Here are the results to my random questions in last week’s blog entry.
Terminated Employees & Black-out Periods
Two-thirds of respondents (37 out of 54) do not subject terminated employees to black-out periods.
For those respondents that do subject employees to black-out periods, the majority (11 out 16 respondents), don’t make any accommodation for them. The terminated employees are simply expected to finance their exercises in a way that doesn’t involve an open market sale.
Two respondents noted in the comments that they would automatically exercise the options if they aren’t exercised by the end of the exercise period. One person noted that their black-out period is shorter than their post-termination exercise period, so this hasn’t been a concern for them.
Evaluating Stock Plan Administration
The majority of respondents don’t have any specific metrics that they use to evaluate the performance of the stock plan administration team (which probably explains why no one has responded to this question in the NASPP Discussion Forum).
Of the metrics suggested in the question, the most popular choices were:
Accuracy of reports produced for tax/financial purposes (7 respondents)
Total time spend on various tasks (e.g., employee inquiries, processing transactions, reporting) (4 respondents)
One respondent indicated that they are evaluated on their average time to resolve employee inquires/escalations and one respondent indicated that they are evaluated on the processing and direct costs per participant.
Some of the metrics suggested in the other comments were:
Timeliness and accuracy of all transactions, participant communications, and tax/financial reporting
Demonstration of increasing knowledge and ability to take on more complex tasks
Quality of response to employee inquiries/escalations
ESPP participation
Responsiveness to plan managers and various company contacts in addition to participants
Personally, I think that having at least a rough idea of how much time you spend on various tasks is an important and valuable metric to be aware of. It can be very helpful when trying to prioritize various initiatives and projects. For example, if tax reporting takes a huge amount of time compared to everything else you are doing at year-end, that might be an indication that you need to invest in improving your tax reporting processes.
I’m also a big fan of the ESPP participation metric, but only if you have the proper tools and resources to impact this (e.g., education budget, attractive plan, etc.)
Grant Conversion
Close to 90% (38 out of 43 respondents) don’t convert grant values into foreign currency before determining grant sizes for non-US participants.
I needed a quick blog entry for today (Jenn is on vacation), so I decided to do another poll with questions that have been posted recently to the NASPP’s discussion forum. If they apply to you, please take a moment to indicate your answers so we can help these folks out. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll). Thanks for indulging me!
It’s been about 15 years (yikes, already?) since the SEC adopted Rule 10b5-1. For those new to the concept, a 10b5-1 plan may be best explained as a device that allows company insiders to trade in the company’s securities pursuant to a pre-arranged trading plan or instruction. The pre-arranged element is intended to help the insider avoid automatic liability for insider trading and serve as an affirmative defense to claims of insider trading. While there have been many benefits to enacting such trading plans, 10b5-1 plans have not escaped scrutiny from the SEC. I won’t cover that particular scrutiny in today’s blog, but will tackle another unintended downside: the impact of well-intentioned, pre-determined trades on a company’s stock price.
Haven’t We Seen It All?
In recent years we’ve seen the gamete of questionable situations that arise from having a 10b5-1 trading plan. Did the executive really not have material non public information at the time they created the plan? Or, on the flip side, did the executive time that press release to be just before or shortly after the trade already set to occur in his or her 10b5-1 plan? The thing these scenarios have in common are that they raise a question as to whether a specific individual should have indeed been able to trade in the company’s stock, in spite of having a 10b5-1 plan. We could cover a lot of examples of these instances. But today I want to turn to one thing I hadn’t heard of until recently, a circumstance that had nothing to do with the ethics of the trades executed under an individual’s 10b5-1 plan. It appears to be a completely, unintended consequence of the executives and company being well intentioned and yet still generating some ripples about it.
