Insider Trading Enforcement

Rajat Gupta’s conviction by a New York court for insider trading has sparked off a debate about the state of insider trading enforcement in India. While several cases have been pursued by SEBI in the last two decades since insider trading has been prohibited by regulation, the rate of successful convictions or regulatory sanctions has been minimal.

An editorialin the Business Standard states that while “Mr Gupta will join some 40-odd insider traders who have been successfully prosecuted in the last three years by Preetinder Singh Bharara, the US attorney for the Southern District of New York (which includes Wall Street)”, the position in India operates in stark contrast:

Insider trading, price manipulation and rigging have always been rampant on Dalal Street. In the past three fiscal years alone (until December 2011), the Securities and Exchange Board of India (Sebi) investigated ... 57 [cases] pertain[ing] to insider trading .... Of these, 28 insider trading cases were solved .... There were some suspensions and prohibitions. Some warnings were issued. In [some] cases, Sebi ordered the disgorgement of issue proceeds, and it issued many consent orders. But nobody went to jail.

As we have earlier observed, regulatory enforcement in insider trading cases is a tall order, particularly given the unavailability of direct facts and evidence to prove charges. SEBI has recently relied on circumstantial evidence to initiate action on two cases (discussed on The Firm), but it remains to be seen whether they will be upheld if taken up on appeal.

In any event, efforts are being initiated to strengthen the evidentiary aspects of insider trading. As this reportin the Economic Times (ET) observes:

Soon after the Raj Rajaratnam-Rajat Gupta insider trading case became public, Sebi had approached the government for powers to tap phone calls for suspected insider trading and other securities frauds.

However, the government did not agree, although some recent reports said that Sebi may finally get access to phone call records of people suspected of insider trading and other market-related illegal activities. The need of the hour, according to market players, is not only the use of the latest tracking technologies to crack down on such unscrupulous people on the Street, but also to set some reasonable timeframe to close these cases.

The ET report also has a summary of the leading cases investigated by SEBI and the current outcome of those.

At the same time, it is not as if SEBI lacks adequate enforcement powers. Somasekhar Sundaresan has previously demonstratedas to how SEBI has greater powers than the US SEC on several counts. Ultimately, what matters is the effective use of the powers rather than their availability in the statute books.

If you are interested in working on Indian financial sector policy, read on

The Financial Sector Legislative Reform Commission ("FSLRC"), with which I am associated as a consultant is actively involved in re-writing financial sector law for India.  Ajay Shah has this post on his blog about opportunities to work with the macro-finance group at the National Institute of Public Finance and Policy: http://ajayshahblog.blogspot.in/2012/06/opportunities-in-macrofinance-group-at.html

This is a very important project for building our national institutions in the financial sector. If you are interested in working in this space, please contact Anurodh Sharma (anurodh54 at gmail.com) with your resume by 22 June 2012, identifying where your interests and capabilities lie.

Delaware Courts Allow Litigation to Move at the Speed of Business

[The following post comes to us from Andrea Tinianow, who is a vice president and assistant general counsel at Corporation Service Company. She is also a Delaware attorney.

This post relates to the Delaware Supreme Court’s decision upholding the Chancery Court in Martin Marietta Materials inc. v. Vulcan Materials, Inc. We had earlier discussed some of the substantive aspects of the Chancery Court’s opinion here]

In a case that began in December of 2011, was argued before the Delaware Chancery Court in April of 2012, and argued on appeal to the Delaware Supreme Court on May 31, 2012, the Delaware courts have addressed a complex piece of litigation in under six months in order to ensure that the parties could have finality before a critical June 1, 2012 shareholders’ meeting.

In confirming the Court of Chancery’s decision, the Delaware Supreme Court also reconfirmed that Delaware courts are not only “open for business” for companies who need the assistance of the courts in resolving their disputes, but also that Delaware courts are capable of making decisions at the speed of business.

In 2010, Martin Marietta Materials, Inc. and Vulcan Materials, Inc. – two of the world’s largest producers of sand, gravel and similar materials used in construction - began discussing a consensual merger.  That transaction was scuttled in June of 2011 as the stock prices of the two companies diverged and disputes arose over the location of the merged companies’ headquarters and who would occupy the executive suite in those offices.  However, during those consensual negotiations, the parties signed a confidentiality agreement – governed by Delaware law - limiting the use of information about each of the companies conveyed to the other during their negotiations.

On December 12, 2011, Martin Marietta commenced a $4.8 billion hostile takeover bid for Vulcan, premised on Martin Marietta obtaining 80% of the shares of Vulcan through a tender offer.  Martin Marietta also launched a proxy battle, attempting to have four individuals supportive of the hostile takeover appointed to Vulcan’s board at Vulcan’s June 1, 2012 shareholders’ meeting.

