One of the worst things about insider trading is how frequently people are apparently willing to betray the trust of their friends and family. It’s just uncanny how often you see situations involving husbands and wives, parents and children, and longtime friends who trade on information provided to them in confidence. The SEC recently announced a settled enforcement action that allegedly involved another example of this kind of conduct. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, while Brian Fettner was a guest in the home of a longtime friend who was also the general counsel of Cintas Corporation, Fettner surreptiously viewed documents contemplating an acquisition of G&K Services Inc. by Cintas. Based on that information and without telling his friend, Fettner then purchased G&K Services stock in the brokerage accounts of his ex-wife and a former girlfriend, and persuaded his father and another girlfriend to purchase G&K shares. The complaint further alleges that after Cintas and G&K announced the merger on Aug. 16, 2016, G&K’s stock price jumped more than 17 percent, resulting in illicit profits from Fettner’s misconduct of more than $250,000.
The defendant consented to a permanent injunction prohibiting him from future violations of Rule 10b-5 and agreed to pay a penalty of approximately $250,000. Despite the outcome, if you read the complaint, you may wonder at first what separates what this guy did from Barry Switzer’s infamous eavesdropping? After all, the SEC alleges that Fettner “surreptiously viewed” documents that were left in relatively plain sight in a room that he seems to have entered with his friend’s permission.
As a recent blog from Keith Bishop points out, the difference may lie in the nature of the relationship between the parties. Under the misappropriation theory endorsed by the Supreme Court in U.S. v. O’Hagan, 521 U.S. 642 (1997), a person who misappropriates material nonpublic information from another may violate the law even without a duty to contemporaneous traders. It’s enough that there be some kind of obligation not to use the information – and the existence of “relationship of trust and confidence” with the source of the information will do the trick.
While Switzer and the person he overheard were merely casual acquaintances, the people involved here were close friends since middle school – and the SEC’s complaint alleged that was sufficient to establish the kind of relationship whose breach could trigger insider trading liability. And in this excerpt from his blog, Keith says that’s a conclusion you can add to the list of things that don’t make a lot of sense about insider trading law as it exists today:
The SEC’s allegations illustrate how the misappropriation theory of insider trading has become completely unmoored from the purposes of the securities laws. Congress did not enact Section 10(b) with a view to protecting guest-host relations. It is absurd that innocence and guilt turns on whether the guest and the host met in middle school or were only recently introduced.
If you stop & think about the implications of misappropriation theory, then maybe it isn’t all that uncanny about how many of these cases involve friends & family – the way the law has evolved, it’s those relationships that give insider trading allegations force.
-John Jenkins, TheCorporateCounsel.net May 13, 2019
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