It Started With A Tweet
On February 9, 2015, CNBC’s Jim Cramer sent a memo to the board of social media darling Twitter. The essence? Stop 10b5-1 trades, because the flow of these trades (albeit pre-timed and planned) are hurting the company’s stock price. As CNBC reported, the actual memo said: “Memo to the board of directors of Twitter: Someone suggest that there be a moratorium on selling stock for a bit, maybe six months, maybe a year, to show that you believe in the company… If I were on the board I would simply say, ‘Hey guys, could you give it a break for a while because you are now telling a good narrative about user growth and engagement and you are starting to get people excited again about the company and its stock and your selling makes them feel foolish.’”
The activity that prompted the memo was a series of sales of stock by top executives at Twitter in the weeks and months prior to the memo. Although the trades were done pursuant to 10b5-1 plans, several were executed in close proximity to each other, bringing in millions of dollars to Twitter executives ($8.5 million to its CEO in January and February alone, with a similar amount to its founder and chairman, and $1.8 million to another executive). Although it may be argued that the trades were executed based on long, pre-planned directives, the quantity and dollar value of the shares liquidated seemed to be sending a message that the executives were dumping stock. Not to mention simultaneously releasing thousands of shares into the market.
So what happened? What did the Twitter board do? The company has not commented on the matter, but in a Fortune article citing exclusive information (Exclusive: Twitter execs put stock sales on ice – April 22, 2015), it appears that the memo was received and action taken. Fortune cites having multiple sources who confirm a moratorium on 10b5-1 transactions, save one insider who continues to be permitted to sell stock. Aside from the transactions of that lone insider, no other 10b5-1 transactions have occurred since February 6, 2015. It’s not clear if the company canceled plans or simply did not renew them. Whatever the details, the end results appears to be a moratorium. Since that time, Twitter’s stock price has risen approximately 25% (as of the date of the Fortune article). You be the judge. Did a halt in insider trading activity send a positive message to shareholders, resulting in an increased stock price?
Takeaways
While the Twitter scenario is the first I’ve heard of this type of moratorium, in particular initiated by a party external to the company, it certainly provides food for thought. Social media has given a voice to many – shareholders, customers, media, and others. It’s quite simple to send a message to a company, including its board of directors. And in this case it seems the message was heard. This raises the question – do other companies need to worry about how their 10b5-1 plan trades are perceived by the market? I don’t have a definitive answer on that, but I do have some suggestions.
Consider the potential timing of trades when approving 10b5-1 plans. One thing companies should consider, if they haven’t already, is how the future trades may be perceived by shareholders in the best and worst of trading scenarios. If an insider has multiple stock price targets to trigger sales, for example, and all those targets are hit in a short period of time given a rapid rise in stock price, how will those multiple trades be perceived?
Evaluate how many plans have similar triggers. Companies approach evaluating and approving proposed 10b5-1 plans differently. One thing to assess is just how many insiders have plans or propose plans with similar triggers. If five executives want to sell shares when the stock price reaches $50, this could result in a large volume of shares and transactions hitting the market all at one time. I’m not a 10b5-1 expert, but it seems there has to be a way to monitor existing plan terms and match those up against those proposed by new trading plans. If volume of shares and shareholder/market perception is a potential concern, perhaps the company can establish collective limits (as a matter of policy) as to how many shares can be sold at a given price or under a certain trigger. I may get flack for even suggesting this option, but I’m throwing it out there. Should companies, as a matter of policy, restrict the number of shares that can be sold under a trading plan, or, even a limit on shares sold cumulatively – based on the collection of all existing plans? This would certainly have helped Twitter buffer against the influx of shares into the market earlier this year.
This type of unintended aftermath of 10b5-1 trades feels like new territory. I’d love to hear from anyone who has (as a matter of policy) specific limits to prevent an influx of shares into the market, or who has ideas about best practices to help companies avoid a public call-out like Twitter received. Although they haven’t publicly admitted to any action taken, if we are to listen to the “sources” in this matter, kudos is due to Twitter’s board for handling the situation in a constructive way.
