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.
-Jennifer
Tags: insider trading, SEC, sec investigation
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!
-Jennifer
Tags: insider, insider trading, sec investigation