Barclays Bank Settles SEC Insider Trading Case Involving “Big Boy Letters”

The SEC continued its aggressive campaign against insider trading today, filing a settled civil injunctive action against Barclays Bank and one of its directors, Steven J. Landzberg.  This is the latest in a series of aggressive insider trading cases brought by the SEC this year.  These cases are part of what appears to be the most aggressive insider trading campaign brought by the agency since the late 1980’s, when cases were brought against Dennis Levine, Ivan Boesky and others. SEC v. Barclays Bank Plc, et. al, Case No. 07 CV 4427 (S.D.N.Y. May 30, 2007). 

According to the SEC’s complaint, Barclays and Mr. Landzberg obtained and traded on inside information in six different bankruptcy cases in which they were involved.  In each case, Mr. Landzberg obtained a seat on a Creditors’ Committee which obtained confidential inside information about the company.  The companies involved were Galey & Lord, Pueblo Xtra International, Desa International, Archibald Candy Conseco and Air 2 US/United Airlines.  In each instance an agreement was executed under which the information obtained through committee membership was to be kept confidential.  Despite that undertaking, Barclays and Mr. Landzberg executed 15 trades in Galey & Lord securities, 13 trades in Pueblo Xtra securities, 4 trades in Desa International securities, 7 trades in Archibald Candy securities, 22 trades in Conseco securities and 82 trades in 2 US/United Airlines securities for a total of 143 trades.  The bank profited by about $3.9 million from these trades.  

Perhaps the most notable allegation in the complaint is the statement that “[i]n a few instances, Landzberg used purported ‘big boy letters’ to advise his bond trading counterparties that Barclays may have possessed material nonpublic information.”  The complaint goes on to allege that Mr. Landzberg did not disclose the specific information in his possession.  

This is perhaps the first SEC insider trading case involving so-called big boy letters.  Traditionally, insider trading in based on a breach of fiduciary duty which is the predicate for the claims in the complaint here.  Under the traditional rule, however, if the information is disclosed prior to the trade, then the trader is not prohibited by insider trading rules from entering into the transaction because the information has been disclosed.  

At least some of the trades in the case against Barclays and Mr. Landzberg appear to involve one-on-one bond trades where the other side was specifically told and agreed to enter into the transaction knowing that Barclays and Mr. Landzberg had inside information.  Although the specific information was not disclosed according to the complaint, the party did in fact agree to proceed with the transaction knowing that it may have been at an informational disadvantage.  Under those circumstances typical insider trading rules would not seem to apply.  The exception may be where the agreement under which the bank obtained the information specifically precluded creditor committee members from trading.  According to the SEC’s complaint, however, only the agreement executed in the Galey & Lord bankruptcy proceeding had such a provision.  Unfortunately, the SEC’s complaint does not provide sufficient detail to determine which trades were made using big boy letters.  The complaint also does not disclose whether the other party was a sophisticated trader, although that would appear to be the case in view of the nature of the transactions.  

Despite the dubious nature of at least some of the trades, Barclays and Mr. Landzberg chose to enter into settlements with the SEC.  Both defendants consented to the entry of statutory injunctions prohibiting future violations of the antifraud provisions.  In addition, the bank agreed to pay over $3.9 million in disgorgement, prejudgment interest, and a civil penalty of $6 million.  Mr. Landzberg agreed to pay a civil penalty of $750,000.