Insights

Eavesdropping and Insider Trading

June 24, 2014

Management Liability/D&O

“Spouses and other family members may gain access to highly confidential information about public companies as part of their relationship of trust. In those circumstances, family members have a duty to protect and safeguard that information, not to trade on it.”

This quote is from Jina L. Choi, director of the San Francisco Office of the U.S. Securities and Exchange Commission (SEC). The occasion? The March announcement of two separate, unrelated cases in which a husband traded on material, non-public information possessed by his wife as a result of her employment with a public company.

In both cases, the information that prompted the illegal insider trading was gleaned by overhearing business conversations the wives were having with colleagues. In both cases, the husbands paid substantial fines. And, in both cases, the wives escaped liability because they had specifically advised their husbands not to trade on their employers’ stock.

Make no mistake: the SEC takes all forms of insider trading seriously. And while everyone knows that an employee cannot make trades while in possession of material, non-public information, sometimes folks forget that these same rules apply to everyone in the employee’s household.

As demonstrated by the two spouse cases described above, the SEC does not go easier on family members than it would on the actual public company employee. In fact, in both cases, the husbands agreed as part of their settlement with the SEC to disgorge the profit gained and pay a fine in that amount as well (totaling $280,000 in one case, and $300,000 in the other).

The lesson here? If you’re a director or officer or other public company insider who receives material non-public information that could be discovered by family members or household members – including spouses – it’s absolutely critical to remind them not to trade while in possession of this information.

This reminder applies both to the stock of your company as well as the stock of other companies you learn about as a result of working for your company.

I write more about this topic, including more details about the cases involving the husbands’ insider trading, in the article, “No Tipping, No Stealing, Says the SEC” at InsideCounsel.com.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

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Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn