The Delaware Courts and Material Non-Public Information
We have been discussing In re General Motors Co. Derivative Litigation.
In culling through the assorted filings (we like to post primary materials on the DU Corporate Governance web site), we noticed a letter from the Vice Chancellor to counsel providing a copy of the opinion in the case before release to the public. The opinion was sent to counsel on June 26. The opinion was made public on June 29. the judge did so as a courtesy to the lawyers involved. As the letter stated:
- I note that the Complaint in this matter was filed under seal, and wish the parties to have the opportunity to review the Memorandum Opinion for confidential mateirla. Unless any party indicates cause by Monday, June 29 at 4:00 p.m. that portions of this Memorandum Opinion should be redacted, I will release the Memorandum Opinion publicly at that time.
Certainly it is better to catch these things before, rather than after. an opinion is issued. Nonetheless, the approach raises an interesting hypothetical, worthy of a law school exam. A court decision can at least sometimes move a company's share prices. Thus, a decision may be material. To the extent that it is, advance knowledge may provide trading benefits.
This raises the obvious question as to whether trading on advance knowledge of an opinion, to the extent the result is material, constitutes insider trading. The answer, of course, is that it depends.
O'Hagan, the Supreme Court case that approved of the misappropriation theory of insider trading actually involved trading by a lawyer at a firm. O'Hagan was alleged to have engaged in insider trading by violating a duty of trust and confidence to his firm and to the firm's client. See 521 U.S. at 653 ("In this case, the indictment alleged that O'Hagan, in breach of a duty of trust and confidence he owed to his law firm, Dorsey & Whitney, and to its client, Grand Met, traded on the basis of nonpublic information regarding Grand Met's planned tender offer for Pillsbury common stock.").
An early release of an opinion, however, is information received not from the client but from the court. So it does not fall within the privilege. Trading on the information by a lawyer could still violate a policy of confidentiality at the law firm, depending upon whether the policy reaches information not received from a client.
At the same time, the policy would presumably not prevent the law firm from using the information for proprietary trades unless subject to a duty of confidentiality from another source. The letter from the judge in this case did not expressly impose an obligation of confidentiality.
What about the lawyer's decision to give the information to his or her client? The first issue is whether the lawyer is a tipper. At the time the opinion was released, the judge (or vice chancellor) could have expected that the content and result remain confidential. Providing the information to the client could violate that obligation, rendering the lawyer a tipper. On the other hand, the lawyer would probably need to benefit from the tip (whether classic insider trading or misappropriation), something unlikely in this fact pattern. If the tipper is not guilty of insider trading, neither is any tippee.
To the extent, however, that the client accepts the information with the expectation of confidentiality, the company becomes the tipper. To the extent the company (or one of the company's employees) trades on the information, there may be a colorable claim for misappropriation.
For a copy of the letter, go to the DU Corporate Governance web site.