The Week In Review (October 19-25, 2007): Insider Trading, Insider Trading, Insider Trading
There is more than a renewed emphasis on insider trading, if last week is any indicator. Insider trading is dominating the regulatory landscape, again suggesting that issuers and executives carefully review compliance procedures and trading programs and carefully consider the timing of securities transactions not made within the confines of a Rule 10b5-1 plan. Key events from last week support this thought.
DHB INDUSTRIES, INC. – The SEC and DOJ have brought insider trading charges against former top executives of this defense contractor. In SEC v. Brooks, Civil Action No. 07-61526 -CIV-Althonaga/Turnoff (S.D. Fla. Filed October 25, 2007), the Commission filed fraud charges against David H. Brooks, former DHB CEO and COB. The complaint alleges a pervasive accounting fraud between 2003 and 2005 and insider trading by Mr. Brooks. At the same time the SEC filed its complaint, the U.S. Attorney’s Office for the Eastern District of New York announced that it was filing criminal insider trading and securities fraud charges against Mr. Brooks, who was arrested in Florida on October 25. Previously, criminal securities charges had been brought against former DHB CFO Dawn Schlegel and former COO Sandra Hatfield. U.S. v. Hatfield, 06-CR-550 (E.D.N.Y.). A superseding indictment will be filed in that case including Mr. Brooks. The Commission’s Litigation release, which also summarizing the criminal action, can be viewed here.
SEC TEMPLATE – The SEC Office of Compliance and Exanimations announced that it is testing out a new template for its inspections which includes an insider trading component. Frequently, when the SEC conducts examinations, firms do not perform testing for potential insider trading problems. This new template will require the firms to focus on and assist the SEC staff in reviewing the issue.
This action follows a staff request in an August letter to hedge funds seeking selected information about persons who have access to inside information. The apparent purpose of this information request, which is raising privacy concerns among many, is to create some type of inside trader profile.
RULE 10b5-1 PLANS – The SEC enforcement staff has commented previously on the fact that it is reviewing Rule 10b5-1 plans to determine whether executives are using the plans in a manner which gives them some type of trading advantage in the markets – something that was not intended when the safe harbor was created. These comments come in the wake of an academic study suggesting that executives using the plans are achieving above market returns. That conclusion at least raises a question as to whether the plans are being properly used. No cases have been brought to date, although there have been media reports of SEC inquiries focused at least in part on the question such as those regarding the Countrywide investigation.
The word from the SEC staff, however, is “watch for something shortly” on this issue. This is the substance of a comment made by a senior enforcement staff official at the ABA National Institute on Securities Fraud which is concluding today in Washington, D.C.
FOREIGN MARKETS – The increasingly intensifying focus on insider trading is not just the U.S. Congress, SEC and DOJ. Rather, for months there have been reports of rampant insider trading around the globe. Last week was no exception. There were reports of insider trading investigations or actions not just in the U.S., but also Singapore, Belgium, France, South Africa and Canada. This continuous stream of reports is no doubt the cause of the increasing global and national efforts of the SEC and DOJ to detect and prosecute insider trading. In the weeks to come, expect to see this trend continue. Again, prudent issuers and executives should consider the clear warning.