Expert Witness Advice on Defending Securities Litigation Involving SEC Rule 10b5-1 Insider Trading Issues
A renowned financial expert witness, former high-level banking and investment portfolio management executive and board member, banking regulator, and nationwide consultant to 80+ banks and investment management companies explains important nuances of how non-attorney investment and banking professionals view nationwide industry standard policies, practices, principles and procedures involved in defending alleged insider trading litigation claiming a violation of the SEC’s Rule 10b5-1.
Based upon my experience handling and managing billions of dollars of bank investments for many years including the investment of the bank’s own funds as well as the investment of trust, estate, and pension funds owned by bank customers and held by the bank in a trustee or other fiduciary capacity, it is my observation and is my opinion that the securities, investment management, and banking industries’ nationwide industry standard policies, practices, principles and procedures regarding insider trading matters conform with the Securities and Exchange Commission’s requirements as stated in Rule 10b5-1 that was enacted in 2000.
This particular rule has to do with insider trading, and as a non-attorney expert witness, I have observed that those rules have fluctuated some in recent years as the regulators and the courts wrestle with implementing workable and fair rules. There still are some defensible positions that are available to defendants involved in alleged insider trading securities litigation.
To me as a non-attorney who has for many years managed portfolios totaling billions of dollars, the crux of what Rule 10b5-1 covers is the purchase or sale of a security by an insider that, by virtue of his position, has material nonpublic information about the security on which to base his investment decision, placing him in a position of unfair advantage when compared to those who do not have the same information. This is considered a breach of the insider’s fiduciary duty to the issuer or its stockholders as well as a breach of a duty of trust or confidence that is owed to the issuer of the security or its shareholders, or to anyone else that is a source of the inside material nonpublic information.
Possession of Insider Information
A question that often arises in alleged insider trading cases and that is still unsettled is whether it is a violation of Rule 10b5 if the insider had “possession” of sensitive nonpublic information whether or not the insider “used” the information in his decision making regarding the investment decision in question.
Some courts hold the opinion that an insider violates Rule 10b-5 simply by trading while in "possession" of material nonpublic inside information, while other courts try to determine whether the insider actually used the material nonpublic inside information in their investment decision making process. Not being an attorney, it is beyond my capabilities to determine what any court might do in this situation.
From my experience and understanding of the requirements under which portfolio managers must operate, it is my opinion as a non-attorney that the following Affirmative Defenses are available:
● Affirmative Defense: It’s a problem if the inside seller was aware of the inside information (possession); so conversely, it should be an affirmative defense if you can show that the inside seller was unaware of the inside information.
● Affirmative Defense: Demonstrate that the inside information was not a factor in the trading decision. Examples: when the trade was made pursuant to a contract, instructions given to another, or a written plan [paragraph (c)].
● Affirmative Defense: Demonstrate that the inside seller planned the trade before he learned the inside information.
● Affirmative Defense: Show that there was no securities transaction since Rule 10b5-1(c) requires violating trades to be irrevocable, so there can be no liability for insider trading without an actual securities transaction.
● Affirmative Defense: You can cancel a planned trade, so no trade exists.
• Affirmative Defense: A person who does not know material nonpublic information making an investment decision on behalf of another person who does know material nonpublic information but not communicating that information to the person making the investment decision should not be considered to be in violation of Rule 10b5.
• Affirmative Defense: Demonstrate that the person or entity making the investment decision had in place reasonable policies and procedures to insure that individuals making investment decisions would not violate the pertinent laws that prohibit trading on the basis of material nonpublic information.
● Note that Paragraph (c)(1)(i)(C) Denies the Affirmative Defense to offsetting or hedged transactions since, in those cases, there would still be an actual trade.
© 2012 by Don Coker. Serving clients worldwide from his Atlanta metro area office.
ABOUT THE AUTHOR: Banking and Investment Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.
Clients have included numerous individuals, 80 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.
B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School. Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.