Traditional wisdom suggests avoiding politics and religion as conversation topics over the holidays. An autumn spate of SEC enforcement actions suggests a third conversation topic should be avoided: events at work. In August, we wrote about the dangers associated with confiding material nonpublic information to friends and family, cautioning that insider trading and tipping investigations, public disclosure of personal information, and civil or criminal charges could result. Since then, additional examples have emerged. To highlight the importance of not talking about nonpublic work events with friends and family this holiday season, we focus on SEC allegations involving three individuals who became ensnared in insider trading and tipping investigations as a result of what appear to have been innocent conversations with trusted loved ones.
The Corporate Executive. Sometimes the simplest circumstances cause huge problems. For example, a former executive of Aon Corporation, Inc. learned from a knowledgeable colleague, “on or about July 6, 2010,” that Aon would soon announce a merger agreement with Hewitt Associates, Inc. During a 12-minute telephone conversation on the afternoon of July 6, the SEC alleges that the executive confided this news to her husband. Shortly thereafter, the Aon executive instructed her husband by email not to “send any emails about what I just told you.” In a second email, she clarified, “[t]o anyone you work [sic] included.” Her husband replied, “I won’t, no need. I only wish we bought their stock!!!”
The following morning, the husband allegedly deposited $28,500 into a previously empty trading account and purchased 831 shares of Hewitt common stock for a total price of $28,476. Aon announced the merger on the morning of July 12, 2010, and that day, the husband sold the Hewitt shares for a profit of $10,241. If the SEC’s allegations are true and complete, it seems clear that the wife confided in her husband, who then used the information for his own purposes, trading without her knowledge. Now, the wife no longer works at Aon, and the husband agreed to accept, without admitting or denying the SEC’s insider trading allegations, a court-ordered injunction, disgorgement order, and civil penalty, totaling $20,766, including prejudgment interest. Communications between husbands and wives are generally not subject to government purview, and the wife’s confiding in her spouse, while also cautioning him not to circulate the information, hardly seems like a federal offense. But this case serves as a good reminder that loved ones are less likely to inspire an insider trading investigation if they have not been told corporate secrets.
The Young Extern. In other contexts, seemingly innocent comments about the impact of undisclosed work events on a young professional’s career can set the stage for trouble. For example, a young extern working at the Walt Disney Company mentioned to her boyfriend in the summer of 2009 that she might get an opportunity to work on a “really cool,” “high profile” project “that people would recognize right away.” While citing “confidentiality” when not disclosing the name of the entity involved, she described the project as something that would be great for her resume, although it would “be super tough, crazy hours and working with not such a great team.” Shortly thereafter, her boyfriend moved into her apartment, and she was staffed on Disney’s pending merger with Marvel Entertainment, Inc. The young extern talked with her boyfriend about whether she should delay her business school applications and complete her work on the acquisition so that her applications could include her reflections on the experience. By August 10, the SEC alleges she learned that the deal would be announced by Labor Day. Her boyfriend had moved to another city by this time, but they stayed in close contact, and she told him that they would be able to attend her friend’s wedding together without interference from the timing of the announcement.
The SEC’s complaint against the boyfriend never alleges that the young woman revealed that her project was a pending acquisition of Marvel. Rather, the SEC alleges that the boyfriend knew she was staffed in the corporate strategy department, working on mergers, acquisitions, and similar projects. The SEC’s complaint further alleges that the boyfriend learned from his girlfriend that Marvel was the target, but does not confirm whether he learned this by eavesdropping on his girlfriend’s conversations, viewing her electronic or paper documents, or talking with her. Whatever the means, the SEC alleged in detail the boyfriend’s pattern of Marvel trading that summer, which included “unusual” call option purchases and trades for his brother’s account, unbeknownst to the brother, who was serving in Iraq.
The boyfriend, who allegedly profited $192,496.61 for himself and his brother, is challenging the SEC’s allegations, and has even established a website at www.secfail.com disputing the SEC’s claims. Already, the young woman’s dating life, vacations, friends, and work relationships are now part of the public record, and she has likely spent significant time and money dealing with the government inquiry. The young woman has not been charged, and one interpretation of the facts suggests that her comments were innocently intended as updates about her life, nothing more. Even so, given the boyfriend’s litigation posture, the public drama will likely continue to unfold in the coming months. This should serve as a good reminder that even innocent comments can be combined to tempt some people to take extra steps and learn corporate secrets, creating fodder for a government investigation.
The Audit Partner. One final case now appears to have involved a husband confiding in his wife and brother-in-law, not knowing that illegal trading resulted from these disclosures. A year ago, however, the case looked differently, as the SEC charged that husband, a former audit partner, with tipping his wife and his brother-in-law about seven acquisitions planned by clients of his audit firm. The SEC also charged the audit partner’s wife with tipping her sister, the sister’s husband, her father, and the sister’s husband’s father, all of whom lived in London. Recently, the SEC and the audit partner’s wife agreed to a settlement after she pled guilty to obstruction of justice charges and was sentenced to eleven months in prison, and the SEC dismissed its charges against the former audit partner. The wife’s London relatives and three other individuals are facing criminal insider trading charges in the U.K. The complaint does not allege that the wife personally traded in the stocks, but individuals arguably may violate insider trading laws by tipping material nonpublic information, provided the tipper obtains a “personal benefit” from the tip (broadly interpreted to include even a gift of the information). Here, the wife agreed to pay a $1 million civil penalty as part of her tipping settlement, and her relatives in London, along with their tippees, are alleged to have profited more than $3 million through their trades. With the dismissal of charges against the former audit partner, no allegations remain that he illegally tipped his wife or his brother-in-law. Even so, family trauma has undoubtedly pervaded his life, and he was subjected to the stress and personal trauma of being named as a defendant in the SEC’s original enforcement action.
Avoiding discussions of politics and religion during the holidays may seem hard enough without adding a third taboo topic of conversation, but the three cases highlighted above emphasize that the risk of allowing anyone access to material nonpublic information – including close friends and family – is high, no matter how much one might trust them. The Aon executive undoubtedly believed that she could trust her husband; the Disney extern surely believed that she was acting with the utmost discretion when she only hinted at the subject matter of her project; and the audit partner certainly trusted his wife and therefore felt safe confiding in her. Presenting factual context to the SEC Staff and having valid defenses to the government’s legal theories hold the potential to avert claims, but even dealing successfully with an investigation can be frustrating, time consuming, expensive, and intrusive. The audit partner’s ultimate vindication in not having been charged for illegal trading and tipping holds little comfort during years of government investigation and public allegations against loved ones.
Because the SEC builds its cases on circumstantial evidence, if unusual trading occurs in the penumbra of a corporate employee or service provider who had access to material nonpublic information, an investigation will delve into very personal areas. Telephone calls, electronic communications, personal work habits, travel records, relationship details – all may be explored by the government. Developing a clear and consistent policy with friends and family members about not disclosing work-related information can minimize risk, as can not sharing electronic devices or passwords that can access work-related materials, not making paperwork easily accessible, and taking work-related telephone calls in private. These measures can prove difficult during holiday periods when families and friends gather, travel, and stay together in part to renew close relationships, but protecting loved ones from temptation can save substantial heartache down the road. So take extra care this holiday season, and always, to protect confidential information, even – or maybe especially – from loved ones.
On December 14, 2011, at 1:00 PM Eastern time, the American Bar Association Business Law Section and ABA Center for Continuing Legal Education will host a webinar addressing the topics discussed in this release. Dixie Johnson, an author of this article, will be moderating. Please click here for details.