In an effort to re-invent itself in response to the financial crisis, the Securities and Exchange Commission (SEC) recently announced a series of reforms designed to substantially strengthen its ability to police the markets. Among other things, the Division of Enforcement has undertaken "the biggest reorganization . . . in more than 30 years." This includes introducing:

The SEC has also delegated its power to issue subpoenas to senior staff, making it easier to initiate formal investigations. Perhaps most importantly, the Enforcement Division has been re-tooled. Now armed with the ability to enter into co-operation, deferred prosecution and non-prosecution agreements, the SEC has at its disposal new mechanisms that will afford it the type of leverage previously reserved for criminal law enforcement agencies.

The SEC's transformation coincides with its adoption of an increasingly aggressive posture towards insider trading cases, many of which have targeted foreign nationals or concerned activities that primarily took place outside the US.

SEC v Condroyer. In some cases, the agency is moving expeditiously to bring actions even where they are based (at least initially) on bare bones allegations.

In SEC v Condroyer, 09-cv-3600 (N.D. Ga.), two French citizens residing in Belgium purchased out-of-the-money call options for Chattem common stock between 7 December and 17 December that they sold on 21 December, immediately following Chattem's announcement that it was being acquired by Sanofi-Aventis. Less than 24 hours later, the SEC filed an action. Remarkably, the complaint did not contain the key facts generally considered central to any insider trading case, such as the source of the inside information, evidence that defendants knew each other, or that defendants knew anyone at either company. Instead, the SEC based its claims entirely on allegations concerning the timing and magnitude of the trading activity.

SEC v Rorech. In other cases, the SEC is suing based on novel theories that could substantially broaden the scope of liability under the Securities Exchange Act of 1934 should they gain widespread acceptance by US courts.

In SEC v Rorech, the SEC pushed to expand the reach of Section 10(b) by bringing its first insider trading case involving credit default swaps (CDSs) (2009 U.S. Dist. LEXIS 115305 (S.D.N.Y. Dec. 10, 2009)). In that case, the SEC alleged that a bond and CDS salesperson at Deutsche Bank learned of a proposed bond offering to be underwritten by his firm and subsequently tipped a portfolio manager at Millennium Partners who purchased related CDSs, which the portfolio manager sold weeks later following the announcement of the offering (Id. at 7-9). The defendants moved to dismiss the action, arguing that a CDS is not a "security-based swap agreement" covered under Section 10(b) as the premium is not "based on" price, yield, value or volatility of the underlying bond (Id. at 11-12). The court refused to dismiss the case, noting, among other things, that there is a secondary market for CDSs in which their price may be based, at least in part, on the value of the underlying bond (Id. at 14-17).

SEC v Dorozhko. The SEC has also recently urged a broad reading of Section 10(b) that captures trading by outsiders who owe no fiduciary or other duty to the source of the non-public information on which they traded.

In SEC v. Dorozhko, the SEC alleged that the defendant, a Ukraine national and resident, bought "extremely risky" out-of-the-money put options for IMS Health hours before the company unexpectedly announced negative earnings based on information he obtained by 'hacking' into a secure computer network (574 F.3d 42, 43-45 (2d Cir. 2009)). The defendant sold the options the very next day (Id). Acknowledging that the defendant was an outsider who owed no duty to IMS Health or the owner of the computer network, the SEC argued his actions were "deceptive" because he misrepresented his identity to the computer server to gain unauthorised access. While the district court rejected the SEC's expansive interpretation of Section 10(b), the Second Circuit Court of Appeals reversed, holding 'hacking' "is plainly 'deceptive' within the ordinary meaning of the word" (Id. at 51).

Although initial efforts have met with some success, the SEC faces several hurdles. Resources are strained as a result of the fact that a smaller percentage of cases are being settled at an early stage and that the SEC is prosecuting fewer cases in parallel with the Department of Justice, leaving it to carry the burden alone. And some of the SEC's higher profile cases involving novel or expansive theories of liability – such as the action brought against Mark Cuban for insider trading – have been dismissed by the courts.

Whether the 'new' SEC's aggressive campaign will be effective thus remains an open question.

In its recent decision in Ogle v. Fidelity & Deposit Co. of Maryland (586 F.3d 143 (2d Cir. 2009)) (Ogle), the Second Circuit Court of Appeals held that, under the Bankruptcy Code, an unsecured creditor is entitled to recover post-petition attorneys' fees that were authorised by an otherwise enforceable pre-petition indemnity agreement, but contingent on post-petition events.

The facts of the case were as follows:

In rejecting Ogle's appeal, the Second Circuit concluded that the Bankruptcy Code entitled an unsecured creditor to recover post-petition attorneys' fees under a pre-petition contract, even though such fees were contingent on post-petition events. The court examined two provisions of the Bankruptcy Code in reaching this decision: section 502(b) and section 506(b).

