We’ve all heard the expression “hard cases make bad law.” But sometimes bad law is the result of bad cases – i.e., cases that should never have been brought in the first place. That’s the case with the SEC’s prosecution of Ray Dirks, who died on December 9 at age 89. I suspect that many
Apparently, I wasn’t the only one who thought it was odd to enforce what was essentially an insider trading matter as an internal accounting controls matter. Commissioners Peirce and Roisman agreed in a November 13, 2020 “statement” that can be found here.
Let’s assume that you are an executive of a company; that you have material non-public information about the company that will, when announced, cause the company’s stock to increase in value; that the company has a policy that prohibits trading when in possession of MNPI; and that you make an open market purchase of the company’s stock before the information is made publicly available. What are the odds that you will be charged with fraud or insider trading?
Let’s assume a similar but slightly different set of facts: The company has material, non-public information that will, when announced, cause the company’s stock to increase in value; the company has a policy that prohibits trading when in possession of MNPI; before this information is made publicly available, the company enters into a so-called Rule 10b5-1 plan to facilitate a stock buyback program; and the company then proceeds to buy shares of its stock under the Rule 10b5-1 plan. What are the odds that the company will be charged with fraud or insider trading?
If you answered both questions the same way, you may be wrong. In a recent enforcement action involving the second fact pattern above, the SEC opted not to charge the company or its executives with fraud or insider trading. Rather, the problem, according to the SEC, was that the company had “insufficient” internal accounting controls. Without going into too many details, the SEC’s theory goes something like this:
Continue Reading Alternate routes (updated)
One of the principal duties of corporate directors and officers is the duty of confidentiality. That’s not just my personal opinion; it’s supported by case law, corporate governance treatises, law review articles, and more. Generally viewed as a subset of the duty of loyalty, the duty of confidentiality means that directors and officers are expected to keep their knowledge of the company to themselves or, at a minimum, to disseminate it on a strict “need to know” basis.
My conviction (all puns intended) was reinforced some years ago, when Rajat Gupta, the former CEO of McKinsey and a member of the board of Goldman Sachs, among others, was convicted of insider trading for spilling secrets he learned in Goldman’s board room to Raj Rajaratnam. Following his conviction, there was a flurry of activity among corporate governance nerds (present company included) as to the appropriateness and reasonability of asking directors and officers to enter into confidentiality agreements with the companies they served. It seemed to me at the time that asking a member of your board – a person charged with oversight of your company, and effectively your boss – to sign a confidentiality agreement might be viewed as insulting or worse.
Events, both recent and not-so-recent, are changing my mind. To start with the not-so-recent, in my many years of in-house practice, I came across the occasional director or officer who, to put it bluntly, was a media whore. They love seeing their names in the paper and being quoted as authorities. I get that; I’ve been quoted in some publications, and it’s very nice. However, in at least one case, a director’s leaks to a reporter resulted in my getting calls from that reporter, literally demanding that I provide information, some of which was clearly privileged, arguing that if it was good enough for a board member it was good enough for me. (I declined.)
Continue Reading Shhh!
Although Dodd-Frank was enacted in 2010, the rule needed to implement one of its provisions – the requirement to disclose hedging policies – only recently took effect. In fact, for calendar-year companies, 2020 will be the first year in which the proxy statement will have
In December 2014, I posted my concerns with the law on insider trading. Perhaps someone read it, because the following year, H.R. 1625, the “Insider Trading Prohibition Act,” was introduced in the House of Representatives. I regarded it as imperfect but a start. Of course, it went nowhere, and the state of the law has not changed.
Well, it’s back – sort of – and may have a bit of life. H.R. 2534, with the same title as in 2015, was introduced by Congressman Jim Himes (D-CT), who introduced the 2015 bill, and co-sponsored by Carolyn Maloney (D-NY) and Denny Heck (D-WA). What’s new about the bill is that it was approved – unanimously – by the Financial Services Committee in May. That probably doesn’t mean anything, as Congress seems to be the place where legislation goes to die, but I suppose anything is possible.
Like its predecessor, it’s a start. But I still think it’s imperfect. The title of the first section is promising: “Prohibition Against Trading Securities While In Possession Of Material, Nonpublic Information.” Sounds good, right? The mere possession of MNPI means you can’t trade. Wrong. The text of the section gives the lie to its title. Specifically, the prohibition exists only if the person trading “knows, or recklessly disregards, that such information has been obtained wrongfully, or that such purchase or sale would constitute a wrongful use of such information.” In other words, (1) the bill seems to say it’s OK to trade while in possession of inside information as long as the information was not known to have been obtained wrongfully or is being used wrongfully (whatever the latter means), and (2) it would get us right back into the very issues that make the present state of the law so confusing. You can’t trade in a stock if you know (or should have known) that the MNPI was wrongfully obtained, but what if you don’t know or have no reason to know it was wrongfully obtained? If someone suggests that you buy (or sell) a particular stock, what is your duty of inquiry, and where does it end?Continue Reading There STILL ought to be a law
A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”
It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session. A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters. And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.
