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Congressman Chris Collins’ Unusually Sweet Settlement Deal With the SEC

Chris Collins was the first Congressman to endorse Donald Trump for President in 2016, and the first Congressman to be busted by the SEC and DOJ for engaging in insider trading while standing on the White House lawn. Why is he being given preferential treatment by the SEC?

Collins, a three-term Congressman, was a director and the largest shareholder of a small Australian biotech company that is publicly traded in the U. S. On the evening of June 22, 2017, Collins called his son from the White House lawn and tipped him about “extremely bad news” (per the SEC) that he’d just received about the company that was not yet public. His son then dumped his stock in the company, as did the son’s friend, girlfriend, the girlfriend’s father and mother, a friend of the girlfriend’s father, and the girlfriend’s uncle. The tippees avoided significant losses when the bad news became public and the company’s stock dropped over 90% in value.

Insider trading is not a victimless crime. The insider trader is actually stealing from other investors who didn’t know the non-public information the thief knew when he bought or sold the company’s stock. The Department of Justice can sue the trader and put him in prison, but the SEC can sue him only to recover money, and, for example, bar him from being an officer or director of a public company. Often, both the DOJ and the SEC may sue the insider trader in what are known as “parallel proceedings.”

In insider trading cases, the SEC always goes after the profit made (or, as here, the loss they had avoided) by wrong-doers from their stock trades, which is called “disgorgement.” The SEC will also seek interest on the money the thief stole, and a penalty of up to three times the amount of disgorgement. If the insider trader settles before trial, the SEC will generally limit the penalty to a one-time disgorgement amount, a sweetener the thief gets for saving the agency the trouble of litigating. However, if the insider trader decides to fight, the SEC will seek the maximum penalty possible. This is standard SEC enforcement policy, and experienced attorneys in the securities defense bar know it.

When the SEC sued Collins and four of the tippees in August 2018, it officially sought penalties. In fact, when the SEC announced a few days later that it had settled with two of the tippees (the girlfriend of Collins’ son and her mother), each woman had to pay disgorgement, interest, and a one-time penalty.

In August 2019 the SEC announced that it had settled with Collins, his son, and the girlfriend’s father. Having successfully negotiated several settlements with insider traders during my 31 years as an attorney with the SEC, I was surprised when I read the SEC’s Litigation Release announcing the settlement terms. Collins and the two tippees who were settling with him aren’t being required to pay any penalties at all!

In insider trading cases, a tipper (here, Collins) is often on the hook with the tippees for the total amount of disgorgement, plus interest—in this instance, $794,179—whether or not he traded the stock. I negotiated a settlement in a similar insider case where a Hollywood producer had tipped his brother, but had not himself traded. Not here. Although Collins and the two men settling with him should be collectively on the hook for, at a minimum, $1.5 million, Collins owes nothing.

The SEC announced its Enforcement lawsuit by publishing a Litigation Release. Curious whether the SEC’s policy concerning insider trading settlements had recently changed, I reviewed the agency’s Litigation Releases for 2018 and 2019, and found 86 that involved insider trading. Of those 86 Releases, I noted 44 instances where settling defendants were required to pay penalties, 23 that did not involve settlement, and 19 concerning parallel criminal cases brought by DOJ, where any SEC disgorgement and penalties were generally offset by the monetary judgments imposed in the criminal case. The Collins settlement is glaringly different.

Here, Collins and his two co-defendants settled with the SEC, and pleaded guilty in the parallel criminal case. However, during the October 2019 hearing where Collins entered his criminal guilty plea, the judge asked the Assistant U.S. Attorney if DOJ would be seeking any money (restitution or forfeiture) from the three men, and he responded that it was not. Therefore, it was solely up to the SEC to go after the money, and the SEC dropped the ball.

This raises some interesting questions:

Why isn’t the SEC requiring Collins and the two tippees to pay civil penalties?

Why isn’t Collins jointly and severally liable with the tippees for disgorgement and pre-judgment interest?

Why isn’t DOJ seeking any money?

The SEC has a long history of going hard after high-visibility insider traders, such as Martha Stewart. It does this because it doesn’t have enough attorneys to go after every insider trader, and it wants to set an example for others who might be tempted to commit securities fraud.

As a Congressman, Chris Collins is about as high-visibility as an insider trader can be. So why is he off the hook for the money? True, he may go to prison—as Martha Stewart did—and he also agreed to an injunction against future securities law violations, and a bar from acting as an officer or director of any public company. However, he’s 69 years old, so the injunction and bar are largely meaningless.

On January 17th, the judge in the criminal case will announce if Collins will go to prison, and, if so, for how long. Still, we should hope that Collins’ separate civil settlement with the SEC will be rejected by the civil court, and that the agency will then seek something consistent with its comparable insider trading settlements.

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