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The recent spate of high-profile deals on Wall Street have brought back memories of Gordon Gekko and the go-go ’80s. In the 1980s, RJR Nabisco, Beatrice Foods, Time Warner and other deals grabbed headlines and brought notoriety and riches to firms like Drexel Burham Lambert and Kohlberg Kravis Roberts & Co., and individuals like Michael Milken, Henry Kravis, Carl Ichan and T. Boone Pickens. With the, at the time, unheard of sums of cash making these deals work, came allegations – and eventually convictions – of insider trading against some of these ’80s titans of Wall Street, including Milken and Ivan Boesky. Within the last two years, the merger-and-acquisition world has reheated to temperatures even beyond those attained during the 1980s. News Corp.’s recent $5 billion bid for Dow Jones and Alcoa Inc.’s recent $27 billion bid for Canadian aluminum rival Alcan are but two examples of the takeover frenzy being played out (again) on Wall Street. In 2006, corporate acquisition and private equity deals cut a wide swath across several industries. For example, Wachovia acquired Golden West Financial for $27 billion, Bayer AG acquired Schering AG for $21.5 billion and Anadarko Petroleum acquired Kerr-McGee for $18 billion. In addition, private equity firms like Kohlberg Kravis Roberts and Texas Pacific Group have been major players, reflected by their $45 billion bid to buy energy producer TXU Corp. And as these big deals have increased, both in size and frequency, so has the regulatory scrutiny of these deals. According to a recent Financial Times report, between Jan. 1 and April 20, the New York Stock Exchange referred 45 cases of possible insider trading to the SEC. That less-than-four-month figure of 45 referrals is compared with the 111 NYSE referrals to the SEC in all of 2006. NASDAQ has not released any referral figures for 2007, but its 2006 referrals showed a substantial rise from 2005. The SEC has made clear that insider-trading cases will be vigorously investigated and prosecuted. Recently, Linda Thomsen, the director of the SEC’s Division of Enforcement, stated that “the SEC has made insider trading ahead of mergers and acquisitions one of its top priorities.” On the heels of News Corp.’s announced bid to purchase Dow Jones, on May 8 the SEC charged a Hong Kong couple with insider-trading arising from their purchase of over 400,000 shares of Dow Jones stock prior to the News Corp. bid announcement. On May 10, Randi Collotta, a former Morgan Stanley compliance officer, entered a guilty plea to insider trading in federal court in Manhattan. Specifically, Collotta admitted providing inside information to her husband, Christopher, relating to pending deals involving Morgan Stanley clients. Her husband, who also pled guilty on May 10, then shared the information with other co-conspirators. On May 3, the FBI arrested a Credit Suisse investment banker on charges of insider trading, alleging that he tipped an accomplice in Pakistan with confidential information involving several pending Credit Suisse deals. Moreover, foreign countries are quickly stepping up their regulatory efforts in order to combat insider trading. On May 24, the New Democratic Party in Canada announced a proposal to establish a Canadian securities commission, replacing the patchwork network of provincial securities commissions. On May 23, Le Monde reported that French regulators are investigating possible insider trading by key executives of the parent company of Airbus relating to the March and April 2006 sale of millions of shares in that company prior to the announcement of a major delay to the rollout of the new superjumbo A380 plane. With the domestic and international regulatory scrutiny attendant to these big deals on the rise, it is important for companies to ensure that their policies against insider-trading are in place and current, and that all employees, officers, and directors be required to review such policies. Information is more dispersed, freely available and in many more forms that in the 1980s – domestic and international Internet chat rooms and message boards, blogs, e-mail, cell phones, text messages, etc., are all possible breeding grounds for inside information. And as regulatory detection techniques advance, these are also areas where regulators will target to find that smoking-gun tip. Most companies already have in place written policies against insider trading. The touchstone of those policies is the prohibition against trading in “material nonpublic information.” At their core, these policies prohibit employees, officers and directors from trading in, or providing to third parties, any material nonpublic information. But many of these policies were crafted several years ago, and they may not sufficiently consider the current realities of how information is disseminated, obtained and used. An insider-trading policy must first define what information is at issue; that is, “material information.” Information is material if it impacts a reasonable investor’s decision to buy or sell stock. Such a simplistic definition must be supplemented, in the policy, by examples of material events. These events include, but are not limited to: acquisition or merger discussions; company financial or legal problems; earnings or sales results; the commencement or settlement of a major lawsuit; a major development in a government investigation; winning or losing a large contract; or a significant change in management. These examples – and perhaps others – should be clearly set forth in the policy. Most companies’ policies simply define “nonpublic information” as information that has not yet been widely disseminated to the public either via a press release or a public filing by the company. Such a definition does not recognize the realities of how information travels, how it is shared and how it is ultimately used. Obviously, those with access to inside information should only share the information with those necessary to the deal – either inside or outside the company. And a mechanism should be established where even such appropriate sharing, whether in e-mail, telephone call or other method should be reported. The policy should explicitly prohibit any postings – of any information at any time – on message boards (companies could also employ software that prohibits access to any chat sites). Moreover, as companies continue to increase international activities and with information not respecting geographic boundaries, companies should step up oversight of their international compliance efforts. Conducting an internal investigation in response to an inquiry from the New York Stock Exchange, NASDAQ, the SEC or a foreign regulator is obviously time consuming and can be costly for a company. It also can result in negative publicity for the company and, while this is an issue of great academic economic debate, many studies have concluded that insider-trading scandals adversely impact share prices. The key is sufficiently educating employees, officers and directors to comply with effective insider trading policies. Conducting training regarding what constitutes prohibited insider training, coupled with attestations that the policy has been reviewed are necessary steps. Instituting procedures for suspected dissemination of inside information would also be part of a comprehensive program. Moreover, in the first instance, while everyone in the company is certainly on the same team, material nonpublic information should only be known by those in the huddle – a small group of employees, officers and directors whose position requires access to the information at issue. While it is ultimately not possible to police and prevent any instance of the trading of material nonpublic information, there are institutional controls that companies should enact that will not only lessen the opportunities for the dissemination of such information but also show regulators that a company is serious about preventing insider trading. Henry E. Hockeimer Jr. is a partner in the litigation department and a member of the white collar litigation practice group at Ballard Spahr Andrews & Ingersoll. He focuses his practice on white collar criminal defense, securities fraud, and complex civil litigation.

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