Time to Dust Off the Sept. 2005 Memo to Public Company Employees

On January 22, 2008, the SEC announced the filing of a settled insider trading action against Aaron S. Cooksey, a former manager at Freescale Semiconductor, Inc.  The SEC alleges that from November 2007 to early February 2008, Freescale Semiconductor, Inc. and SigmaTel, Inc. negotiated a deal that resulted in Freescale acquiring SigmaTel, and that Cooksey was Freescale’s manager of qualified plans and worked on the pre-acquisition due diligence.

The SEC claims that while performing his job duties, Cooksey learned material nonpublic information about the SigmaTel acquisition, which he then traded on before Freescale publicly announced the deal.  According to the SEC’s Litigation Release, Cooksey agreed to settle the case by disgorging $23,552, plus prejudgment interest of $883.70, and a civil money penalty in the amount of $23,552.

It is clearly time to dust off Bruce Carton’s September 13, 2005 memorandum to public company employees.  Here it is, in its entirety:

To: Public Company Employees About to Engage in Insider Trading in Advance of “Big News” About Their Companies

From: Bruce Carton

Re: Your Future (or Lack Thereof)

Date: September 13, 2005

I saw it when I was at the SEC and I’ve seen it regularly ever since:  SEC enforcement actions against employees of publicly-traded companies who get advance notice of earnings news or other big news concerning their companies and buy/sell the company’s stock prior to the announcement of that news.   Of course, that practice is called “insider trading” and it is against the law.  As I hope to persuade you below, it is also called “incredibly stupid.”  Seriously, people, we’re talking about Darwin Award-level stupidity here.

Let me break this down for you as simply as I can.  The following points are true and you need to understand this:

  • The SEC at least takes a look at the trading that precedes every merger, earnings surprise or other announcement that causes a significant rise or fall in the price of a company’s stock.  Every one.
  • If there is unusual trading activity preceding a rise/fall in a company’s stock, the SEC will immediately obtain the names of the traders involved.  That means your name.  They will, in addition, obtain the New Account form that you filled out when you opened the account in which you traded.  Now think back…what information was included on that form?  Right — your employer.
  • The SEC also will immediately obtain from the issuer in question (i.e., your company) a list of its employees.  Guess whose name is going to be on that list?  They will then match that list up against the people who traded in advance of the news announcement.  Your name is going to be on both lists, dummy.
    What’s that you say??  No one will catch you because you cleverly traded in your gramma’s account?  Wrong again — the SEC is going to call your gramma when they see the trading in her account.  They’ll ask her if she knows anyone on a list of suspicious traders.  Your name will be on that list.  Your gramma will then rat out your no-good-gramma-account-trading self or she’ll commit perjury.  Don’t do that to your gramma.
  • Probably within a week or so, you will be called by the SEC.  You will be asked specifically why you bought/sold the stock when you did.  You will be asked what you knew and when you knew it.  All of this is under penalty of perjury.  You will either confess or lie.  If you tell the truth, it is game over.  If you lie, you may go to prison.  See Stewart, Martha.
  • You will be sued by the SEC, and you will need to either settle or go to trial.  You will pay up to hundreds of thousands of dollars if you go to trial, and since you worked for the company and the company will provide a detailed chronology to the SEC of exactly who knew about the “big news” and when, you are going to lose anyway.  If/when you settle, you will be forced to disgorge all of your profits (or losses avoided) and pay an additional penalty of somewhere between one and three times that amount.  Through your settlement, you may also be prohibited from serving on the board of any public company in the future, and you will be subject to an ongoing court injunction against violating the securities laws.
  • You will almost certainly be fired by your company when it learns you are among the people who traded in advance of the big news and who is being investigated by the SEC.  If you are not fired at that time, you probably will be when you settle or lose the case.  You will then likely join the ranks of the hard-core unemployed.

That’s it.  That’s as plain as I can put it.  This is an IQ test and every one of you employees (or directors) of public companies whose names show up on this list are failing.  Just stop it.