Vulcan’s board opposed the hostile takeover and asserted that Martin Marietta improperly used information obtained during the consensual negotiations to structure its hostile bid, in violation of the confidentiality agreement.  On the same day it launched its hostile bid for Vulcan, Martin Marietta commenced an action before the Delaware Chancery Court asking the court to find that Martin Marietta had not violated the confidentiality agreement.  Vulcan counterclaimed, arguing that Martin Marietta had violated the confidentiality agreement and should be enjoined from proceeding with the hostile takeover.

Clearly time was of the essence for both Martin Marietta and Vulcan.  Martin Marietta needed certainty that its hostile bid and proxy effort would not be overturned by a finding of breach of the confidentiality agreement after the fact.  Vulcan, on the other hand, required a finding that Martin Marietta had breached the confidentiality agreement prior to the June 1, 2012 meeting and an injunction lasting long enough to prevent Martin Marietta from misusing the confidential information to take control of Vulcan.

In an extraordinarily detailed and well-reasoned opinionissued on May 4, 2012, just three weeks after argument by the parties and a month before the critical Vulcan shareholders’ meeting, Chancellor Strine of the Delaware Chancery Court concluded that Martin Marietta had breached the confidentiality agreement and that it should be enjoined from pursuing its hostile tender or proxy efforts for four months – past the time for Vulcan’s shareholders’ meeting, effectively delaying Martin Marietta’s efforts until another shareholders’ meeting could be called. 

The Delaware Supreme Court heard oral argument on an expedited basis on May 31, 2012 and issued a preliminary opinionupholding Chancellor Strine that same day, providing Martin Marietta and Vulcan the certainty both needed ahead of Vulcan’s June 1, 2012 shareholders’ meeting. 

The Martin Marietta/Vulcan case is yet another example of why companies choose to litigate in Delaware, where the Court of Chancery quickly and ably responds to the needs of companies at the speed of business with careful and thorough opinions, and the Delaware Supreme Court is open to those parties and flexible enough to ensure that the court’s calendar does not harm their interests.  Once again, the importance of choosing Delaware for incorporation and the governing law for contracts has been illustrated by Delaware’s courts.  

- Andrea Tinianow

The Supreme Court of India and the law of unjust enrichment

These are troubled times for the law of unjust enrichment in India, so much so that one is forced to ask whether such an area of law at all exists in this country. That is regrettable especially because the High Courts (especially those in Bombay, Madras and Calcutta) gave many powerful and important judgments on this area of the law, particularly between 1900 and perhaps the late 1960s. We began the year with a discussionof the Supreme Court’s judgment in Nagpur Golden Transport, in which the Court approved a claim for restitution for unjust enrichment without considering what, if any, the unjust factor was. The purpose of this post is to comment on another important judgment, Indian Council for Enviro-Legal Action v Union of India, in which the Court has considered certain principles of the law of unjust enrichment in some detail.

As we noted in our discussion of Nagpur Golden Transport, it is crucial to a coherent understanding of private law to distinguish a cause of action founded on consent (for example, contract) from those founded on a wrong (for example, tort) and those founded on neither. Unjust enrichment is a prominent member of the third category, although it was thought at one time that it was a form of (implied) contract. Today it is recognised across the common law world that a claim for restitution founded on unjust enrichment is founded neither on consent nor on wrongdoing (see for example Lipkin Gorman v Karpnale and Kleinwort Benson v Birmingham City Council). It is also generally recognised in English law that a claim for unjust enrichment has four elements: (a) enrichment of the defendant; (b) “at the expense” of the claimant; (c) an unjust factor and (d) defences, if any, such as change of position. The judgments of the High Courts in India, especially before the 1960s, also accept that the juridical basis of unjust enrichment is neither consent nor wrongdoing, and have considered such important issues as the ability of a claimant who confers a gratuitous benefit to bring a claim for restitution (see for example Nallaya Goundar and Damodarasamy Mudaliar). However, in recent years, the Supreme Court has held on more than one occasion that unjust enrichment is any enrichment that appears to the court to have been “unjustly” gained and has occasionally referred to it as “implied contract”, creating doubt as to the state of the law of unjust enrichment in India.

In ICELA, as the name suggest, the Court was concerned with issues of environmental law. For the purposes of our discussion, it suffices to note that the Supreme Court passed an order in 1996 giving certain directions to industries to the Government to take remedial action to clean a village badly affected by pollution caused by chemical industries. In this order, the Court found that the industries in question were liable to pay the costs, which were later quantified as Rs. 37.385 crores. This amount was not paid by the industries for more than fifteen years, and the litigation, the Court records, was kept alive by filing a number of interlocutory applications. In these circumstances, the question arose whether the Supreme Court could direct the industries to not only pay Rs. 37.385 crores, but also to pay compound interest on it for the period of non-payment (14 years). It may be that the Court could have made this order as a punitive measure, but it chose to analyse the law of unjust enrichment for an answer.

What is of more interest than the eventual conclusion of the Court that the industries were liable to pay compound interest is a number of observations that it makes on the meaning of “enrichment” and the nature of the law of unjust enrichment. It is impossible to summarise these, and the following is a selection of some of the observations of the court, with comments.

