• Timing is Everything: Officers and Directors Must Look Before They Leap When Buying or Selling Company Stock
  • August 27, 2004 | Authors: J. Chase Cole; W. Travis Parham
  • Law Firm: Waller Lansden Dortch & Davis, LLP - Nashville Office
  • Every day, print and television media discuss notable events relating to publicly traded companies. When the story underlying the discussion is significant enough to move the price of the stock, officers and directors must proceed with caution.

    Securities laws prohibit officers and directors from buying or selling company stock on the basis of material nonpublic information. A trade by an officer or director is presumed to have been made "on the basis of" material nonpublic information if the buyer/seller had knowledge of the information. The presumption can be rebutted only by proving that the buyer/seller, before learning the information, had: (1) entered into a binding contract to purchase or sell stock; (2) instructed another person to purchase or sell stock for the trader's account; or (3) adopted a proper written plan for periodic trading.

    The Securities and Exchange Commission monitors trading patterns very closely. Surprisingly small trades, if timed propitiously, will attract great scrutiny. The investigation usually starts with the SEC placing a call to the buyer/seller to solicit information regarding the reason for the trade. If a lawsuit is filed, the SEC often attempts to introduce statements made by the buyer/seller during the call into evidence.

    If, as an officer or director, you engage in a suspiciously timed trade you can expose yourself to civil and criminal liability. Under Sarbanes Oxley, penalties have become much harsher. The exposure is there even if the motivation was innocent and tied to some long time anticipated expense like the purchase of a new home or paying for a child's college. Unless you plan to rely on one of the exceptions, you may choose to delay any purchase or sale.

    Finally, should you receive a call from the SEC, do not forget the lessons learned from the Martha Stewart case: (1) absent a subpoena, you have no obligation to speak to an investigator; (2) statements made to an investigator, even if you are not under oath, can be the basis for criminal charges; and (3) criminal charges relating to obstruction of justice can present a greater risk than charges of insider trading. A more detailed discussion of the Martha Stewart case entitled "Silence Can Be a Good Thing: Lessons Learned from Martha" was originally published in the March 24, 2004 edition of the Nashville Business Journal.