BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

US Securities and Corporate Governance

Insider Trading

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Beware of Insider Trading Whistleblower Scams

What You Should Do First with Anonymous Reports

There has recently been a rash of similar anonymous whistleblower tips to public companies, each claiming that an unnamed company supervisor boasted about reaping profits from insider trading. The number of public companies receiving very similarly worded anonymous reports leads to the conclusion that they may be hoaxes. While the apparent scheme’s ultimate goals are unclear, companies should be very cautious about engaging with sources of such anonymous complaints, especially given the risk of ransomware and other forms of cyberattack. One theory is that these reports may be the first step in a sophisticated campaign to inject ransomware or facilitate other forms of cyberattack.

These complaints present a challenging development for ethics and compliance reporting systems, since they require companies to quickly assess whether a whistleblower report is bona fide and address issues at the intersection of ethics policies and cybersecurity controls.

Several things should be considered by a company that receives a confidential whistleblower report alleging insider trading that does not name the employee involved:

  • The most immediate concern is determining whether the report appears to be authentic and legitimate (regardless of merit), and not a hoax or some form of cyberattack. Anonymous submissions should be handled in accordance with the company’s data and cybersecurity policies and procedures, since files and links are potentially dangerous vectors for cyberattacks. A senior IT employee should review the submission (without seeking to identify the purported whistleblower) and consulted in connection with any engagement

Wait Continues for Any SEC Public Response to Senators’ Urgent Call for Rule 10b5-1 Plan Reform

The wait continues for any public response from the SEC to a recent letter from three Democratic members of the Senate Committee on Banking, Housing, and Urban Affairs, including Senator Elizabeth Warren, urging the SEC to (1) consider reforms to prevent what the senators identified as abusive 10b5-1 plan practices and (2) improve disclosure of and enforcement relating to such plans.

Senators’ SEC Requests for Information.  The senators asked the SEC to respond to the following questions by Monday, February 22, 2021:

  • What actions does the SEC currently take to ensure that 10b5-1 plans are compliant with the Commission’s current rules and requirements?
  • How many enforcement actions has the agency taken with regard to 10b5-1 plans in the past five years? Please provide a list and summary of all such actions.
  • Has the SEC taken action to require a “cooling off period” between the adoption or amendment of any 10b5-1 plan and any stock sales under that plan?
  • Does the agency intend to require that 10b5-1 plans are disclosed publicly and posted online in advance of any trades made under that plan?
  • Has the SEC considered or evaluated modifications of regulations to ensure that 10b5-1 adequately covers “short-swing” purchases?
  • What other actions has the SEC taken or are under consideration to prevent the abuse of 10b5-1 plans?
  • In the letter, the senators said they believe reforms are necessary in large part because “new evidence indicates that executives – especially those in the health care industry – are abusing these

    Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

    Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

    Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

    Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

    Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

    Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

    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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