Section 502(b) of the Bankruptcy Code provides that a claim will be allowed in an amount as of the date of the filing of the petition, unless one of the enumerated exceptions contained in section 502(b) applies to the claim. The definition of "claim" in the Bankruptcy Code includes contingent rights to payment. The Second Circuit noted that, under contract law, a right to payment based on a written indemnification contract arises at the time the indemnification agreement is executed. The court therefore characterised Fidelity's claim for post-petition attorneys' fees as a contingent right that arose pre-petition. Although the dollar amount of Fidelity's claim for post-petition attorneys' fees had not been fixed as of the day that Agway's chapter 11 petition was filed, the Bankruptcy Code did not bar Fidelity from recovering such fees on that basis.

The Second Circuit relied on the Supreme Court decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. (549 U.S. 443, 127 S.Ct. 1199, 167 L.Ed.2d 178 (2007)) (Travelers) in reaching this conclusion, noting that all of the claims at issue in Travelers were for post-petition amounts, and that "if an unsecured claim for post-petition fees was for that reason unrecoverable, the Travelers court could have disposed of the claim on that simple, available ground alone."

At issue in Travelers was the recoverability of legal fees incurred post-petition solely to litigate issues of bankruptcy law. The Travelers court started from the premise that "an otherwise enforceable contract allocating attorney's fees . . . is allowable in bankruptcy except where the Bankruptcy Code provides otherwise" (Id. at 448, 127 S.Ct. 1199). The Supreme Court went on to explain that, because none of the section 502(b) exceptions applied, and because the claim was valid under applicable state law, Travelers' claim for post-petition fees was permitted under section 502(b)of the Bankruptcy Code.

In Ogle, as in Travelers, none of the section 502(b) exceptions applied to Fidelity's claim, and the claim was based on a contract valid as a matter of state law. Extending the Supreme Court's reasoning, the Second Circuit thus found that Fidelity had an allowed claim for its post-petition attorney's fees, even though, unlike in Travelers, these fees were not incurred to litigate bankruptcy issues.

The Second Circuit next turned to Ogle's argument that section 506(b) of the Bankruptcy Code amounted to a bar to Fidelity's claim, by negative inference or otherwise. Section 506(b) provides, in the relevant part, that an oversecured creditor can recover interest on a claim, and any reasonable fees, costs, or charges provided for under the agreement or state statute under which such claim arose, to the extent that the value of the collateral exceeds the secured debt.

The court considered whether section 506(b) of the Bankruptcy Code, by limiting the amount of unmatured interest that oversecured creditors could recover on their claims, implied that unsecured creditors were barred from recovering post-petition attorneys' fees. The Second Circuit had previously held, in United Merchs. & Mfrs., Inc. v. Equitable Life Assurance Soc'y of the U.S. (674 F.2d 134, 137-39 (2d Cir. 1982)), that neither the wording of section 506(b) nor its legislative history sheds any light on the status of an unsecured creditor's contractual claims for attorney's fees. The court went on to conclude that there was nothing in the later Supreme Court decision in Travelers that was inconsistent with United Merchants. Accordingly, the Second Circuit ruled that section 506(b) does not implicate unsecured claims for post-petition attorneys' fees, and it did not, therefore, operate to bar Fidelity's claim.

Ogle raised a number of additional arguments that were also rejected by the Second Circuit. One such argument was that allowing an unsecured creditor to collect post-petition attorneys' fees based on a pre-petition contract would unfairly disadvantage other creditors, such as tort claimants and trade creditors, whose distributions would thereby be reduced. The Second Circuit rejected this argument, holding that where equally sophisticated parties negotiate a loan agreement that provides for recovery of collection costs on default, courts should presume, absent a clear showing to the contrary, that the creditor gave value, in the form of a contract term favourable to the debtor or otherwise, in exchange for the collection costs provision. The court should therefore give effect to this provision bargained for between the parties.

The importance of the Ogle decision is that it provides a clear statement that, in the Second Circuit, unsecured claims for post-petition attorneys' fees are recoverable where such claims are based on a valid pre-petition agreement, or otherwise arise under applicable state law. Ogle leaves open the question of whether claims for amounts other than attorneys' fees are similarly recoverable by unsecured creditors.

The ISDA Master Agreement provides that, in case of a default under the agreement, the defaulting party indemnifies the non-defaulting party for and against all reasonable out-of-pocket expenses, including legal fees, incurred by the non-defaulting party by reason of the enforcement and protection of its rights under the ISDA Master Agreement and related documents. Counterparties of debtors under ISDA Master Agreements may thus attempt to rely on Ogle to argue that they have a valid claim for costs of enforcement of their rights under the ISDA Master Agreement, even where these costs arose post-petition.