I think it’s safe to say that if you work in this industry, you’re familiar with the concept of insider trading. What do we know? You can’t trade in a company’s stock based on material non-public information. If you do, the Securities and Exchange Commission (“SEC”) could hunt you down and make your life very, very miserable. Isn’t that what time and experience have taught us? In the past, I’ve blogged about the SEC’s renewed and aggressive interest in pursuing a variety of insider trading violations (see Husbands and Wives Insider Trading and “There’s a Reason They Call it “Insider” Trading). With more sophisticated technology and monitoring mechanisms, even the smallest trades are not below the line of scrutiny, and it’s an area where I’ve been advocating the use of caution for a while now. However, what was left unsaid in those many recounts of insider trading crackdowns was the fact that although there have been prosecutions and penalties and repercussions for trading based on material non-public information, there isn’t actually a federal law that specifically makes insider trading illegal. Now, that tide may be changing, with multiple bills in pending in Congress that intend to create a federal statute to address this legislative hole. In today’s blog I’ll catch you up on what’s happening on that front.
How Can That Be?
I already know what you are thinking: “Huh? Insider trading is illegal.” I mean, isn’t that why we’ve seen dozens of successful prosecutions in the last few years? You know what I’m talking about – and we’ve seen it all. CEOs, hedge fund managers, employees who accidentally passed on inside information to their wives, friends having brunch together and sharing small talk about their jobs. I think the variety of circumstances is broad, with one commonality: the SEC has been successful in working with the Justice Department to bring charges, obtain convictions and levy penalties. Jail time has been a very real outcome in some of these cases. So how could this all happen if insider trading is NOT illegal? Well, technically it’s not. And, although the SEC has been successful in pursuing these cases, they have had to use loopholes to do so – relying on general antitrust laws and decades of case law (and, I’m not a lawyer, but I’m told that case law is subject to interpretation by individual judges, so the application of that could vary widely). The bottom line is there isn’t a statute that specifically addresses insider trading, which leads to potential ambiguity and inconsistencies in the courts.
Why the Interest Now?
We’ve established that there are no clear federal insider trading laws on the books, but what’s the sudden interest in creating one? The initial catalyst was a landmark ruling (December 2014) by the Second U.S. Circuit Court of Appeals (U.S. v. Newman) that overturned two “key” insider trading convictions, dealing a blow to the Justice Department and the SEC. At the time, the Wall Street Journal summarized the situation as follows: “…a federal appeals court overturned two insider-trading convictions and ruled it isn’t always illegal to buy or sell stocks using inside information.
The ruling raised the bar for prosecutors on a crime that is already hard to prove, and it will likely limit the types of cases the government can pursue.
Specifically, the three-judge panel of the Second U.S. Circuit Court of Appeals said prosecutors must prove traders knew that the person who provided an inside tip gained some sort of tangible reward for doing so. The judges also said it may be legal to trade on inside information, even if it gives an investor an unfair advantage in the markets, as long as the tipper didn’t commit an illegal breach of his or her duty.”
What’s the Fallout?
The Newman decision has created a still ongoing fallout, making it more challenging for the SEC and Justice Department to pursue insider trading cases. As a result, some pending cases have been dropped, others who were successfully convicted are now seeking review of their cases, and Congress is taking action to statutorily define insider trading and also to reverse the requirement under the appellate decision that:
“the tippee know both that the tipper breached a duty of confidentiality and
the tipper received a personal benefit of “some consequence.”
What’s Happening in Congress?
There are currently three bills pending in Congress that seek to define insider trading. The National Law Review describes them as follows:
“Two bills introduced by Democrats have been pending without bipartisan support and have stalled. The broadest of these is the Stop Illegal Insider Trading Act, which was introduced by Sen. Jack Reed (D – RI) and Sen. Robert Menendez (D – NJ). The Stop Illegal Insider Trading Act would make it illegal to trade on “material information” that the person “knows or has reason to know” is not publicly available – excluding information a person developed from publicly available sources.
The second bill is the Ban Insider Trading Act of 2015, which was introduced by Rep. Stephen Lynch (D – MA), and would redefine “material” nonpublic information as information that would likely affect the stock’s price if it were made public.
