to demonstrate that a PIPE investor "used" the information for its financial gain or traded "on the basis of" the information. However, the Commission cannot by rule-making eliminate the scienter requirement in the statute or overrule Smith and Adler.36 Until tested in litigation, the reach of Rule 10b5-1 is yet to be seen.

2. A Pre-Defined Hedging Strategy Might Rebut Proof That a PIPE Investor Traded ‘on the Basis of’ Material, Non-public Information

A PIPE investor—for example, a hedge fund—might well be able to establish proof of a consistent, predetermined, strategy to hedge the anticipated restricted long position in an issuer’s stock in order to protect its investors from market volatility. Such proof might arguably rebut the inference of scienter, as to a PIPE investor’s pre-announcement short sales, and be used to show that such short sales were not "on the basis of" the PIPE announcement itself (i.e., the alleged material, nonpublic information), or made with an intent to defraud.

This argument would be strengthened in those instances where a PIPE investor remains "net long" as of the date of the PIPE announcement. Indeed, illegal insider trading is generally characterized by an overall trading position that reflects a view of the expected direction that a security will take once the information in question becomes known. Yet, it is counterintuitive to say that someone who establishes a net long position or a perfectly hedged position is trading with a view to a decline in stock price. Rather than seeking "no-risk profits through the purchase or sale of securities,"37 it might be demonstrated that the purpose of a trader who establishes a hedge is to diminish future risk on the net long and to lock in the discount for which it bargained with the issuer.38 Evidence of the success, if any, of such arguments has yet to find its way into the public record.

II. Conclusion.

Regardless of the particular factual circumstances of a PIPE offering, it is clear that any investor that shorts a PIPE issuer’s public stock after being informed of a prospective PIPE offering, but before the public announcement of that offering, faces a substantial risk of being accused by the SEC of illegal insider trading. Notwithstanding potential legal arguments relating to such activities, and potential covering strategies that may limit such exposure, investors should carefully consider these substantial risks before executing any PIPE shorting tactic.

Footnotes

* Mr. Hiler is the head of the Securities Enforcement practice group at Cadwalader, Wickersham & Taft LLP, where Mr. Kuczajda is Special Counsel and Ms. Helm is an associate. A version of this article originally appeared in BNA’s Securities Regulation and Law Report. This article reflects the views of the authors and is not intended as legal advice on any particular matter.

1. See, e.g., "Hedge Funds, Insider Trading Top List of Enforcement Priorities, Schonfeld Says," BNA Securities Law Daily (Nov. 6, 2007) (director of the SEC’s New York Regional Office "predicted ... that for the foreseeable future, insider trading and hedge funds will continue to be major areas of concern in terms of his office's enforcement priorities.").

2. As used here, a PIPE is a transaction through which a publicly traded company raises capital by (1) issuing and selling unregistered shares to private, accredited investors, often hedge funds, in a private placement in which (2) the issuer agrees to use all reasonable efforts to register those shares for sale within a relatively short time period, so they can be freely traded in the public market thereafter.

3. This article discusses only insider trading issues in the context of PIPE offerings. Hedging strategies in such scenarios may also pose other significant regulatory and legal risks, including, for example, allegations of selling unregistered shares in violation of Section 5 of the Securities Act of 1933.

4. See United States v. O’Hagan, 521 U.S. 642, 643 (1997); United States v. Smith, 155 F.3d 1051, 1068 (9th Cir. 1998); SEC v. Adler, 137 F. 3d 1325 (11th Cir. 1998).

5. SEC v. Pollet, Complaint, No. 05 Civ. 1937 (E.D.N.Y., Apr. 21, 2005) (avail. at http://www.sec.gov/litigation/complaints/2007/comp19984.pdf) at ¶ 12 (emphasis added). Final judgment was entered against the defendant on January 29, 2007. See SEC Litig. Rel. 19984 (avail. at http://www.sec.gov/litigation/litreleases/2007/lr19984.htm).