Problems with the Approach
I’m not saying that all of the ideas being floated are awful, or even bad. (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.) In fact, some of the ideas merit consideration. However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question. (I have problems with some of the ideas, as well, but more on that later.)
Problems with the Proposals
As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.
Continue Reading Dear Washington: How can we miss you if you don’t go away?
No, this is not a riff on Hamlet’s soliloquy. It’s about the current kerfuffle (one of my favorite words) about stock buybacks. In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:
And now there’s another concern. Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above. And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.Continue Reading To buy or not to buy
On February 21 the SEC issued a “Commission Statement and Guidance on Public Company Cybersecurity Disclosures”. The Release contains new guidelines and requirements regarding public companies’ disclosure responsibilities for cybersecurity situations. No new rules or regulations have been issued at this point, but the Release contains some valuable guidance. It is also clear that cybersecurity is a hot button for the SEC and for Chair Clayton, and I believe that cybersecurity disclosure issues will be subject to more rigorous scrutiny going forward. All public companies should carefully review the Release and evaluate their disclosure obligations in connection with cybersecurity.
The Release updates the SEC’s position on cybersecurity. The SEC’s previous guidance in this area was primarily a Corporation Finance Division Release issued in 2011 that did not contain specific disclosure requirements. The cybersecurity landscape has changed radically since then. The substantial increases in the number and severity of cybersecurity incidents, coupled with the growing dependence of businesses on cyber systems and the associated problems that arise in a cybersecurity incident, have clearly convinced the SEC that additional disclosure is required.
Continue Reading SEC issues guidance on cybersecurity disclosure obligations (and more)
This is a first for The Securities Edge – a book review. The book in question is The Chickenshit Club – Why the Justice Department Fails to Prosecute Executives by Jesse Eisinger. Mr. Eisinger is a writer for Pro Publica. He’s a very smart man and a good (even great) reporter; among other things, he’s won the Pulitzer Prize. I met him once and was impressed by his intellect and commitment.
However, the book bothers me greatly, and that’s why I’ve decided to post this review. As indicated by his title, he is concerned with the failure to prosecute executives, both generally and in connection with the financial collapse. That concern is legitimate; many people – including people in business – share it, and some hold the failure at least partially responsible for our political situation today. The problem with the book is that in Mr. Eisinger’s view there are heroes and villains and nothing in between; those who prosecute are good, and those who don’t (or who do so halfheartedly) are bad – and the businessmen themselves are the worst of all.
For example, among the people he idolizes is Stanley Sporkin, a retired USDC judge who previously served as the SEC’s Director of Enforcement. Mr. Sporkin’s integrity may be beyond question, but in Mr. Eisinger’s view, his judgment is (and was) as well. Those of us who practiced during Mr. Sporkin’s tenure at Enforcement may have a different view. Among other things, Mr. Sporkin was responsible for pursuing insider trading cases against Vincent Chiarella and Ray Dirks. Mr. Eisinger lauds Mr. Sporkin for going after Mr. Chiarella – a typesetter for a financial printer who saw some juicy (nonpublic) information and traded on it. Did he trade on the basis of inside information? Yes, but at the end of the day he was a schnook who should have gotten a slap on the wrist rather than being subjected to a (literal) full court press by the federal government. The courts apparently felt the same way, and, as courts often do, they found a way to let him off the hook by developing a strained approach to insider trading law that continues to haunt us today. (Mr. Eisinger doesn’t mention the equally ill-advised insider trading prosecution of Ray Dirks, which also contributed to the current garbled state of affairs in insider trading law.)Continue Reading Heroes and villains: A review of “The Chickenshit Club” by Jesse Eisinger
In the few days since the Supreme Court handed down its decision in Salman v. United States, many commentators have said, in effect, that criminal prosecutions for insider trading are alive and well. Alive, yes; well, maybe not.
At the risk of quoting myself, almost exactly two years ago I posted an item on this blog entitled “There ought to be a law”. My belief at the time was that insider trading law is so byzantine that it’s impossible to know where legally permissible behavior becomes legally impermissible behavior. For better or worse (worse, IMHO), nothing has changed all that much. In the Salman decision, SCOTUS says that a prosecutor need not prove that a tipper received something of a “pecuniary or similarly valuable nature” to convict the tipper of illegal insider trading. So far, so good. However, as many commentators have pointed out, Salman leaves any number of other issues wide open.Continue Reading Insider trading: there still ought to be a law