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The Devil Is in the Details: Chairman Cannot Escape Insider Trading Liability based on General Announcement of Stock Buyback Program

Monday, January 30, 2012

Susan M. Greenwood | Bloomberg LawSEC v. Powell, No. 11-CV-00161 (W.D. Tex. Jan. 25, 2012) The U.S. District Court for the Western District of Texas denied Phillip Powell's motion to dismiss insider trading charges brought by the Securities and Exchange Commission (SEC) pursuant to Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

Trading in Advance of Stock Buyback

As the Court explained, Powell served as chairman of the board (Board) of First Cash Financial Services, Inc. (First Cash), the company he founded. In early November 2007, First Cash announced that the Board had authorized a stock buyback program (Buyback). While the public announcement of the Buyback indicated that the company would purchase up to 1 million shares, it did not disclose any additional details. The Board continued to privately discuss the Buyback and on March 7, 2008, decided that the Buyback would commence on March 12, 2008, with J.P. Morgan Securities, Inc. serving as agent for First Cash. In addition, the Board decreed that company insiders should not trade in First Cash's common stock during the Buyback. The Board issued a consent to various insiders, including Powell, attesting to the terms of the Buyback, including the prohibition against trading. The SEC alleges the even before the Buyback began, Powell hatched a scheme to profit from his knowledge of the details of the Buyback. Its complaint notes that in early March 2008, Powell mentioned to another Board member that his son-in-law was planning to purchase 100,000 shares of First Cash stock. The Board member told Powell to "prevent the purchase given that First Cash was soon to begin its share repurchase." According to the SEC, Powell referenced his son-in-law as a ruse to disguise his own planned purchase of First Cash stock. Indeed on March 11, 2008, Powell purchased 100,000 shares of First Cash for $807,000. This was Powell's first ever market purchase of First Cash stock, even though he had been associated with the company since 1991. Although Powell purportedly wanted to use a personal bank account to make the purchase, he eventually used funds from a brokerage account he opened under the name Myloe Max L.P., an entity he controlled. Three days after Powell's purchase, First Cash announced the Buyback, leading to a 13 percent increase in the stock price and a $124,000 profit for Powell.

Powell Possessed Material Inside Information

Citing the U.S. Supreme Court, the Court noted that an insider trading violation of Rule 10b-5 has two main elements, (1) "'a relationship affording access to inside information intended to be available only for a corporate purpose,'" and (2) "'the unfairness of allowing a corporate insider to take advantage of tht information by trading without disclosure.'" In addition, the Court said, "the information traded must be 'material.'" Powell argued that the information he learned on March 7, 2008, was not material because the Buyback already had been announced publicly in November 2007. The November 2007 announcement, however, was speculative. "'While speculative or 'soft' information is often immaterial, courts have been reluctant to find it per se immaterial.'" Rather, the Court explained, "'courts often look to the actions of those who were privy to the information in determining materiality.'" Reviewing the actions of Powell and the Board, the Court held that the March 7, 2008 information was material, despite the earlier November announcement of the Buyback. The March 7, 2008 meeting provided specific information as to the exact date of the Buyback, the number of shares affected, and the outside broker orchestrating the Buyback. "Any shareholder," said the Court, "would consider this information material as such action could, and actually did, cause an increase in the price of First Cash's stock." Moreover, the Board's decision that "no insiders would buy or sell any company common stock during the repurchase," indicated that the Board also considered the information material. Even Powell's own actions support a finding of materiality, the Court found. It pointed to Powell's false representation that his son-in-law planned to purchase the stock, when Powell himself actually arranged to purchase 100,000 shares. Powell also instructed his broker to complete the transaction by March 11, 2008, one day prior to the Buyback. Lastly, Powell concealed the transaction, failing to either (1) seek corporate approval for the transaction, or (2) file a timely SEC Form 4 disclosing the transaction.
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