I was engaged by a retiring director of a major public company, one closely regulated by an agency of the Federal government, to help the client navigate a difficult minefield. The individual, for personal reasons, was anxious to achieve a certain amount of liquidity. As he retired from the board (and various significant roles on board committees) of the public company, he wanted to exercise significant stock option positions and simultaneously sell the shares in order to be able to pay the tax and, secondly, to deploy the after tax proceeds for the personal projects he had in mind … involving members of this family. The client had been to outside counsel for the company and asked for advice on how to protect himself from an allegation that the client’s trades were based on material non-public information which he had acquired in his capacity as a board and committee member. That counsel (a partner in a prestigious law firm) had given a familiar response: wait until six months has elapsed before you trade.
This advice did do the trick for the individual concerned. Thus, he wanted to have capital available (for a variety of reasons) shortly after he left the board. Secondly, he was concerned that six months might either be too long, which it was for his personal purposes, or too short, the thought being he might be in possession information which might not be publicly disclosed for a considerable period of time … perhaps a year or more. Whether a six month rule of thumb would protect the retiring director under those circumstances was, accordingly, problematic in his mind.
Therefore, I set up a procedure which focused on the issue at hand … the possession (or not) of material non-public information as of the date of resignation. I explained the procedure to the lawyers in the office of general counsel of the company, which was well staffed with people highly experienced in the ways the Federal government operated … and were cautious, as quasi-bureaucrats typically are. I submitted a memorandum explaining the procedures I had in mind, which was accepted and acknowledged. We requested copies of the minutes of the board and committee meetings for the past 12 months, we searched the web for all public announcements, including press releases made by the company concerned; we collected all documents filed with the SEC for public inspection; and we located the principal investment banks which provided analytical reports respecting the company and reviewed those reports for the previous 12 months. We set up a data room and assembled the documents in piles, separated by categories.
We then matched the information in the minutes of the meetings which the director had attended, plus all memoranda made available to him in his capacity as a board or committee member with the information which had been made public. We then went through a lengthy session with the client, covering the better part of a day … interrogating him subject-by-subject, noting all the information about the company he recalled … or jogging the client’s memory, we could show as having been made available to him during the preceding 12 month period). We refreshed the individual’s memory by referring to minutes of the meetings, memoranda and any and all correspondence from the company’s files which had been produced to us, or extruded from his own files, including e-mail correspondence. The procedure was in the nature of a deposition, designed to flush out every piece of material information the individual was then in possession of and which had not been made public.
We then matched the memoranda of the committee meetings, as expanded and explained by what I call the deposition testimony of the individual, to ascertain whether, in fact, there was any material non-public information which he enjoyed. Whenever we came across an item where we needed clarification, we had the cooperation of the general counsel’s office on the question of disclosure because they were convinced we were proceeding in good faith and taking all the steps necessary to get the job done right. As luck would have it, it turned out all the items we and he identified had in fact been disclosed publicly through one conduit or another and were publicly available. We then gave the director written advice, outlining the procedures we had followed and advising the client that, following his resignation, he was, based on all information we had been able to assemble, in a position to sell his shares. We, of course, made him aware of the regulations involved, including Section 16 of the `34 Act, etc. We shared our memorandum to the individual with the general counsel’s office, we did not ask them to approve or disapprove, but we wanted to make sure we were on the record. Once we had created the record I have outlined, the company, acting through its general counsel, advised the staff to honor the individual’s exercise of his options and the transfer agent, plus the participating broker, to execute the trades. We received a congratulatory pat on the back from the general counsel, who said that, based on the materials we had supplied and a copy of our advice to the client, he was not aware of any firm which had taken the pains that our client had.
Obviously, every situation does not demand that level of attention and care. That said, were more counsel and their clients to take the pains we have mentioned, there would be fewer law suits in my view and indeed, fewer jail cells occupied.