Tip-Off – Ticked-Off & Commercial Litigation
Did you escape the media blitz regarding New York Congressman Christopher Collins (and others) facing SEC charges for insider trading? Public figures and their purported dirty deeds might make good headlines, but beyond the media coverage there are some valuable nuggets, tips and reminders for individuals, investors, board members and corporations.
Backstory (In Case You Need a Refresher)
While Christopher Collins served on the board of directors for Innate Immunotherapeutics Ltd, an Australian biotech company, Innate’s CEO emailed board members bad news. The company’s pride and joy, an MS drug, MIS416, failed in a round of clinical trials. The bad news, spread quickly. The SEC claims that Representative Collins immediately announced the trouble to his son and other close friends and family, so they could sell off their shares in Innate before the news reached the market and the stock price plummeted. This information paid off for seven people including Collins’ son, Cameron, and his girlfriend’s father, Stephen Zarsky. Cameron Collins and Stephen Zarsky were able to save $700,000 in potential lost share price. Cameron Collins alone sold 1.4 million shares ahead of the stock price tanking. See SEC Press Release and SEC Complaint.
Details that Never Made Most Headlines
Cameron Collins’ girlfriend, Lauren Zarsky, and the girlfriend’s mother, Dorothy Zarsky, settled with the SEC without admitting guilt. Lauren’s early trading resulted in an approximately $19,000 gain. Likewise, Dorothy benefited by around $22,000. Not such a big deal? How about the fact that Lauren is a CPA? According to the SEC Press Release, “Lauren Zarsky, a CPA, has also agreed to be suspended from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Zarsky to apply for reinstatement after five years.”
Beyond the insider trading case, there are a host of potential issues for a commercial lawyer to examine.
- Fiduciary Duty. Board members owe the shareholders and corporation a fiduciary duty, even in the absence of a contract. But the duty doesn’t stop with board members or shareholders, other leaders and managers have some responsibility to the corporation.
- Breach of Contract. From employment agreements and non-disclosure agreements, to confidentiality agreements and intellectual property ownership documents, commercial lawsuits are filed daily to protect corporations from loose lips. While it’s best to have legal agreements from the beginning of the company and the employment relationship, it’s also prudent to have documents reviewed by your commercial lawyer periodically to account for legal changes and changes within the organization.
- Mitigating Damages. Often times a commercial contract requires a party to mitigate damages. Unfortunately for Collins and others, when it comes to the SEC, mitigating damages can be a crime.
- Confidentiality in the Office. You may have confidentiality clauses, contracts and a handbook that outlines employees’ duties of confidentiality. However, many business owners and managers don’t comprehend what is protected and what is not. Not surprisingly, employees don’t necessarily understand what they sign. Spend the extra time with your commercial lawyer identifying what information can be protected and how. You may be surprised how many items you think are confidential, actually are not considered confidential in the judicial system. Knowing what is not confidential may lead you to revamp some business processes.
- Follow Accounting Guidelines. Lauren Zarsky is a reminder to always follow procedures designed to reduce fraud. As a CPA, Lauren Zarsky knew insider trading was equivalent to stealing. But she was willing to risk her future career for less than $20,000. Small businesses often rely heavily on their accountants for much more than cash management and financial statements. They are often in a position to steal or take advantage of the company. Make sure your external CPA has assisted in setting up accounting procedures. If you don’t undergo audit or financial compliance, talk to your CPA firm about other ways they might periodically review your organization to limit your exposure.
- Employee Screening. Background screens may not reveal all that you should know. It’s unclear whether Zarsky’s settlement will preclude her activities from showing up in an employer’s background check. Will her state revoke her CPA license? How many employers validate credentials?
Hot Tip. Tip-Off. Ticked Off
Beware OTC Pink Market
Even when trading was suspended on the Australian Exchange, The OTC Pink Market continued to trade the stock in the U.S. What is the Pink Market? Check out Information on OTC Pink Market
Text Tips to Tick You Off
Lauren Zarsky, CPA, texted her mother nearly a year before the stock plummeted, “I think we all need to consider investing in [I]nnate [T]herapeutics. I might put in $15k and that has a greater than 50% chance of going up to $250k …. that is actually unheard of and [C]am’s dad almost guarantees it within the next 1 to 2 years.” Subsequently Lauren texted, “And we’ll always keep in touch with [C]am’s dad who I’m guessing would know how things are looking as we get closer to the end of the trial. A” And days later, “I’ll make sure [C]am’s dad keeps us in the loop.” SEC Complaint
Small Pharma – Big Risks
When investing in small pharma, risks abound. The big pharmaceutical companies often rely on these smaller companies to take drugs to trial, letting the smaller companies do all the research. If the trial goes well, Big Pharma may buy the small company, making small pharma investors some incredible returns. But if a company only has one, two or even three drugs, if the drug fails in testing, the company’s stock will most certainly tank.
Beware the Stock Tip
Six people close to Christopher Collins invested in Innate’s stock due to his recommendation. Family and friends stock tips often lead to investments in pyramids or Ponzi schemes. Vet all stock tips with professionals before taking the plunge. Know the risks so you won’t get ticked off and end up as part of an SEC investigation or in a commercial lawsuit.
If you find yourself exploring a breach of contract, confidentiality or fiduciary duty matter, we are ready to help.
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