6. See also, e.g., SEC v. Langley Partners, et al., Complaint, Case No.  1:06CV00467 (D.D.C., Mar.  14, 2006) (avail. at http://www.sec.gov/litigation/complaints/comp19607.pdf) at ¶¶ 30-31 (emphasis added). Notably, a PIPE issuer’s shares often trade at relatively low prices and even small movements can constitute a seemingly high percentage change but can be due to other market factors and may be statistically meaningless. Moreover, PIPEs may be announced along with other news from the company, which also can have an effect on the share price.

7. Basic v. Levinson, 485 U.S. 224, 231-232 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).

8. See, e.g., In re Allied Capital Corp. Sec. Lit., No. 02 Civ. 3812 (GEL), 2003 WL 1964184 at *6 (S.D.N.Y. Apr. 25, 2003) ("the stock price’s recovery, in the face of a general decline in the market, negates any inference of materiality").

9. SEC v. Mangan, No. 3:06-CV-531, Transcript of Proceedings (W.D.N.C. Oct. 24, 2007) at 46 (the court went on to deny the defendant’s motion to dismiss insider trading allegations). See also, e.g., Oran v. Stafford, 226 F. 3d 275, 282 (3d Cir. 2000) (holding information immaterial as a matter of law because of lack of stock price movement upon disclosure); Grimes v. Navigant Consulting, Inc., 185 F. Supp. 2d 906, 912-913 (N.D. Ill. 2002) (same).

10. O’Hagan, 521 U.S. at 652.

11. United States v. Chestman, 947 F.2d 551, 568-570 (2d Cir. 1991) (en banc); Moss v. Morgan Stanley, 719 F.2d 5, 14 (2d Cir. 1983)(citing Walton); Walton v. Morgan Stanley, 623 F.2d 796, 798 (2d Cir. 1980)(applying Delaware law).

12. See United States v. Kim, 184 F. Supp. 2d 1006, 1014 (N.D. Cal. 2002).

13. United States v. Cassese, 273 F. Supp. 2d 481, 485 (S.D.N.Y. 2003) (citing O’Hagan, 521 U.S. at 652).

14. See United States v. Falcone, 257 F. 3d 226, 234 (2d Cir. 2001) (citing Chestman, 947 F. 2d at 567-69).

15. Chestman, 947 F. 2d at 569 (emphasis added); see also, e.g., Falcone, 257 F. 3d at 234-35

16. See, e.g., Walton v. Morgan Stanley, 623 F. 2d 796, 798 (2d Cir. 1980).

17. See, e.g., Cassese, 273 F. Supp. 2d at 485-86; Walton, 623 F. 2d at 798; Dirks, U.S. at 663, n. 22 (citing Walton); Moss v. Morgan Stanley, 719 F. 2d 5, 14 (2d Cir. 1983) (citing Walton); SEC v. Talbot, 430 F. Supp. 2d 1029, 1064 (C.D. Cal. 2006).

18. Id. at 487 (citing Walton, 523 F. 2d at 799).

19. SEC v. Talbot, 430 F. Supp. 2d 1029, 1064 (C.D. Cal. 2006).

20. Walton, 523 F. 2d at 798 (decided under Delaware law, but subsequently relied upon in Moss v. Morgan Stanley, 719 F.2d 5, 14 (2d Cir. 1983) and cited in Dirks v. SEC, 463 U.S. 646, 663 n.22 (1983), cases decided under Section 10(b) and Rule 10b-5).

21. Id.

22. Id.

23. Although Walton was decided under Delaware state law, the Second Circuit subsequently applied the reasoning in Walton to a similar situation, involving a claim under Section 10(b) of the Exchange Act. See Moss v. Morgan Stanley, 719 F.2d 5 (2d Cir. 1983). The court in Moss, citing to Walton, held that the receipt of information from an investment banker hired by a potential acquiring company did not create a duty on the recipient to the company possibly being acquired or that company’s shareholders. 719 F.2d at 14.

24. See e.g., Reed, 601 F. Supp. at 685 (the "mere unilateral investment of confidence by one party in the other ordinarily will not suffice to saddle the parties with the obligations and duties of a confidential relationship), rev’d on other grounds, 773 F. 2d 477 (2d Cir. 1985); Falcone, 257 F. 3d at 226, 234 ("a fiduciary duty cannot be imposed unilaterally by entrusting a person with confidential information").

