A recent litigation release from the SEC Division of Enforcement, though seemingly unremarkable, highlights five basic principles that sometimes slip off a company’s insider trading compliance radar.
The SEC’s complaints.
According to the SEC’s complaints against two former employees and the spouse of a former employee of Ariad Pharmaceuticals, Inc., which develops and markets drugs to treat cancer:
- The husband of an Ariad employee traded Ariad stock before company announcements about the safety profile and FDA approval status of Ariad’s only FDA-approved drug and after his wife learned of material non-public information related to Ariad’s dealings with the FDA. The husband also advised a friend to trade Ariad stock on the basis of non-public information learned from his wife, enabling the friend to obtain profits of $4,188.00.
- Ariad’s former Senior Director of Pharmacovigilance and Risk Management sold Ariad stock after she had attended meetings with the FDA and had learned of a forthcoming FDA decision to require Ariad to include a safety warning on its product label, thereby avoiding $9,420.00 in losses.
- Ariad’s former Associate Director of Pharmacovigilance and Risk Management alerted certain of her relatives one day before Ariad publicly announced a pause in all clinical trials for its FDA-approved drug. By selling in advance of Ariad’s announcement, her relatives avoided $2,888.10 in losses.
The SEC’s complaints charged each defendant with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and sought various injunctions, disgorgements with interest, and civil penalties.
The five reminders.
First: The SEC remains vigilant against insider trading of all shapes and sizes. For example, consider that:
- Ariad was relatively small and low profile, not an S&P 500 company or media darling.
- The amounts of profits or avoided losses involved were relatively insignificant.
- The relevant persons were not Ariad’s most senior executives.
It remains clear, therefore, that insider trading enforcement remains a focus of the SEC and Department of Justice, no matter how seemingly minor the violation may be.
Second: Tipping remains in the SEC’s crosshairs, despite the Second Circuit’s 2014 Newman decision, which narrowed the scope of “personal benefits” sufficient to establish tipper/tippee liability. (See this Doug’s Note.)
Third: Spouses, family members and household members must be advised of their duties and potential insider trading liability. This means that insider trading policies must be clear as to the scope of their coverage, and employees must be educated about (and frequently reminded of) the need to inform these persons of their potential exposure.
Fourth: Effective insider trading policies and internal training remain critically important. In fact, the SEC notes that Ariad’s insider trading policy expressly prohibited each of the allegedly illegal behaviors and that the employees in question were expressly reminded of the policy’s prohibitions at various key stages throughout the FDA approval process, including the imposition of blackout periods. Effective preventative policies and procedures can protect the company from liability for their employees’ illegal insider trading as a “control person” (Exchange Act Sections 20(a) and 21A) or for “aiding and abetting” (Exchange Act Section 20(e)).
Fifth: More generally, the SEC, DOJ and other regulators now attach great importance to the existence of effective compliance programs. A robust insider trading program can mitigate the impact of an insider trading investigation, including the substantial reputational damage that usually follows a front-page insider trading enforcement action.
If it has been a while since you reviewed your company’s insider trading policy, procedures or training, now may be a good time to do so.