Most recently, Rep. Jim Himes (D – CT) and Rep. Steven Woman (R – AK), introduced the first bill with bipartisan support, which would ban trading based on material, nonpublic information that the person knew or recklessly disregarded was wrongfully obtained.”
What’s Next?
It’s not clear what the outcome of any of these efforts will be, but what we do know is that the fallout from the Newman decision has caused a ruckus, and there is more pressure than ever to find a consistent way for the courts to define insider trading. It’s quite possible that any new legislation in this area will trigger a need to revamp the insider trading policy, educate employees and possibly adjust some practices and procedures. We’ll keep you informed on any new developments in this area.
We are excited to bring our popular “Meet the Speaker” series back to the NASPP Blog, featuring interviews with speakers at the 22nd Annual NASPP Conference. This is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
NASPP: Why is your Section 16 compliance particularly time right now?
Alan: Section 16 compliance is a particularly timely topic because the importance of the reporting function for compliance personnel remains high. Mistakes result in highly visible delinquency disclosures in the company’s proxy statement, and the rule requiring disclosure leaves little room for forgiveness. The person responsible for Section 16(a) compliance needs to be aware of recent developments in an envirnoment of changing types of equity compensation.
NASPP: What are some best practices companies should implement?
Alan: Every public company should have a designated compliance person who is responsible for preparing and filing Section 16(a) reports and who is empowered to assure that directors and officers provide to him or her adequate information about their securities transactions in time to permit timely and accurate reporting on Form 4.
NASPP: There’s always a silver lining; what is the silver lining to Section 16 reporting?
Alan: Rarely does a failure to file a Form 3 or Form 4 on time result in any SEC interest in bringing an enforcement action. Disclosure of the deliqnency in the proxy statement is the extent of the insider’s punishment.
NASPP: Tell us something people don’t know about you.
Alan: I was serving as special counsel to SEC Chairman John Shad when some of the staff had the idea to start the George Fitzsimmons Memorial Golf Classic in honor of the late Secretary. I presented to Chairman Shad the “order” declaring the tournament an official SEC tournament. I came in second place in one of the early Fitzsimmons tournaments in the 1980’s, and won the event in 1990. My golf has never been as good since.
The 22nd Annual NASPP Conference will be held from September 29-October 2 in Las Vegas. This year’s program features 60+ sessions on today’s most timely topics in stock compensation; check out the full agenda and register today!
We are excited to bring our popular “Meet the Speaker” series back to the NASPP Blog, featuring interviews with speakers at the 22nd Annual NASPP Conference. This is a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For our first Meet the Speaker interview, we feature Mike Andresino of Posternak Blankstein & Lund, who will moderate the session “10b5-1 Plan Twists & Turns.”
NASPP: What is the most critical thing NASPP Conference attendees need to know about Rule 10b5-1 plans?
Mike: If your company does not yet use 10b5-1 plans as part of its insider compliance program, you are missing out on an important tool. If you do use these plans, there are important best practices that companies ignore at their peril.
NASPP: What are some best practices companies should implement for 10b5-1 plans?
Mike: Companies need to address, up-front, the expectations that plan participants should have regarding issues such as suspension, amendment or termination of 10b5-1 plans, SEC disclosure of their plans, price targets and other hot button issues that are not addressed in the 10b5-1 regulations but are part of the administrative environment for the plans.
NASPP: What is the worst horror story you have heard about a 10b5-1 plan gone wrong?
Mike: Angelo Mozilo, former CEO of Countrywide Financial, agreed in 2010 to a $67.5 million settlement with the SEC over charges that he abused his 10b5-1 plans for trading gains. If I’m trying to get directors and officers to pay attention to compliance issues, sixty-eight million bucks will usually do it!
NASPP: And last, just for fun, if you had a store on Etsy, what would you sell in it?
Mike: One word–Marinade! More specifically, I would bottle and sell a marinade that I use for salmon and other fish, that uses oil, soy sauce, honey and dark rum. Maybe I would package it in a kit with the rub I use. Hmm, now I just need a good design for the bottle….