25. 17 C.F.R. § 240.10b5-2 (2000).

26. Id. (indicating that the rule applies to the circumstances in which a person has a duty of trust or confidence for purpose of the "misappropriation" theory, and "does not modify the scope of insider trading law in any other respect" (emphasis added).

27. Indeed, at least one court has questioned the validity of this position with respect to Rule 10b5-2. See United States v. Kim, 184 F. Supp. 2d at 1014 ("[A]n express agreement can provide the basis for misappropriation liability only if the express agreement sets forth a relationship with the hallmarks of a fiduciary relationship."). In that case, the Commission characterized Rule 10b5-2 as a mere clarification of the pre-rule scope of misappropriation liability. Kim, 184 F. Supp. 2d at 1014. The court applied Chestman and cases decided prior to the adoption of the Rule to reject that position.

28. SEC v. Pollet, Complaint, No. 05 Civ. 1937 (E.D.N.Y., Jan. 29, 2007) at ¶ 29 (emphasis added) (avail. at http://www.sec.gov/litigation/complaints/2007/comp19984.pdf) ("Pollet SEC Complaint").

29. See SEC v. Langley Partners, et al., Complaint, Case No. 1:06CV00467 (D.D.C., Mar. 14, 2006) (avail. athttp://www.sec.gov/litigation/complaints/comp19607.pdf); SEC v. Edwin Buchanan Lyon, et al., Complaint, (S.D.N.Y., December 12, 2006) (avail. at http://www.sec.gov/litigation/complaints/ 2006/comp19942.pdf). The SEC charged insider trading in only seven of 23 and 4 of 35 PIPE deals at issue, respectively, and only where the SEC raised allegations of written evidence of an agreement to keep information about the PIPE confidential and/or to refrain from trading prior to the deals’ public announcements. Langley at ¶ ¶ 30-31; Lyon at ¶ ¶ 6, 54-56.

30. See O’Hagan, 521 U.S. at 651-52 (explaining "insider trading liability" as when an insider trades "on the basis of" information, and the misappropriation theory as requiring "use" of the principal’s information by the fiduciary in violation of the duty).

31. Chiarella v. United States, 445 U.S. 222, 226-28 (1980) (an insider’s duty arises from "the unfairness of allowing a corporate insider to take advantage of [inside] information by trading without disclosure") (emphasis supplied); Dirks, 463 U.S. at 659-60 ("[n]ot only are insiders forbidden by their fiduciary relationship from personally using undisclosed corporate information to their advantage, but they also may not give such information to an outsider for the same improper purpose of exploiting the information for their personal gain") (emphasis supplied); O’Hagan, 521 U.S. at 651-52 ("Trading on such information qualifies as a ‘deceptive device’ under § 10(b).") (emphasis added).

32. See United States v. Smith, 155 F. 3d 1051, 1068 (9th Cir. 1998); SEC v. Adler, 137 F.3d 1325 (11th Cir. 1998).

33. 155 F.3d at 1068. (emphasis added).

34. Adler, 137 F.3d at 1336.

35. 7 C.F.R. § 240.10b5-1(b) (2000).

36. See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 213, 214 (1976) (the "rulemaking power granted to an administrative agency charged with the administration of a federal statute is not the power to make law"; "despite the broad view of the Rule advanced by the Commission in this case, its scope cannot exceed the power grated the Commission by Congress under § 10(b)").

37. O’Hagan, 521 U.S. at 656.

38. For example, in SEC v. Langley Partners, the complaint suggests that pre-defined, "lawful" hedging strategies exist, explicitly noting that "[m]any PIPE investors ‘hedge’ their investment by selling short the PIPE issuer’s securities before the resale registration statement is declared effective." When discussing insider trading allegations, however, the complaint merely concludes that the PIPE investors "traded on the basis of that material nonpublic information," without a discussion of any evidence of the "use" of that information. SEC v. Langley Partners, et al., Complaint, Case No. 1:06CV00467, at ¶¶ 16, 31 (D.D.C., Mar. 14, 2006) (avail. at http://www.sec.gov/litigation/complaints/comp19607.pdf).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.