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:
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