The SEC’s Biggest Insider Trading Case Is Heating Up by Michelle Celarier @FortuneMagazine January 18, 2017, 2:04 PM EST E-mail Tweet Facebook Linkedin Share icons Hedge fund billionaire Leon Cooperman’s battle with the Securities and Exchange Commission shows no signs of going away. The SEC earlier this month accused Cooperman of trying to create a “loophole…that rewards deception” in his bid to throw out the insider trading case against him. And the long-shot logic behind his defense suggests just how strong the SEC’s case against him might be. Cooperman, the CEO of Omega Advisors, is accused of making dozens of trades in Atlas Pipeline Partners securities in 2010, netting profits of $4 million, after learning from a company insider that the troubled oil and gas company was on the verge of a merger deal. To make matters worse, the SEC accuses Cooperman of trying to cover up his conversations and, according to its initial complaint filed in September, has three witnesses to bolster its case. The 73-year-old onetime Goldman Sachs gs exec is the most prominent financier to be charged with insider trading in decades. He has refused to talk to the SEC, pleading his Fifth Amendment right to not incriminate himself. His defense team’s next court filing in the case, which is being heard in a federal court in Pennsylvania, is due Friday. But Cooperman has not gone silent. Cooperman, who has adroitly used the media over the years to promote stocks he owns, has appeared on CNBC and Bloomberg TV several times to insist he will be exonerated. His most recent appearance was on Jan. 5, the day before the SEC’s latest court filing was made public, when he reiterated “These charges are totally without merit” even as he explained that the firm’s assets have slid to $3.4 billion as investors have bailed. Two years ago, Omega had $10.4 billion. There is no specific law against insider trading, complicating prosecutions of such cases. But it is illegal to trade on inside information if you have agreed to keep the information confidential—that is, not trade on it. Violation of such agreements underpins what is called the “misappropriation” theory, which is what the SEC alleges in this case The SEC’s approach has appeared to be a way to sidestep the legal controversy and uncertainty over another form of insider trading that involves insiders receiving some sort of a “personal benefit.” In 2014, a federal appeals court struck down the convictions of hedge fund managers Todd Newman and Anthony Chiasson, saying the men did not offer a “pecuniary benefit” to the insider who offered them information that led to a trade. (For more on that case, read this recent Fortune magazine feature.) But since then, ruling in a separate case, the U.S. Supreme Court has upheld a broader view of what constitutes a benefit, saying that such a benefit doesn’t have to be financial and bolstering the government’s more expansive definition. While that decision won’t directly affect Cooperman’s battle with the SEC, it does indicate that the judicial environment is hardening against insider trading. That trend seems unlikely to change in a Donald Trump administration, either, as the President-elect has asked Preet Bharara, the Manhattan U.S. attorney whose Newman conviction was overturned, to stay on. An Unusual Defense Shortly after the SEC filed its case, Cooperman defended his actions in a letter to investors, saying he had planned to make those dozens of Atlas trades anyway, thus sidestepping the question of whether or not he actually received the inside information. (Before receiving the information, he had been selling out of Atlas.) In a lengthy Bloomberg TV interview in October, Cooperman even claimed, “If you have inside information, you should not use it.” But in December, in their bid to toss the case, Cooperman’s lawyers didn’t contest that Cooperman received the illicit information. Instead, they argued that the SEC’s case should be thrown out because of the timing of his agreement to keep the information confidential. Cooperman had at least three conversations with an Atlas executive, on July 7, 19, and 20, according to the SEC, which claims that during at least one conversation, he promised not to use the inside information. The SEC does not indicate when that promise occurred, and Cooperman’s latest defense is that even if he did get inside information, he did not agree to refuse to trade on it until after he’d already received it—and that therefore, the agreement was moot, from a legal standpoint. “No court has upheld a misappropriation theory of insider trading based on a purported promise to keep information confidential (or to refrain from trading) made after the information was acquired,” wrote Daniel Kramer, his lead Paul Weiss Rifkind attorney, in a December filing in a Pennsylvania federal court. The SEC says that doesn’t matter. “Defendants ask this Court to create a loophole in insider trading law that rewards deception,” the wrote in its opposition to Coopermans’ move to dismiss the case. “Specifically, Defendants contend that Cooperman could obtain material, nonpublic information from a senior executive, deceive the executive by agreeing not to trade on the information, and still trade so long as he did not lie until the end of their conversation. This is an astounding theory that runs contrary to a fundamental tenet of insider trading law: the prohibition of deception in securities trading. Defendants offer this loophole to the Court without citing a single case, statute, rule, or regulation holding that an agreement not to trade must precede the disclosure of confidential information.” Even if Cooperman is right on the law, it’s hard to see that his latest defense will work if the SEC’s witnesses hold up, and if he made the promise not to trade on any one of those three days. He began buying Atlas securities on July 7, the first day he learned of the impending deal, and continued until July 27—well after his last alleged conversation with the insider executive. In October, Cooperman said he has declined an offer from the SEC to settle the case for $8 million, though Bloomberg reported that the SEC also wanted to impose a temporary ban on Cooperman managing money as well. Last week, he estimated his defense would cost $100 million. Cooperman did not reply to a request for comment.