Insider Trading Steps Closer to Strict Liability

SEC sues an investment banker who just put 2&2 together

In 2010, Richard Bruce Moore, an investment banker at Canadian Imperial Bank of Commerce (“CIBC”), counted the Canadian Pension Plan Investment Board (the “Pension Board”) among his best clients.  Through Moore’s efforts, the Pension Board regularly used CIBC to finance its private equity investments.

iStock_000003392734XSmallAs is often the case with senior bankers, Moore became very friendly with the executive who managed the Pension Board’s private equity program.  Every month or so, Moore would ask his friend what transactions he was working on and if there could be a financing role for CIBC.

In May of 2010, the Pension Board executive happened to mention to Moore that he was involved in a major transaction that was taking up all of his time.  Moore tried but failed to get his friend to tell him about the deal or to engage CIBC to finance it.

At a charity event that June which they both attended, Moore noticed the Pension Board executive chatting up someone whom he wouldn’t introduce or identify to Moore.  Moore later found out from a CIBC colleague at the event that the mystery guest was the CEO of Tomkins plc, a UK auto parts manufacturer.  Moore already knew that his friend at the Pension Board had been flying back-and-forth to London and he had also heard rumors of a possible Tomkins take-over, so he put two-and-two together and went out and bought 51,350 Tomkins ADRs on the NYSE.  Three weeks later, Tomkins announced its acquisition by the Pension Board and a Canadian private equity firm (Onex Corp.), which caused the price of its ADRs to jump 27% on the news.  Moore sold his entire position the next day and pocketed $163,000 in profits.

Moore already knew that his friend at the Pension Board had been flying back-and-forth to London and he had also heard rumors of a possible Tomkins take-over, so he put two-and-two together and went out and bought 51,350 Tomkins ADRs on the NYSE.

Somehow, the SEC got wind of Moore’s trades and, on April 16th of this year, entered into a settlement with the 49 year-old Canadian for abusing his position at CIBC by trading on “inside information” regarding the Tomkins acquisition.  The settlement required Moore to disgorge his $163,000 of profits and pay the SEC a penalty of the same amount.  Moore was also permanently barred from the US securities industry, but, by not contesting the charges, he avoided a criminal prosecution and possible jail sentence1.

So, what exactly was the SEC’s case?

Classic insider trading occurs when a company insider buys or sells his employer’s securities based on information he has about his employer which has not yet been made public and which is capable of moving the market in its securities.  The abuse has been extended to tippees of corporate insiders who trade on material, non-public information and to other outsiders who obtain and trade on MNPI by misappropriating it from sources to whom they owe a duty of confidentiality.

In Moore’s case, nobody from the Pension Board, CIBC or Tomkins gave him any MNPI about Tomkins at any time, so no duty of confidentiality played any part in the proceedings.  The SEC, however, took the position that Moore misappropriated MNPI from CIBC, even though the only thing he learned from CIBC was the identity of the person to whom his friend at the Pension Board was speaking at the charity event.  What CIBC did provide to Moore was the opportunity to do business with his friend at the Pension Board and thereby gain access to a critical piece of the information mosaic on which he was relying in buying the Tomkins securities (even though it was happenstance).

What apparently drove the SEC to bring this case were two facts strongly suggesting that Moore actually felt he was trading on illicit information.  The SEC complaint points an accusatory finger at Moore’s having executed his ADR trades through secret pension accounts maintained at a bank in the Channel Islands (presumably instead of using his CIBC account) and spending almost a third of his $4.3 million net worth on his purchases of Tomkins securities (including incurring a penalty for early pension withdrawals).  His close relationship with the Pension Board official who managed the Tomkins buy-out certainly didn’t help his case.

In US tort law, there is a concept called ‘strict liability’ which holds manufacturers of defective products, for example, legally responsible for any harm caused by their products regardless of whether the manufacturers are at fault.  In light of the charges brought by the SEC against Richard Moore, insider trading law in the US seems to be stepping closer and closer to ultimately imposing an absolute duty on anyone who acquires MNPI on any security traded publicly in the US not to buy or sell that security no matter how the MNPI comes into his possession.

1 In addition to the ADRs, Moore acquired and later sold 212,000 shares of Tomkins common stock on the London Stock Exchange for which he was charged by the Ontario Securities Commission with “acting contrary to the public interest.”  That suit was settled on the same day as the SEC’s, with Moore being penalized another $400,000 and prohibited from trading securities or serving as an officer of a public company for 10 years.