BUS607 Assignment Week 2 Violations of Securities Laws

Name

BUS607

13/08/2022

Violation of security laws

Svoboda’s crimes

Svoboda committed crimes of securities fraud and insider trading. His role in Rogue Bank gave him access to confidential information about client companies, and he passed this information to Robles prior to her trades. This insider trading violated 15 U.S. Code §78j(b). Svoboda aided and abetted the purchasing securities while possessing material, non­public information by Robles and therefore committed securities fraud under 18 U.S. Code §1348. Rogue Bank fired Svoboda after his involvement with insider trading came to light, which also violated SEC Rule 3b­5. The rule prohibits credit personnel from “trading for their account while possessing non­public material information.” Svoboda and Robles were legally liable for insider trading (Sinha,2021). The statute of limitations for insider trading has ten years, but the limitations period does not begin to run until the illegal conduct ends.

Robles’s crimes

Robles committed crimes of aiding and abetting securities fraud, securities fraud, and being an accessory after the fact. She knew that Svoboda was selling the stolen securities and providing them to her personally to profit. Robles’s crimes are the reverse plagiary of Svoboda’s crimes; she got information from Svoboda and made trades benefiting herself by using it. This reverse plagiary occurred after the statute of limitations, which had not expired. Robles violated 18 U.S. Code §1343 and Rogue Bank’s policy, which prohibited using bank employees to conduct the trades to avoid suspicion or to profit personally (Sinha,2021). The analysis of Robles’s crimes requires discussing reverse plagiary and tacit knowledge. Robles also committed the crime of securities fraud by knowingly executing her trades while possessing non­public material information generated by Svoboda before her trades. She profited from her trades by more than $2,000,000. During her trial, Robles lied to her probation officer when she stated that Svoboda was responsible for the trading. Svoboda did not intervene in any of Robles’s trades after Rogue Bank informed him that they were violating their policies. This also violated Rogue Bank’s policy against using bank employees to conduct the trades to avoid suspicion or to profit personally. In addition, Robles committed crimes of theft of government records, obstruction of justice and destruction of evidence, and aiding and abetting securities fraud under 18 U.S. Code

§1343.

Civil liability

The civil liability for Svoboda and Robles is related to the breach of contract. Robles agreed with Svoboda so that she may use and benefit from his insider information for her to make more money in trading activities (Shulman,2020). Through the contract, Robles could earn more than $2 million using Svoboda’s insider information. This, therefore, is a breach of contract. Robles also used Svoboda’s insider information without consent, which is a violation of the confidentiality agreement.

Lawsuit file

The one who could file suit is the Rogue Bank since it is the client of Robles and Svoboda. The basis for this lawsuit is the breach of contract, which gives the plaintiff a legal remedy. Robles and Svoboda’s liability can also be related to insider trading, which involves people who buy or sell a security in breach of some fiduciary duty or other relationship of trust and confidence (Seldin,2018). The relationship usually arises when one party has access to nonpublic information about the company. Confidential information may give such traders an unfair advantage over others who do not possess it. Insider trading includes an illegal trading practice aimed at profiting on inside information about publicly traded companies.

Another reason why Rogue Bank is the one to file a lawsuit is because of a breach of confidentiality. All parties should follow the confidentiality agreement signed between Rogue Bank and Robles. Robles, however, violated this agreement since she divulged information about her client to another person, which is an illegal action since it violates the relationship between the two. In addition, Rogue Bank never consented to Robles to disclose the information to other people.

Defenses

Svoboda and Robles could raise the same defenses that defendants in insider trading cases generally can raise. They can argue that (1) they were unaware of the wrongdoing, (2) they did not have a duty to report it, or (3) a mistake in the law.

The first defense—that they were unaware of the wrongdoing—is not particularly persuasive. The bank was relying on its employees for critical information, so it was likely that Rogue Bank’s employees were aware of the wrongdoing (Seldin,2018). That said, the crime involving trades that went against their clients instead of favoring them could be very complex, and it would not be out of character for a credit officer and an accountant not to understand the full details.

The second defense—that they did not have a duty to report it—is more plausible in this case. But it is unlikely that either employee could argue that they were unaware of the wrongdoing. Even if they did not have a duty to report it, though, several other factors weigh against this defense. This defense does not work when the employee has a fiduciary duty to report the wrongdoing or when the employee has a special relationship with the employer. The court may take an especially harsh view of this defense because Svoboda and Robles have demonstrated their willingness to lie to conceal their scheme and were both aware of their fiduciary duties.

A third defense—that a mistake in the law created an unintentional violation—could lead us to find Svoboda and Robles not guilty. Svoboda could argue that he had no duty to report the wrongdoing until he knew about it, but he thought (wrongly) that his supervisor knew about it and approved it. Robles could argue that she was neither aware of nor participating in any wrongdoing; she just took advantage of Svoboda’s actions on the assumption that they were correct and proper. This defense—that a mistake in the law excuses their actions—is somewhat plausible, though. This defense requires that there be some highly unusual circumstance that makes it unjust for them to be prosecuted under the law as it exists and would prevent them from having any fair notice about their legal obligations. Svoboda and Robles knew that their scheme was very risky, and the details of the scheme were in their contract. So, they must be taken to have read the contract, which means they were not required to know this law either.

Svoboda’s defense on a duty­to­report basis depends on his argument that he had no duty to report wrongdoing because Rogue Bank’s policies allowed him to trade in client accounts without disclosing it to the clients. If Rogue Bank’s policy did not require disclosure, Svoboda would have no duty to report wrongdoing because it was not his duty (and thus not within his power).

To sum it all up, if the defendants were unaware of wrongdoing or did not have a duty to report, the case against them would be dismissed for lack of evidence, and their defense would likely succeed. If the defendants were aware of the wrongdoing, they could argue that they are entitled to rely on people who appear to be reliable sources and that it is only when they are aware of their error that they have to report it. Other cases had used this defense successfully to argue that there was no insider trading because the defendants should not have relied on their sources of information because they were not reliable and that it was only when the defendants became aware of their source’s unreliability that they had a duty to report it. Under this defense, their trades would be legal if the defendants could prove that they did not know about the wrongdoing or were unaware of the true nature of their source’s information. They would likely not be found liable for insider trading.

References

Seldin, I. P. (2018). When Stock is Not a Security: The" Sale of Business" Doctrine

Under the Federal Securities Laws. The Business Lawyer, 637­681.

Shulman, H. (2020). Civil Liability and the Securities Act. The Yale Law Journal, 43(2),

227­253.

Sinha, A. (2021). Fraud Risk Management in Banks: An Overview of Failures and Best

Practices. Money Laundering and Terrorism Financing in Global Financial Systems, 280­303.