In-house counsel and insider trading: what can we learn from recent case law?

Two recent insider trading cases involving internal counsel, one on each side of the border, serve as a reminder of the high standards to which regulators hold internal counsel, and the importance of robust insider trading policies.

In both of these cases, the internal counsel were regularly given access to material non-public information (MNPI) as part of their roles. Both also either had direct oversight of, or were involved in administering, the issuer’s trading policies. The combination of access to MNPI and involvement in trading policies in both cases created a heightened possibility for risk of insider trading.

Timeline of events: Volk and Frontera

• In June 2018, the Ontario Securities Commission entered into a settlement agreement with Peter Volk, who was the long-standing general counsel to Frontera Energy Corp. (at the time Pacific Rubiales Energy Corp.), a Canadian issuer. At issue was Volk’s purchase of certain unsecured notes issued by Frontera in February 2015.
• Prior to Volk’s purchase, Frontera had been entertaining discussions with two separate parties about a potential acquisition. The transaction process commenced in October 2014, with the receipt of a non-binding letter of intent from ALFA S.A.B. de C.V. Initial discussions with ALFA did not result in the execution of confidentiality agreement.
• Frontera was later approached in December by Harbour Energy Ltd., who executed a confidentiality agreement to enable it to commence due diligence. ALFA returned in February 2015, and executed its own confidentiality agreement.
• After separate discussions with both parties culminated in each advising that they would not propose a transaction without a partner, Frontera introduced ALFA and Harbour so they might consider a joint offer in March 2015.
• A non-binding letter of interest was provided by ALFA and Harbour in April, and an acquisition agreement was signed in May. However, the joint bid was ultimately withdrawn and no acquisition occurred.

The OSC’s concerns

Volk had oversight of Frontera’s insider trading policy, including responsibility for implementing trading black-out periods for the issuer. Volk did not impose a black-out in respect of any of the non-binding discussions with either Harbour or ALFA until March 2015, following ALFA and Harbour’s joint expression of interest. Volk made his black-out decisions in the good faith belief that the information that ALFA and Harbour were engaged in, including due diligence and discussions with management, was not material. Against this backdrop, Volk acquired approximately $75,000 of senior unsecured notes in February 2015.

In the Agreed Statement of Facts, the parties agreed that on the date of his purchase, Volk was aware that:

• there had been a non-binding expression of interest from Harbour (which lacked material terms, including price);
• discussions with Harbour were ongoing; and
• ALFA had executed a confidentiality agreement and been granted access to conduct due diligence.

However, there was no agreement between Frontera and either party about deal terms, nor any certainty that a transaction would materialize with either party and indeed, none did. Volk admitted that as general counsel and the person responsible for implementation of Frontera’s insider trading policy, he “was in a position of high responsibility and trust and was subject to a high professional standard to avoid any appearance of conflicts of interest and any appearance of misuse of confidential information.” He also admitted that the prudent course would have been to refrain from purchasing the notes. However, there was no admission that Volk had contravened insider trading prohibitions, rather, the OSC pursued this settlement on the basis that Volk’s conduct was contrary to the public interest.

The facts in Re Volk are grey—as is common in cases involving allegations of insider trading. What appears to have compelled Staff at the OSC to pursue enforcement is the fact that Volk was an experienced internal counsel, who was responsible for the implementation of Frontera’s insider trading policy. The settlement agreement notes the fact that Volk “self-assessed” that he had no knowledge of any MNPI. That Volk was required to both dictate the black-out periods and comply with them likely informed Staff’s enforcement decision.

Levoff and Apple

In February, the U.S. Department of Justice and the SEC commenced criminal and civil proceedings, respectively, against former Apple Inc in-house counsel Gene Levoff. It is alleged that Levoff earned approximately US$227,000 in profits and avoided US$377,000 in losses as a result of trading prior to Apple disclosing its financial results. Levoff was a senior counsel at Apple, and sat on its Disclosure Committee. The criminal complaint against Levoff alleges that he used information obtained through Apple’s disclosure process to trade during black-out periods at brokerage accounts he had not disclosed to Apple.

The claims against Levoff are unproved but serious. Like Volk, Levoff was responsible for Apple’s insider trading policy. He was in a position of significant trust at Apple, with ready access to MNPI in his role on the Disclosure Committee.

Transparency remains key

Although the facts of these cases differ, the pursuit of claims against Volk and Levoff by regulators illustrates the high standard expected of internal counsel. In light of these high expectations, businesses should ensure that their insider trading policies are robust, and that such policies (and the enforcement of them) take particular account of individuals within businesses who regularly have access to MNPI, including internal counsel. The responsibility for administering insider trading policies can provide opportunities for misuse of MNPI, and regulators can be expected to hold those taking on these responsibilities to a higher standard. In order to ensure insider trading policies contain sufficient checks and balances, businesses may also wish to consider tasking more than one individual with oversight of such policies, including the imposition of black-out periods.