Lessons from Recent Insider Trading Cases

02/01/2010

Leaks of material non-public information from a publicly traded company can give rise to insider trading by recipients of that information. In most cases, the leakage occurs without any wrongful action by the company whose securities are implicated. Instead, it often is the result of an action by a misguided employee or company outsider who obtains and then trades on market sensitive information. It can also result from an employee’s reckless and even inadvertent disclosure of information, which often stems from a failure to appreciate the legal ramifications of their actions.

Yet, when the insider trading is revealed and the source of the leak is identified, the company suffers in the media and its customer relationships may be harmed. Moreover, the company may incur significant expenses in connection with the lost time and costs associated with an SEC enforcement action and possible litigation. It can also lead to an independent violation by the company of SEC rules. So, how can a company limit this risk?

Recent SEC enforcement actions, including those against Mark Cuban and persons associated with the Galleon Group, provide some guidance on how companies can act to minimize risks. In particular, companies should consider new internal compliance policies and procedures, should restrict and manage their employees more effectively, and should reassess their relationships with, and how information is provided to, outside parties such as investors, professional advisors and contractors.

Reproduced with permission from Headnotes, a publication of the Dallas Bar Association, February 2010, Vol. 34, No. 2. To read the full article, click on the PDF linked below.

Related Practices

Email Disclaimer