Most insider trading violations are not technical but rather involve black-hearted fraud. Robert Khuzami, Director of the SEC's Division of Enforcement, recently described such a case in his remarks discussing 13 additional civil defendants in the widening Galleon insider trading investigation.
Lost in the noise of the hedge fund manager's headline-grabbing behavior is a more prosaic figure whose sad tale bears repeating as a reminder of the law governing insider trading and related corporate policies.
Robert W. Moffat, Jr., a Senior Vice President at IBM prior to his indictment, is a named defendant in the SEC's original civil complaint against the Galleon insider trading ring. Moffat reportedly disclosed material nonpublic information regarding multiple public companies to Danielle Chiesi, a portfolio manager at New Castle Funds. Chiesi, in turn, traded on the information and was recorded discussing Moffat and his information with the alleged ringmaster, Raj Rajaratnam of Galleon Management, LP. For his role, Moffat has also been charged with conspiracy to commit securities fraud, a criminal offense punishable by up to five years in prison or $250,000. IBM placed Moffat on leave after his arrest, and at the beginning of the month, announced via employee email that he is "no longer an employee of IBM."
In the words of the SEC:
"[Moffat and certain co-defendants] obtained material nonpublic information from their respective employers and/or as a result of a confidential or other relationship of trust and confidence with the public company issuers whose securities were traded based on their tips. . . .
"[E]ach breached a fiduciary duty, or other relationship of trust and confidence, by providing material nonpublic information to their respective tippee or tippees, and each knew, or was reckless in not knowing, that the information they conveyed was material and nonpublic."
It is noteworthy that, while Moffat is alleged to have tipped with the expectation of receiving a benefit, neither complaint alleges that he in any way benefitted financially from the use of the information he tipped to someone believed to be his friend. Similarly, Moffat's attorney denies that his client benefitted financially from the alleged trading and has stated that Moffat was unaware of the insider trading.
Perhaps the trial will ultimately reveal Moffat's true motivation, but with no apparent financial benefit to himself, it could not have been greed. As evidenced by the indictment and SEC civil complaint, the government's view is that one does not have to receive a financial benefit to violate the insider trading laws. Further investigation may indicate that the revelation of confidential information enhanced Moffat's standing with his friend – a so-called "reputational" benefit.
The criminal complaint recounts numerous wiretapped phone calls involving Moffat and information he provided regarding earnings and material developments at IBM, Sun Microsystems, and AMD, all of which he obtained through his role at IBM. The criminal charge focuses on Moffat's violation of IBM's Business Conduct Guidelines, which embody his fiduciary duties. In short, the Business Conduct Guidelines that apply to all IBM employees provide:
|"In the course of your employment with IBM, you may become aware of information about IBM or other companies that has not been made public. The use of such nonpublic or ‘inside' information about IBM or another company for your financial or other benefit not only is unethical, but also may be a violation of law."|
The IBM Guidelines go on to describe the applicable laws and regulations and provide a detailed definition of material nonpublic information. Moffat's tale is a persuasive and real-world reminder of the gravity of violating such a policy, which is itself based on applicable law.
For corporate counsel, senior management, and service providers alike, the take away points from Moffat's situation are:
- Train all potential recipients of material nonpublic information on the requirements and prohibitions set forth in the company's insider trading and nondisclosure policies. For larger companies, this training is often performed electronically, without a check on the viewers' attention. Consider having face-to-face training, on a regular basis, to focus your employees and stress the paramount importance of these policies for both the company and themselves.
- Make a habit of "just in time" reminders to personnel who are regularly exposed to material nonpublic information. Such persons include, for example, a public company's financial reporting team and any personnel, whether located inside or outside the company, possessing knowledge of a material transaction.
- Remind personnel of the breadth and depth of the company's insider trading and nondisclosure policies. A common misperception is that such policies only apply to senior management or certain persons regularly "in-the-know." It is important to remind the entire workforce that anyone who comes into possession of material nonpublic information is equally accountable and that it is not necessary to trade. Unauthorized disclosure alone is a problem. Violations by high-profile executives like Moffat may garner more publicity, but the SEC has pursued insider-trading prosecutions against secretaries, other clerical employees and proofreaders. No one is exempt.
Furthermore, insider trading laws, and consequently most insider trading policies, don't just apply to information about the employer company, but also apply to information obtained in the course of employment about other companies.
- Consider forwarding a copy of this article as a timely reminder. Moffat's case is an unfortunate example that sharing material nonpublic information in violation of corporate policy can bring a promising career to ruin.