New York partner John Carney, formerly the Chief of the Securities and Health Care Fraud Unit in the U.S. Attorney Office and Senior Counsel in the SEC's Division of Enforcement in Washington, D.C., and associate Jimmy Fokas, who served as a Senior Counsel in the SEC's Division of Enforcement in New York, co-authored an article for the July 25 edition of the New Jersey Law Journal titled, "Insider Trading and Company Counsel: Why More Attorneys are Being Charged and What Companies Should Do to Prevent It."
The article focuses on the increase in insider trading cases and "the fact that a significant number of the cases brought this year involve alleged misconduct by attorneys." The authors detail the two primary theories of liability with regard to insider trading: The Classic Theory and the Misappropriation Theory, and the SEC's "powerful civil arsenal of potential penalties it could seek against those who commit insider trading."
According to Carney and Fokas, "The SEC and DOJ have been particularly aggressive in the past year prosecuting insider traders. A sampling of cases from the first six months of 2007 and the unique factual situations therein, provide clear notice that enforcement is on the rise and that attorneys are increasingly finding themselves on the wrong side of an enforcement action script."
The article cites a number of these recent cases and the authors note, "The increase in number of high-profile insider trading cases involving attorneys and senior corporate executives who should have known better, underscore the need for companies to strengthen and modernize their compliance programs to avoid the negative publicity, reputational harm and significant costs of an insider trading scandal."
Carney and Fokas detail some of policies and procedures companies employ to prevent the misuse of confidential information and to adequately monitor employee trading, and suggest some additional methods which could be employed.
The authors conclude: "As the SEC and the DOJ both continue to make insider trading an enforcement priority, companies must reassess their policies, procedures and training and make appropriate changes to prevent the misuse of material nonpublic information. The costs of not taking proactive steps to strengthen procedures and training before a problem arises include the significant costs of the investigation, potential regulatory and criminal sanctions to key employees and the incalculable cost of reputational harm to both the employee and the company."