We’ve covered the range of insider trading cases in past editions of the NASPP Blog – ranging from employees gone rogue with inside information, to the accidental tipping off of friends during a Sunday brunch, to the SEC’s recent vigor in pursuing these cases. Just when I thought there were no more angles to cover with the SEC’s recent and ongoing crackdown on insider trading, I find myself surprised. It turns out the latest pair to settle SEC charges of insider trading are two husbands, both who gleaned inside information from their wives about their employers and used that knowledge to trade profitably.
Are Spouses Precluded from Trading?
I’ve read many an insider trading policy, and they often attempt to extend the boundary of insider trading parameters to spouses and other family members living in the same home. Even if a policy doesn’t address it, it pretty much goes without saying that a spouse shouldn’t be trading on any information received from their partner about the partner’s employer.
Sneaky Husbands
This week the SEC reiterated their no-nonsense approach to pursuing insider trading charges when they settled charges against two husbands. What strikes me is that, based on the facts available, the “tipping” in this case was so benign – virtually through the normal co-existence that occurs in a same-household relationship. In one case, a husband put two and two together as his wife talked about an upcoming acquisition. In the other case, a wife talked on the phone to her employer about the fact that the company would be missing their earnings target for the first time in 31 quarters, all while on a leisurely vacation drive to Reno with her husband. When they returned from vacation, the husband structured a series of trades to profit off the earnings miss. In both cases, the wives reportedly instructed their husbands to never, ever trade on any information shared or overheard.
Neither of the wives were charged in the SEC’s investigation. However, the penalties to their spouses weren’t cheap – both husbands settled with the SEC for double the amount of their profits in the case (a $300,000 settlement for one husband based on $150,000 in profits, and a $280,000 settlement in the other case, based on $140,000 in profits).
Tipping from Merely Existing?
Many of us in stock compensation can probably relate to the manner in which the inside information in these cases were obtained. How many times are we on a conference call at home, or explain to a spouse that we have to work late because of the “deal” that’s in the works? It probably is somewhat routine for our issuers, and not a far fetch for our service providers and consultants either. While both wives in these two cases seemed to do everything right by instructing their spouses not to trade, insider trading still happened. I’m not suggesting that all of our co-habitants out there are likely to trade on overheard information, but I’m guessing these wives didn’t think their husbands would do it either. Perhaps this is the right time to clip the articles on the matter and remind our spouses, significant others, roommates, and anyone else who is in a position to overhear or learn from our work habits, that the SEC is on a roll and the penalties can be significant. Not to mention the public embarrassment that occurs from having your name liked to insider trading in the public eye. Yes, it can happen to you. Just ask two wives in Silicon Valley.
It’s been a while since we’ve had major regulatory updates that impact stock compensation. Knowing that, I sometimes find myself scanning the horizon, looking for the next “thing” that’s going to have us examining our practices, changing procedures or implementing something new. This week my radar went into action when I heard that SEC Chair Mary Jo White had laid out quite a list of upcoming initiatives in a recent address.
Technology on the Brain
In spite of some significant cutbacks in technology dollars available to the SEC for long term initiatives, the SEC seems to still have advancement in this area on the brain. Chair White announced that the SEC has deployed a new analytical tool called “NEAT” (National Exam Analytics Tool) to help identify possible insider trading or other misconduct. This tool can identify red flags in a fraction of the time it took to do so in the past. I’m guessing this means that the wave of insider trading investigations and scrutiny is not over.
In the spring of 2013, the SEC issued guidance permitting issuers to use social media sites to communicate company announcements (see the NASPP Blog, May 16, 2013). White has now indicated that the SEC is broadly rethinking disclosure requirements for public companies and the role of technology in sharing information with investors. Last month the SEC recommended to Congress in a report (which was mandated by the JOBS Act) that the disclosure rules undergo comprehensive reexamination and reform. White shared some insight into the SEC’s thinking: “I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.” Saying it and issuing a report doesn’t mean new rules are imminent, but it is perhaps a hint of things to come. It seems within the realm of possibility that this type of reform may be fairly significant if and when it happens.
