Private Investor Meetings in Public Firms: The Case for Increasing Transparency

By Bengtzen, Martin | Fordham Journal of Corporate & Financial Law, December 1, 2017 | Go to article overview

Private Investor Meetings in Public Firms: The Case for Increasing Transparency


Bengtzen, Martin, Fordham Journal of Corporate & Financial Law


Introduction

What are the consequences if a senior manager of a public firm selectively discloses valuable non-public information ("NPI") about the firm (such as details of its next quarterly report) to curry favor with an investor who trades on the information and makes a substantial profit? In theory, they may both be in breach of the insider trading prohibition and the manager may have violated Regulation Fair Disclosure ("Reg. FD"). In practice, however, this Article argues, the development of the federal common law of insider trading, the flawed design of Reg. FD, the enforcement policy and practices of the Securities and Exchange Commission ("SEC"), and the preference and ability of both corporate managers and investors to keep such selective disclosures out of the view of the public and the regulator combine to allow such conduct to occur with impunity. As a result, selective disclosure provides an attractive method for extraction of private benefits from public firms to the detriment of investors without preferential access.

As an example of how managers may be able to distribute such valuable information, consider the recent Second Circuit decision in United States v. Newman: an investor relations manager at Dell (at the time, a large public firm) selectively provided non-public information about its upcoming quarterly results that earned two investors trading profits of $62 million. The Second Circuit held that this activity did not constitute unlawful insider trading and the SEC did not even allege a Reg. FD violation.1 Yet, the receipt of $62 million worth of information from a corporate manager would be a meaningful event for any investor and the potential availability of such awards could sway investors' decisions on parallel matters where they can influence the manager's position-such as when they vote on executive pay or in director elections.

This Article argues that the current regime, which affords corporate managers significant discretion over the allocation of corporate information, requires increased transparency to prevent abuse. As there is no current comprehensive treatment of the regulation and practices of private investor meetings, Part I begins by establishing what is publicly known about these highly private activities and describes the function of private investor meetings from the perspectives of firms and investors. Managers of large public firms participate in hundreds of private meetings per year, more than half of which are with hedge funds.2 Notably, managers have significant discretion over their firms' disclosure choices and are often able to choose whether to disclose information publicly or selectively. This means that managers can decide whether to make such information a public good or a private good-a trade-off between increasing informational efficiency in the market for the firm's stock and providing their selected recipients with a valuable trading advantage.

Part II analyzes how federal securities regulation fails to deter undesirable selective disclosures. First, it examines when selective disclosure may violate the prohibition on insider trading by "tipping." In its still leading 1983 decision in Dirks v. SEC, the Supreme Court held that selective disclosure of material NPI is not prohibited unless the insider receives a personal benefit from the disclosure.3 Without a personal benefit, neither the insider who discloses valuable information nor the outsider who trades on it will violate the insider trading framework. Against this permissive regulatory backdrop, the 1990s saw an increasing number of press and research reports documenting how public firms used selective disclosure of material NP1 to curry favor with selected sell-side financial analysts, which drew the regulator's attention to this issue. In considering its options, the SEC decided against attempting to extend insider trading law to selective disclosures where the "personal benefit" accrued to the firm instead of to one of its insiders, as the threat of such litigation would deter corporate communications. …

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