Knowing an Insider and Trading Is Not Necessarily “Insider Trading” | Bracewell LLP

Coaching your daughters basketball team with your brother-in-law and then profiting later from buying stock in your brother-in-law’s company is not in itself an insider trade. This seems fairly obvious. On Monday, December 13, 2021, U.S. District Judge Claude Hilton agreed in Northern Virginia when, during trial, he found that the Securities and Exchange Commission (“SEC”) had not provided sufficient evidence that Christopher J. His assistant/in-law’s company formed an illegal internal trade.1

Clark’s trading was flagged as suspicious because, as the Securities and Exchange Commission argued, his trades had an “unlikely success rate.” The Securities and Exchange Commission (SEC) took the position that Clark’s trades were too good to be true, along with the fact that Clark spent too much time with his son-in-law and borrowed money to make the disputed trades, clearly indicating insider trading. Rather than providing testimony or other direct evidence, the SEC’s case relies largely on identifying statistical monitoring tools for trades as “highly suspicious.”

A company insider who provides material non-public information to a family member or friend who then trades on the basis of that information is required to trade insider in violation of Section 10(b) of the Securities and Exchange Act and the Authority’s Rule 10b-5.2 A “tippee” like Clark can also be held liable for trading in material non-public information if they knew, or should have known, that the information was provided to them in violation of a fiduciary duty.3

The alleged “insider” in Clark’s case was his son-in-law, the company’s controller of CEB Inc. , a company that provides business support services to executives. The government alleged that Clark’s brother-in-law provided Clark with material non-public information about CEB’s upcoming $2.6 billion merger with Gartner, a S&P 500 technology research and advisory company. His brother-in-law was sued in the same complaint that Clark filed in December 2020, but instead of taking his case to trial, he settled with the Securities and Exchange Commission for $240,000 without pleading or denying his guilt.

Not all information shared by an insider in the Company to friends and family constitutes “material non-public information,” however. Suppose, for example, that Clark noticed that his son-in-law was showing up to basketball practice more tired and tense than usual, or that while apologizing to his family for needing to get away from a holiday dinner, his son-in-law said something like “Work has been crazy lately.” In this assumption, Clarke’s remarks about the pressures of his son-in-law or his knowledge that things were “crazy” at work could lead to the conclusion that the CBE would merge with a larger company. But it could also lead to the conclusion that the CBE was in financial trouble, or that Clark’s single job could be in trouble.

Moreover, Clarke’s explanation of his son-in-law’s behavior does not quite fit with the mosaic theory4 Insider trading. In order for the trade to conform to the Mosaic theory, the in-laws had to provide small bits of non-public information which, when combined with other facts known to Clarke, could collectively be considered non-public material information (and form the basis for improper deals). An explanation of Clarke’s behavior certainly does not fit with the traditional tiper/tippee theory, which would have required the in-laws to knowingly or recklessly provide Clarke with information that he knows is both material and not public.

However, if the Securities and Exchange Commission had provided evidence that Clarke had indeed received material non-public information from his brother-in-law, Clark’s case might have ended differently. The Securities and Exchange Commission recently indicted three individuals in a similar set of circumstances in which Florida businessman David Schuttenstein and his accomplices allegedly shared material non-public information given to Schuttenstein by his cousin and uncle, both of whom were on the board of several. publicly traded companies. The SEC has yet to prove its case against Schuttenstein, but unlike Clark’s case, this complaint alleges that the SEC had real evidence that the cousin and uncle were Schuttenstein’s source of information.

Clark’s case emphasizes that insider trading fees should not depend solely on conclusions. Judge Hilton did not see any testimony, texts, emails, or other direct, or even circumstantial, evidence that Clark’s brother-in-law transmitted material and non-public information to Clark – instead, the judge merely referred to “the suspicious Securities and Exchange Commission talk.” Very trade.” Judge Hilton added, in this case, “[t]Here there is simply no circumstantial evidence here that leads to the conclusion that he received insider information.” The ruling is still subject to appeal, but Clark’s case makes clear that the SEC’s statistical evidence is not everything—the SEC’s statistical evidence is not supported ( SEC).

The case also reimposes the value of internal trading compliance policies and procedures and training of company personnel, so that companies and their employees can demonstrate that they understand their duties to protect confidential information. Policies and procedures may be of increasing importance in the near future, as newly proposed amendments to the rules of the Saudi Electricity Company include requirements that companies annually disclose their insider trading policies and procedures. Clarke may have evaded liability in this case, but the line between “insider trading” and “insider knowing and trading” remains thin, and employees must be well trained to avoid disclosing non-public information.

1. The deals in question were Clark (and his son) buying out-of-the-money options on CEB stock. The Securities and Exchange Commission complaint details Clark’s trading activity as follows:

“In 15 transactions between December 9, 2016 and January 3, 2017, Clark purchased 377 short-term, cashless CEB call options for $33,050. Clarke also directed his son to purchase similar options. Five times, it represented Clark purchased 100% of the volume of the options chain for that day. On four of the remaining five occasions, the only other buyer of those call options was Clark’s son.”

2. Salman vs the United States, 137 S. i. 420, 427 (2016).

3. Dirks vs SEC463 US 646, 660 (1983).

4. Mosaic theory involves collecting general, non-public and non-material information about the company and by integrating it and transforming that information into material non-public information about the company.

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