New Investigation Focus
White says that as the SEC wraps up investigations stemming from the financial crisis, attention is now shifting to other areas of enforcement – namely financial reporting fraud and accounting irregularities amongst others. This is a good time to make sure our controls, checks and balances are operating full force. While we can’t control other areas of financial reporting beyond stock administration, we can ensure that the areas under our realm can stand up to the possibility of an intense audit or investigation. This seems particularly wise, since Chair White also said that “The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.”
It looks like the SEC continues on their roll of assertive enforcement actions and attempt to progress into more modern times. Let’s see what the horizon holds in that regard.
I had a different blog topic in mind for today, but as I was literally putting this to bed, Congress voted to end the 16 day government shutdown and raise the debt ceiling – at least temporarily. We promised updates as things changed, so I’ll take this opportunity to assess the situation. Separately, there was a verdict yesterday in the high-profile insider trading civil case brought against billionaire celebrity Mark Cuban that will round out today’s news.
Government Back Online
As I write this, the word on the street is that the government will reopen “immediately”. I wasn’t quite sure what that meant, but based on news reports, it appears that “immediately” means today or at some point shortly thereafter. Since Congress voted late at night, I’m wondering if word will really get out that government workers need to return to work first thing today. But things should be back to the normal routine soon. I’ve heard that the National Zoo will be one of the last places to reopen, and they are presently saying Friday, October 18th will be the day. I guess we’ll know for sure that the government has reopened on a widespread basis when the panda cam at the zoo (which went dark in the shutdown – depriving many of us fans the ability to tune into the latest panda baby) is back on.
Areas where we’ll see some changes are:
The IRS should reopen and resume accessibility for taxpayer questions. Other pending activities, such as audits and refunds should move forward imminently as well.
The SEC’s filing systems were never shut down, so everything related to company filings should still be business as usual.
The poison ivy eating goats furloughed in New Jersey should be back to work soon. If you’re wondering what I’m talking about, see my blog on the Government Shutdown: Part 2 from a couple of weeks ago.
An Insider Trading Verdict
Billionaire Mark Cuban (owner of the Dallas Mavericks basketball team, star of TV’s Shark Tank) was found not guilty of insider trading by a jury yesterday. The SEC first initiated action against Cuban back in 2008, filing a civil suit alleging that he dumped his 6.3% stake in Mamma.com ahead of negative news, based on insider information. The initial lawsuit was dismissed by a judge, but the SEC persisted, and the case was revived on appeal in 2009. Cuban refused to settle and, after a tooth and nail 5 year fight in which Cuban refused to settle, the case went to trial, culminating with yesterday’s verdict. This case was part of a long string of cases brought by the SEC in recent years. The SEC has quite a track record of success in these cases. According to the SEC’s web site (yes, I obtained this information from their web site even in spite of the government shutdown), 161 entities and individuals have been charged with insider trading as of September 1, 2013, resulting in more than $1.53 billion in penalties. The Cuban verdict was one of few losses for the government in this long string of insider trading cases (though the SEC has lost some other high profile cases as well), which is part of what makes it newsworthy. Some prominent newspapers are already asking the question of whether this verdict will undermine the SEC’s movement to hold more individuals accountable for insider trading. It seems the SEC is not giving up, though. In a statement, the SEC spokesperson said that “while the verdict in this particular case is not the one we sought, it will not deter us from bringing and trying cases where we believe defendants have violated the federal securities laws.” All indications are that this long insider trading crackdown is yet to be over.
One message to employees continues to be that SEC action is not limited to larger cases like Cuban’s. In a recent blog, I highlighted another case that amounted to a mere profit of $7,900 for one guilty party, and consequences for an unintentional tipper that didn’t profit at all. While some cases get a lot of publicity, like Cuban’s case, it’s important to remember that no trade is too small or person too insignificant to escape SEC scrutiny.
