Corporate Governance

The Rocky Mountain Securities Conference: Judge Stanley Sporkin and Ethics

By Ryan Miller

As part of the 40^th annual Rocky Mountain Securities Conference, former U.S. District Court Judge Stanley Sporkin presented a keynote address on current issues in professional ethics titled “Ethics in a Turbulent Marketplace.” With participation from SEC Regional Director George Curtis, Baker Botts LLP’s James Doty, and Gibson, Dunn & Crutcher LLP’s John F. Olson, Judge Sporkin presented hypothetical situations and illustrated how the unsteady market conditions complicate ethical obligations in advising clients on insider trading issues.

The hypothetical that inspired the most enthusiastic debate concerned the use of Rule10b5-1 plans.  The hypothetical involved XYZ Company and its CEO, who wanted to sell stock in XYZ in order to diversify his portfolio. On counsel’s recommendation, the XYZ CEO created a routine plan by which he would sell stock on the first of every month. After six months, the CEO participated in negotiations that would lead to the acquisition of XYZ the next month at a 20% premium. The CEO asked for counsel’s advice as to whether he may properly cancel the routine plan or whether he must continue to sell the shares.

In favor of cancelling the plan, some argued that since a 10b-5 violation requires the purchase or sale of a security, the CEO could avoid such a violation by refusing to engage in a purchase or sale of securities while in possession of the material non-public information. Counsel would avoid the ethical issues involved in recommending that a client trade securities during merger negotiations. However, others observed that simply cancelling the plan could potentially introduce other complications. By discontinuing the plan, some contended that the CEO stood to benefit improperly from knowing of the non-public merger negotiations and reaping the profits of waiting to sell until the shares were sold at a 20% premium.

Several of the participants insisted that they needed more facts, and noted that providing advice to the CEO in a real practical situation would involve extensive factual development, beyond the materials provided. In either situation, Judge Sporkin concluded, there existed potential ethical difficulties in advising a CEO on selling or purchasing shares in his own company, and suggested that attorneys dealing in securities law at the beginning of the twenty-first century face particularly complicated ethical obligations due to the nature of the market and the continuing evolution of Sarbanes-Oxley and other corporate governance legislation.

Full post as published by The Race to the Bottom on May 13, 2008 (boomark / email).