1. Unjust enrichment is the unjust receipt of any benefit (Paras 152, 153, 159)

152. “Unjust enrichment” has been defined by the court as the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust.

159. A person is enriched if he has received a benefit, and he is unjustly enriched if retention of the benefit would be unjust

Comments: With respect, it is submitted that these observations require reconsideration. The observation in para 152 that unjust enrichment is the retention of a benefit that is unjust comes close to holding that this is a matter of discretion, which is far from what the law of unjust enrichment is. Perhaps the best explanation of this is Lord Goff’s oft-cited observations in Lipkin Gorman:

… it does not, in my opinion, follow that the court has carte blanche to reject the solicitors' claim simply because it thinks it unfair or unjust in the circumstances to grant recovery. The recovery of money in restitution is not, as a general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle [emphasis added].

2. Unjust enrichment is (i) the receipt of a benefit that causes loss to the claimant, or (ii) the wrongful receipt of a benefit by the defendant, or (iii) the receipt of a benefit that “belongs” to the claimant (Paras 152, 154, 161)

154. Unjust enrichment occurs when the defendant wrongfully secures a benefit or passively receives a benefit which would be unconscionable to retain

Comments: It is widely accepted that a claim for restitution for unjust enrichment is not founded on wrongdoing. Indeed, that is precisely the reason the law distinguishes restitution for unjust enrichment from restitution for wrongs. The cause of action for unjust enrichment is a distinct one; and as distinct as contract or tort. Whether the claimant must prove not only that the defendant was enriched but also that he suffered loss is somewhat controversial, though the prevailing view is that he does not (see for example Sempra Metals; BP v Hunt). With respect, it is submitted therefore that the above observations require reconsideration.

3. The relationship between restitution and unjust enrichment

159. Unjust enrichment is basic to the subject of restitution, and is indeed approached as a fundamental principle thereof. They are usually linked together, and restitution is frequently based upon the theory of unjust enrichment. However, although unjust enrichment is often referred to or regarded as a ground for restitution, it is perhaps more accurate to regard it as a prerequisite, for usually there can be no restitution without unjust enrichment

161. The terms “unjust enrichment” and “restitution” are like the two shades of green—one leaning towards yellow and the other towards blue. With restitution, so long as the deprivation of the other has not been fully compensated for, injustice to that extent remains. Which label is appropriate under which circumstances would depend on the facts of the particular case before the court. The courts have wide powers to grant restitution, and more so where it relates to misuse or non-compliance with court orders.

Comments: Para 161 again appears to suggest that unjust enrichment is a matter of discretion, which it is submitted it is not. Para 159, to the extent it notes that restitution is “frequently based upon the theory of unjust enrichment”, is undoubtedly correct, but it may not be accurate to suggest that there “can be no restitution without unjust enrichment”, for the law does recognise restitution for wrongs (Attorney General v Blake). This observation also obscures the distinction between a cause of action founded on wrongdoing and a cause of action founded on unjust enrichment.

4. There is a distinction between “pre-suit” and “post-suit” unjust enrichment (Paras 162, 164)

162. We may add that restitution and unjust enrichment, along with an overlap, have to be viewed with reference to the two stages i.e. pre-suit and post-suit. In the former case, it becomes a substantive law (or common law) right that the court will consider; but in the latter case, when the parties are before the court and any act/omission, or simply passage of time, results in deprivation of one, or unjust enrichment of the other, the jurisdiction of the court to levelise and do justice is independent and must be readily wielded, otherwise it will be allowing the court’s own process, along with time delay, to do injustice.

164. This view of law as propounded by author Graham Virgo in his celebrated book The Principles of the Law of Restitution has been accepted by a later decision of the House of Lords (now the UK Supreme Court) in Sempra Metals Ltd. v. IRC

Comment: It is submitted, with respect, that there is no distinction between “pre-suit” and “post-suit” enrichment claims. In Sempra Metals, the House of Lords was in fact concerned with whether a claimant who mistakenly pays taxes can recover compound interest on it. Four of the five Law Lords held that he can, but on different grounds. Lords Nicholls and Hope accepted a claim in unjust enrichment, of which the best explanation is that the Government was enriched by the “inevitable expense” of borrowing the funds it unlawfully collected as taxes, and that enrichment was measured by the compound interest the Government would have to pay in the market (which is lower than what a commercial party pays). It is submitted, with respect, that the Court’s reliance on Sempra is misplaced, because there was an unjust factor in that case (mistake), but apparently none in this case. The basis of the Court’s order – that a party “saves” the interest it would have paid a nationalised bank to borrow the money it did not pay – is correct only if it is first shown that it was inevitable that the party would have borrowed money (see Lord Nicholls’ example at paras 118 and 119). The Court does not make this finding. Nor does it find that there is an unjust factor, which there was in Sempra.

Unfortunately, these developments mean that the law of unjust enrichment in India is close to being reduced to one sentence: the receipt of enrichment that the court finds is unjust in the circumstances of the case. It is hoped that the Supreme Court will revisit these issues.

Hat-tip: Aditya Swarup