BOARD MEMBER ALLEGEDLY PLACES INSIDER TRADES … FROM THE BOARDROOM

SEC HQs 2There is no good time or place to engage in insider trading, but it would be difficult to imagine a worse scenario than making trades from the boardroom during a meeting where the nonpublic information was revealed. As alleged in a civil enforcement action filed in the U.S. District Court for the Middle District of Tennessee, a lawyer and board member of a bank holding company traded on nonpublic information he learned about an impending merger, and realized more than $56,000 in ill-gotten gains from the transactions.

The SEC charged that James C. Cope made several trades in the stock of the merger target after learning at a monthly board executive committee meeting that his company had made an informal offer to acquire the target at a premium over its current share price. Trading records allegedly indicated that Cope placed his first purchase order while the executive committee meeting was still in progress. The SEC alleged that he made seven additional purchases that day, totaling 6,179 shares. Six days later, he allegedly purchased another 4,000 shares. When the companies announced the merger approximately two weeks later, the target's stock price increased by 40 percent, resulting in the $56,000 profit.

Cope signed the required yearly certification that he read, understood and would comply with the company’s insider trading policy. A few weeks before the alleged unlawful trading, he and other board members participated in a training session on insider trading conducted by the company’s outside counsel. The law firm left little room for doubt as to the conduct expected from the directors, as its presentation stated that the board members should “never buy or sell stock while in possession of inside information.” At the executive committee meeting, the company's CEO and CFO emphasized the particular need for extra care to keep “in-market” acquisitions confidential.

According to the SEC, several of the executive committee members believed that, given the status of the negotiations, it was likely the merger would occur. Additionally, many of them believed that the negotiations had advanced enough to be sufficiently material and precluded them from trading in the target's shares.

“We allege that Cope completely disregarded his responsibilities as an attorney and public company director and illegally seized the moment to purchase stock in an acquisition target after learning confidential, nonpublic information at a board executive committee meeting,” said Walter Jospin, director of the SEC’s Atlanta Regional Office.

The SEC requested a permanent injunction against future violations, disgorgement and the imposition of civil penalties. The U.S. Attorney’s Office for the Middle District of Tennessee also filed a parallel criminal case against Cope.

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Complaint, SEC v. Cope, Dkt. No. 3:16-cv-02764 (M.D. Tenn. Oct. 21, 2016).