Investment Fund Law Blog
The Securities and Exchange Commission (“SEC”), on March 31, 2014, announced insider trading charges against two men who allegedly traded on information they overheard from their respective wives. On April 3, 2014, the SEC announced charges against two friends who traded tips related to an impending acquisition deal. The spouse cases and friend cases differ with respect to the culpability of the tipper. In the friend cases, the tipper and the tippees were all aware that they were breaching their duties to maintain the information and not trade on it. In the spouse cases, the wives were unaware of their husbands’ intentions and actions and had previously informed their husbands of the prohibition on trading on any information gleaned from them.
Friends
The SEC has charged three friends who worked together to trade on nonpublic information related to the acquisition of The Shaw Group by Chicago Bridge & Iron Company. John W. Femenia was employed by a major investment bank from which he obtained the information about the impending acquisition. Femenia told his friend Walter D. Wagner the nonpublic information and Wagner passed that information along to Alexander J. Osborn. Osborn and Wagner proceeded to invest substantially all of their liquid assets based on the information from Femenia. When the public announcement was made, Wagner and Osborn profited approximately $1 million collectively.
Femenia was charged in December 2012 for knowingly being the source of nonpublic information to a whole insider trading ring.
Wagner settled with the SEC by disgorging all illicit profits and a parallel criminal action against him was announced on April 3rd. The SEC case against Osborn is ongoing.
Family
The SEC charged two men with insider trading, in unrelated cases, for illegally trading on information they obtained from their wives. In each case, the husband overheard his wife on a business call in which market moving information was discussed. The SEC found that both men were aware of the prohibition on trading on the information obtained from their spouses and knowingly violated the duty and profited from the information.
Both men have settled their cases with the SEC and each has agreed to pay more than double the profits realized.
The lessons from these cases apply to any person who may obtain material nonpublic information about public entities that they have a duty to protect. Investment advisers and broker-dealers should be sure their insider trading training and policies address the friends and family issue directly. Employers should remind their employees to be cognizant of who can overhear their phone conversations or potentially see their written communication with clients or co-workers and take as many precautions as practicable to prevent the insider information from being used illegally.