On March 22nd, NIRI Boston held an event shedding light on a topic that may sometimes seem removed from many Investor Relations teams - white collar crime. Moderated by Walt Pavlo, a consultant and lecturer on white collar crime, the event focused in part on the story of fellow speaker Todd Newman, a former Diamondback Capital portfolio manager who was tried and convicted of insider trading before his case was overturned and vacated on appeal. Walt and Todd were joined by Michael Fee of Latham & Watkins, who discussed how insider trading cases are investigated, prosecuted and defended.
In November 2010, Todd Newman's office was raised by government agencies following suspicions of potential insider trading. Spurred by a tip from a younger analyst in his team, two small trades executed by Todd led to five years of litigation, 4.5 million subpoenaed documents, hefty legal fees, and ultimately, an overturned conviction. As Michael recounted, the extensive litigation triggered by this type of white collar offense frequently destroys careers and can damage company reputations.
The story of Diamondback Capital highlights the need for institutional safeguards in hedge fund/ IR relationships. What may seem like an innocent conversation between two parties can result in serious legal implications. The panel discussion recounted how the piece of information that triggered Todd's trading in this case came to him "fourth-hand" during off-hour conversations between an analyst at another fund and the IRO of a listed company. Newman's analyst shared his trip via a messaging platform, and Newman performed the trade without questions (or knowing) the initial source of information.
Michael explained that the Financial Industry Regulatory Authority (FINRA) and the SEC both have market surveillance mechanisms and whistle-blower hotlines in place to detect potential insider trading cases. These organizations frequently contact public companies and investors as part of their initial investigations. If the case merits further investigation, the SEC Enforcement Staff will proceed with interviews and testimony, sometimes in cooperation with a U.S. Attorney's office and/or the FBI.
The panel touched upon one case in particular in which an IRO played a pivotal role. In 2012, a former VP of IR at Carter's was indicted for insider trading after working as a consultant for various hedge funds. He was sentenced to two years in prison.
Given the serious nature of these cases, Michael stressed the importance of policies, trainings and controls within public companies. While Regulation FD is well understood now among hedge funds, the panel urged IR teams to take extra precautions to ensure that material non-public information remains non-public.
Thank you to Paulina Brown of EQS for preparing this summary.
Congrats to our winner, David Calusdian of Sharon Merrill Associates, of two premium seats at an upcoming Red Sox game courtesy of The Proxy Advisory Group.