One of the most distinct phenomena at the peak of the Internet bubble in the late 90s was the way that so many otherwise entirely ordinary companies added “dot com” to their names to try to cash in on the frenzy. It now looks as if some companies are attempting moves from the same playbook amidst the current cryptocurrency mania. Companies with no prior connection either to bitcoin or blockchain are adopting names or strategies as a way to try to ride the current wave, even where the companies have little or no experience with the technologies. Regulators noting these developments have started sounding the alarm bell. And in at least one instance, these kinds of developments have led to securities litigation.
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One issue with which courts dealing with insider trading cases have struggled is how to interpret and apply the personal benefit element of the liability standard. The personal benefit standard was in fact an important part of the U.S. Supreme Court’s 2016 decision in Salman v. United States (as discussed here). Last week, the Second Circuit issued an important decision in the United States v. Martoma, in which the appellate court provided important additional perspective on the personal benefit test. In the following guest post, Brad S. Karp, Geoffrey R. Chepiga, Daniel J. Kramer, Lorin L. Reisner, Audra J. Soloway, and Richard C. Tarlowe of the Paul Weiss law firm take a look at the Second Circuit’s decision in the Martoma case and the appellate court’s discussion of the personal benefit test. I would like to thank the authors for their willingness to allow me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ guest post.
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sec sealThe Securities and Exchange Commission is primarily concerned with public companies and the securities markets in which the shares of public companies trade. However, in a series of recent speeches and presentations as part of what the agency had called the “Silicon Valley Initiative,” the agency made it clear that it is increasingly concerned with private and pre-IPO companies as well, particularly so-called “unicorns” – that is, the private start-up firms with valuations greater than $1 billion. SEC Chairman Mary Jo White highlighted these concerns in a March 31, 2016 speech at the Rock Center for Corporate Governance at Stanford Law School, a copy of which can be found here.

As summarized in an April 4, 2016 memo from the Fenwick & West law firm about the SEC’s Silicon Valley Initiative, “the SEC is closely watching the conduct of private companies as well as emerging platforms that trade in private company securities, and will bring enforcement cases as needed to protect investors.” The agency’s recent presentations and SEC Chair White’s speech, the memo said, underscored that “the SEC expects even private companies to embrace and demonstrate sound corporate governance.”

As discussed below, these pronouncements from the SEC raise troublesome questions about what has in the past been viewed as a clear demarcation between the potential liability exposures for private and public companies.
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Whistleblower information may be one of the SEC’s “most effective weapons in its new enforcement arsenal,” but the agency’s whistleblower program “faces challenges on many fronts,” according to an April 23, 2013 New York Times Dealbook article entitled “Hazy Future for Thriving S.E.C. Whistle-Blower Effort” (here). As evidence of the whistleblower program’s promise