This White & Case alert describes two related civil insider trading actions brought by the New York AG under the state’s Martin Act — one against the executive and one against the company. As the alert explains, both actions have unusual features:

– [T]he Company is a Delaware corporation headquartered outside of New York. Nonetheless, according to the complaint filed against the CEO (the “CEO Complaint”), the NYAG asserted jurisdiction on the basis that the Company’s shares were traded on the New York Stock Exchange (“NYSE”), the CEO’s trades were executed through a New York-based investment adviser, the trading plan was governed by New York law, and New York investors — including state pension funds — purchased and sold the Company’s shares during the relevant period.

– [The CEO action] represents an unusual instance of the NYAG bringing an insider trading action against a corporate executive for trading pursuant to a Rule 10b5-1 plan [. . .] [O]n October 14, 2020, the CEO initiated discussions about entering into a Rule 10b5-1 trading plan. The plan was reviewed by the Company’s Senior Counsel on November 11 and 12. It was signed by the CEO on November 13, 2020, in the midst of what the CEO Complaint describes as an “all-hands-on-deck” manufacturing crisis and just days after the Company and AstraZeneca had agreed to slow down production.

– The NYAG found that the Company engaged in fraud because it “approved the CEO’s Trading Plan despite the CEO’s possession of material non-public information, and that [the Company] had not disclosed the information at the time of the [p]lan or sales.”

– Both the SEC and the U.S. Department of Justice (“DOJ”) examined the insider trading issue but did not bring charges [. . .] [U]nlike federal insider trading laws—which require proof of scienter, i.e., an intent to defraud—the Martin Act has been found to not require proof that the defendant acted with fraudulent intent. This lower standard of liability may explain why the NYAG was willing to bring this action after the SEC and DOJ, which operate under the more demanding federal scienter standard, declined to do so. We are not aware of a prior instance in which the NYAG has pursued a company for approving an executive’s trading plan.

The alert says that the NYAG’s pursuit of the company, based on its approval of the plan, creates additional compliance considerations for issuers.

Companies should implement robust procedures for reviewing and approving executive trading plans, which may include:

a) Requiring detailed certifications from executives that they are not in possession of MNPI at the time of plan adoption;

b) Conducting diligence beyond written certifications, including inquiries regarding recent significant operational activities, management and board presentations, and undisclosed developments that could constitute MNPI;

c) Where a company is experiencing material, nonpublic business developments — such as operational issues, regulatory challenges, or significant contractual developments — considering whether it is appropriate to delay the adoption or approval of trading plans or to implement additional safeguards, such as General Counsel and CFO approvals;

d) Consulting with legal counsel to assess potential MNPI risks based on the company’s current business circumstances; and

e) Documenting the review process and the basis for approving the plan.

Check out our “Insider Trading Policies” and “Rule 10b5-1” Practice Areas for more.

– Meredith Ervine