I never quite know where the world of blogging will take me. This week I planned to blog on a completely different topic (that I will save for another time), when I found myself mesmerized by a recent Forbes article titled “Insider Trading Nightmare, the IBM Trade That Went Bad.” Attention captured, I just had to blog about it this week.
What More is there to Say?
I’ve spent many past blogs exploring the ins and outs of insider trading, including the recent SEC investigations surrounding the issue. So what more could there be to say on the topic? This week, the above mentioned article struck me because it centered on yet another recent SEC investigation, leading to yet another guilty plea. The interesting part? The amount of the profit was small – only $7,900, and there was no “hot” stock tip that led to the insider trading. In fact, the “tip” that started it all began with two friends venting about their jobs over brunch. It was the latter fact – that such an ordinary circumstance, one likely repeated millions of times a week around the country, touched off a sequence of events that included an international manhunt, an extradition, jail time, and a guilty plea. Whoa!
A Venting Session
The intricacies that made up this situation are many, so I will have to summarize. One day two friends met for brunch. Both friends discussed their jobs – one was a research analyst and the other was a lawyer with a firm that handled M&A transactions, amongst other things. The lawyer confided to his friend that he was overwhelmed with a project he was working on – IBM’s acquisition of SPSS, Inc., a Chicago software company. As the Forbes article says – “The partner on the job was tough and the lawyer’s lack of experience, combined with long hours at the office, had led to the open therapy session over brunch. There was no “hot tip”, or “You gotta buy these shares and get some for me;” there were just two kindred souls consoling one another about the misery of working for someone else.” I mean, how many times have employees vented about their jobs over a meal? I’m guessing that’s standard conversation amongst friends, right?
Too Tempting to Resist
A few days later, the research analyst friend realized what he had “learned” from his friend through the venting session – that IBM was acquiring SPSS. Another long story short – he took that information and bought shares of SPSS, Inc. Then, he passed along the information to friends, who shared the information with more friends. Eventually the SEC caught on to the trades (and the series of text messages back and forth between all involved documenting their fears about getting caught didn’t help). The interesting part is that the lawyer who unwittingly provided the “tip” wasn’t involved. He didn’t trade – and he may not have realized at the time that the information he shared with his friend over that brunch set off a chain of insider trading events.
Consequences, Consequences…
Ultimately in the end, the SEC had enough information to pursue charges. The friend who first received the innocent tip and passed it along (profiting $7,900) had fled the country by then (having originally been in the U.S. on a work visa) and was eventually caught in Hong Kong and extradited back the U.S., where he recently pleaded guilty to charges related to insider trading. The lawyer who vented about his job (but did not purchase any stock) lost his job. And the consequences go on.
The Moral of the Story is…
I’m thinking, there must be a moral here. What I’ve come up with is that we’ve got to get employees to equate insider trading to more than just big stock trades. Even though the “tipper” never mentioned trading stock, or made any kind of suggestion that his friend may profit from purchasing SPSS stock (as we typically envision when we think of insider trading), he still ultimately lost his job – presumably because he (even innocently) passed along material, non-public information in the first place. And, the SEC is demonstrating that no amount is too small – they will find you, and in this case hunt you down for insider trading. Surely the cost of finding the insider trading offender and extraditing him back to the U.S. far exceeded the amount that he profited from insider trading. This sends the message that a crime is a crime, and punishment will be pursued.
This lends a prime opportunity and example for employers to use in educating employees. Sharing material, non-public information is very risky – even if you didn’t intend for it to be misused. This is a strong message about safeguarding information – even from close friends and family – because you never know what happens to the information after it leaves your mouth. At the end of the day, even if you don’t act on it, even if you didn’t intend for it to be used for profit, you can still be held responsible. If not by the SEC, perhaps by an angry employer (as was the case here). If you have a hand in employee education about insider trading, contemplate using this example in your message. If you routinely come into contact with material, non-public information, consider this a lesson learned.
We do have many resources in our Insiders portal that can further enhance your understanding or aid in preparing communications.
Next week’s blog will feature photo highlights from our 21st Annual NASPP Conference in Washington, DC. Be sure to check it out!