Securities Law & Corporate Counsel Blog

On January 25, 2013 the Securities and Exchange Commission ("SEC") charged a financial adviser in Floridawith illegally "tipping" his friend about inside information he acquired regarding the upcoming sale of a pharmaceutical company in exchange for $35,000 and a jet-ski dock.  The friend (along with another individual whom the friend informed of the sale) made $708,327 in illicit insider trading profits in just two days.  The SEC is alleging that the financial adviser learned this information from his supervisor, who in turn was informed by a client of the advisory firm who served on the pharmaceutical company's board of directors.  The SEC is seeking disgorgement of all ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction against the financial adviser.  Additionally, the U.S. Attorney's Office for the District of New Jersey announced that it will seek criminal charges in a parallel action against the adviser. 

This recent action shows that an individual need not purchase securities directly upon receiving inside information in order to violate insider trading rules.  Under a theory commonly referred to as the "misappropriate theory," it is not the insider himself trading on the information (the "tipper"), but rather, someone that he tips (the "tippee").  Liability attaches if the tipper/insider breaches a duty by passing on the information, and the tippee knows, or has reason to know, that the tipper/insider would benefit personally from the tip (for more information on this and other insider trading rules please review JLG's August 2012 Legal Risk Management Tip).  Here the adviser, or tippee, breached the fiduciary duty he owed to the advisory firm's client by disclosing the inside information to his friend.  Conversely the friend, or tippee, knew that the adviser would benefit from the tip by receiving cash and a jet-ski dock.  Thus, assuming the allegations are true and can be proved, liability for insider trading under the misappropriate theory will attach in this instance.

For those in the financial industry, having effective insider trading policies within the organization is mandatory.  It is important to remember that training and education on these policies should extend to all employees in order to protect both the firm, and it's clients.  For further information on this, or other related topics, please contact us at [email protected] or (619) 298-2880.