We think of SEC documents as a snore, but the complaints issued by the SEC’s enforcement division can be more interesting than you think. Today I look at a recent complaint related to insider trading that illustrates how important it is to make sure employees understand the laws in this area.
In the complaint (SEC vs. Toby G. Scammell), the SEC alleges that Toby Scammell, an employee of an investment fund, found out about Disney’s acquisition of Marvel Entertainment before the deal was announced publicly (by sneaking a look at his girlfriend’s Blackberry), purchased call options on Marvel, and then sold them at a 3,000% profit after the deal was announced.
This is a good case for me to write about because, as far as I can tell from the complaint, Disney wasn’t in any way at fault for this. Scammell didn’t work for Disney and his girlfriend, who did work for Disney as an extern, didn’t voluntarily give the information to him. So I don’t have to suggest that an NASPP member had less than perfect procedures (I’m sure all of you are perfect anyway).
There are many things that are interesting about this case and there’s definitely some entertainment value in reading the complaint (or at least the SEC’s summary of it). What I find most interesting is that Scammell isn’t some high level executive or celebrity (a la Martha Stewart) and, although he realized a 3,000% profit, his investment apparently wasn’t that much to begin with, because that only worked out to around $200,000. On the surface, the whole thing hardly seems worth the SEC’s time, but not only is the SEC pursuing the case, it has garnered a fair amount of attention from the media.
And this is exactly why you have an insider trading compliance policy and why you want to make sure all your employees, not just your executives, understand it. Even if your employees aren’t subject to black-out periods and don’t regularly have access to material, non-public information, it is important that they understand what insider trading is, that it is prohibited by law, what the penalties could be, and your company’s insider trading compliance policy. You just never know what someone is going to overhear or come across–a confidential document could be left out on a copier, for example.
Insider Trading = Bad News for Everyone
Here’s why you don’t want your employees to be prosecuted for insider trading:
- It’s bad news for your employees. They could pay stiff penalties to the SEC and/or face criminal prosecution (and have to pay back all the money they made on the trades, of course). They might also end up being fired for cause, since this is a common provision in insider trading compliance policies. Even if they aren’t guilty–and Scammell has been vocal about professing his innocence–their legal fees are likely to be significant (unless they opt for a public defender).
- It’s bad news for the company–literally. The SEC prosecuting your employees for insider trading is likely to generate a lot of unwanted media attention, as evidenced by the flurry of articles, blogs, etc. on this case (which I am now contributing to).
- It’s more bad news for the company. If the SEC is successful in prosecuting your employees for insider trading, then they could potentially focus their attentions on the company as well. Your insider trading compliance policy demonstrates that you actively discouraged employees from insider trading and could protect the company from an SEC enforcement action.
Your insider trading compliance policy is not just ceremonial or a formality. It is an important policy that protects both the company and its employees. A key part of your stock plan education program is to make sure employees understand this policy, even if they aren’t subject to black-out periods, and understand the types of transactions that are prohibited by law and by your policy.
For more information on insider trading compliance polices, check out this month’s Compliance-O-Meter quiz.
NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
- Register for 19th Annual NASPP Conference (November 1-4 in San Francisco).
- Make your hotel reservations for the NASPP Conference–don’t wait, the hotel is almost out of rooms!
- Check out the NASPP’s Facebook and Twitter pages.
- Complete the Compliance-O-Meter quiz on Insider Trading Compliance Policies.
- Take the “Question of the Week” challenge.
- Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today).
- Say hello to our newest chapter president, Jeannette Wheeler of OptionEase, at the Orange County chapter meeting on September 26.