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US Securities and Corporate Governance

Insider Trading

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Second Circuit Case Shows How Confidentiality Pact May Support Insider Trading Charges

A recent decision by the U.S. Court of Appeals for the Second Circuit shows how an investor’s entering into a confidentiality agreement with an issuer of securities may support insider trading charges against the investor.

The decision, United States v. Kosinski, No. 18-3065 (2d Cir., Sept. 22, 2020), did not create new law in the Second Circuit.  But the court did reaffirm its earlier holding that by agreeing to keep confidential  information provided by an issuer, a trader had taken on a fiduciary-like duty to the issuer sufficient to support insider trading charges under section 10(b) of the Securities Exchange Act of 1934.  And it rejected the argument that to create the requisite duty, the agreement needed to have a no-trading provision as well as a confidentiality provision.

What creates a sufficient duty has been a hotly disputed issue in insider trading law in recent years.  It elicited heightened attention during the SEC’s case against billionaire Dallas Mavericks owner Mark Cuban, where the SEC’s charges were based in part on an alleged promise by Cuban to maintain confidentiality as to information provided by issuer Mamma.com.

But Cuban’s case did not resolve that issue as a legal matter.  Rather, the U.S. Court of Appeals for the Fifth Circuit, without addressing all of the legal questions posed,  held that the SEC had alleged enough to support a finding that Cuban had agreed both to maintain confidentiality and not to trade, so that the case could go to a jury.  It did,

Is it safe to open our trading window in the midst of a pandemic?

Toward the end of the first quarter of 2020, many public companies imposed a blackout period, during which directors and specific employees deemed insiders could not trade the company’s stock. The obvious purpose of these blackout periods is to prevent insiders from trading at a time when they are likely to have material nonpublic information about the soon to be completed quarter.  This year, insiders were also likely to have material nonpublic information about the early impact of the coronavirus on their business, including demand, supply chain, cancelled orders and the costs of complying with stay-at-home orders.  In an earlier alert, we noted that trading while in possession of early visibility into the impact of the coronavirus on the business could be deemed insider trading, and that the SEC expressed concerns about trading under these circumstances.

Typically, public companies plan to open the trading window to permit insiders to trade within a day or two of issuing their earnings release for the quarter.  Even in these uncertain times, many public companies may be able to maintain their normal protocols.  As they consider this issue, public companies should be sure that their earnings release contains sufficient disclosure around the impact of coronavirus on the business and management’s expectations of the impact going forward.  For some companies, waiting until the Form 10-Q is filed to open the window may be advisable.  For others, including an expanded earnings release that provides more fulsome analysis to the market about the coronavirus impact and then setting out

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