Securities Attorneys Must Self-Regulate to Avoid Potential Insider Trading Pitfalls

by Laura Anthony, Esq. on October 30, 2009 in Insider Trading, Securities Attorneys, Uncategorized

Attorneys who accept stock as compensation from public companies need to be aware of a vigilant regarding their insider trading obligations. Before analyzing the dynamics of proper compliance in stock compensation scenarios, it is assumed that the stock received by the attorney was issued pursuant to a registration statement or valid exemption and is being resold also pursuant to a registration statement or valid exemption to registration.

Insider Trading

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information. Securities attorneys are in a unique position as they are often privy to material, non-public information regarding their public company clients.

The SEC prohibits insider trading in Rules 10b-5, 10b5-1 and 10b5-2 or the Securities Exchange Act of 1934, as amended. The law of insider trading is otherwise defined by judicial opinions construing these rules. Rule 10b-5 is the general anti-fraud provision under the Exchange Act. Rule 10b5-1 provides that a person can be guilty of insider trading if at the time of the purchase or sale, they are aware of material non-public information. The Rule also sets forth several affirmative defenses or exceptions to liability. In particular, the rule permits persons to trade in certain specific circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract or instruction that was made in good faith.

Confidential Information

Rule 10b5-2 clarifies how the misappropriation theory applies to insider trading. In particular, when a person is aware of confidential information and owes a duty of trust or confidence as to such information, such person is deemed to have misappropriated the information when they make a purchase or sale of securities while aware of such information. For example, when a person has signed a confidentiality agreement or is a party to an attorney/client or other trust relationship.

Securities attorneys can violate both theories of insider trading. Attorneys need to be aware of their knowledge of insider information both at the time of purchase and the time of the sale of the securities. When an attorney accepts stock as compensation, they have “purchased” such stock. That is, the attorney has made an investment decision to accept stock instead of cash for their services. Clearly when an attorney sells such stock on the open market, they have engaged in a sale.

Attorneys should exercise great caution in making the decision to accept stock as compensation from public company clients. Attorneys should systems and safeguards already in place to ensure absolute compliance at the time of accepting stock and at the time of sale. Particular care should be paid to the existence of pending transactions, or any other material non-public information that could impact the share price of the stock at a later date.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!


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