Learning Center
Plans & pricing Sign in
Sign Out

SEC Prop Alert


           REORGANIZATION &                                                                             Attorney Advertising

By: John D. Hogoboom, Esq., Sharon L. Levine, Esq. and S. Jason Teele, Esq.                                            June 2007

In SEC v. Barclays Bank PLC and           Although enforcement actions by the          the value of the securities being
Steven J. Landzberg, Case No.             SEC against creditor committee mem-          traded. Such agreements are typically
07-04427 (S.D.N.Y.), the SEC ac-          bers are rare — the first such action        used in transactions where the seller is
cused Barclays Bank PLC and               was brought in 1993 — the Barclays           prohibited by fiduciary duties or confi-
one of its traders of illegally           enforcement action calls into doubt          dentiality agreements from disclosing
trading millions of dollars of            the prophylactic benefits of the big boy     actual material nonpublic information
bond securities based on mate-            letter. The SEC recognized that Bar-         to the other party. Big boy letters, as a
rial non-public information ob-           clays and the trader used big boy let-       means of avoiding insider trading liabil-
tained through Barclays’ service          ters in many of the allegedly illegal        ity, springs from the United States
on several different official and         transactions, but nevertheless accused       Supreme Court’s recognition of the
unofficial committees of unse-            the defendants of multiple Rule 10b-5        misappropriation theory of insider trad-
cured creditors in various chap-          violations for failing to disclose the ma-   ing in its landmark ruling in U.S. v.
ter 11 cases. The defendants              terial nonpublic information to which        O’Hagan, 521 U.S. 642 (1997). Prior
recently settled the action for           they were privy prior to engaging in         to O’Hagan, courts recognized only the
$10.9 million plus the defen-             the trades. By implication, only the         classical theory of insider trading. The
dants’ consent to the entry of            disclosure of the material nonpublic in-     classical theory of insider trading re-
permanent injunctions prohibit-           formation by the defendants, a disclo-       quires that before a duty to disclose
ing further violations of the Se-         sure prohibited by the defendants’           arises, there must be a fiduciary duty
curities Act of 1933 and the              confidentiality agreements with the          owed by the insider to the counter-
Securities and Exchange Act of            debtors, could have rendered the             party to the trade. See SEC v. Texas
1934. Barclays’ use of so-called          trades compliant with Rule 10b-5.            Gulf Sulphur Co., 401 F.2d 833 (2d Cir.
“big boy” letters did not shield                                                       1968). The misappropriation theory
it or the individual trader from                                                       expands the classical theory by extend-
insider trading charges. This             The Rise of                                  ing insider trading liability to non-insid-
enforcement action should serve           Big Boy Letters                              ers without any fiduciary duty owing to
as an alarm bell to all who rely          Big boy letters are agreements be-           their trading counterpart, but with a fi-
on big boy letters to trade on            tween buyers and sellers of securities       duciary duty owing to another third-
material nonpublic information.           pursuant to which one party (usually
                                          the seller) discloses that it has better
                                          information than the other party, and
                                          the parties agree to go forward with
                                          the transaction despite this information
                                          disparity and the potential impact on
             Bankruptcy, Financial
Reorganization & Creditors’ Rights              LOWENSTEIN SANDLER PC CLIENT ALERT

 party. See SEC v. Cherif, 933 F.2d 403,       liberations and information are confi-      chapter 11 cases involving public com-
 409 (7th Cir. 1991)(“The misappropri-         dential. Moreover, creditor committee       panies, often provide a procedure for
 ation theory focuses not on he in-            members owe fiduciary duties to other       providing notice of intent to trade and
 sider’s fiduciary duty to the issuing         similarly situated creditors. See Pan       an opportunity for the debtor to ob-
 company … but on whether the in-              Am Corp. v. Delta Air Lines, Inc., 175      ject to certain trading.
 sider breached a fiduciary duty to any        B.R. 438, 514 (S.D.N.Y.1994); In re
 lawful possessor of material non-pub-         First Republicbank Corp., 95 B.R. 58,
 lic information.”).                           61 (Bankr. N.D. Tex. 1988)(“A member        Conclusion
                                               of a creditor’s committee owes a fidu-      The jurisprudence of big boy letters
 In recognizing the misappropriation
                                               ciary duty to represent the interest of     will soon change again as the first
 theory, the Supreme Court shifted
                                               all creditors… .”). Clearly, committee      case involving these agreements is set
 traders’ disclosure obligations away
                                               members occupy positions of trust           to go to trial in Texas. Nevertheless, in
 from their trading partners and to-
                                               and confidence.                             light of the Barclays enforcement ac-
 ward the issuers. But an exception to
 the misappropriation theory renders           Committee members who misappro-             tion, those who use big boy letters to
 less than all trading on material non-        priate material nonpublic information       trade on material nonpublic informa-
 public information a violation of Rule        may therefore be found to have              tion must take an even more cautious
 10b-5. In O’Hagan, the Supreme                breached their duties to the debtor as      approach, after consulting with legal
 Court implied that a person in posses-        well as their fellow committee mem-         counsel, to ensure that their trading
 sion of material nonpublic information        bers and similarly situated creditors.      activity complies with all applicable
 may avoid liability by disclosing his in-     See In re Tucker Freight Lines, Inc., 62    trading laws, rules and other
 tent to trade to the company without          B.R. 213 (Bankr. W.D. Mich.                  requirements, both before deciding
 disclosing the actual information to          1986)(finding that committee mem-           to trade, and as the trade is being
 the trading partner. Thus the rise of         bers violated their duties to similarly     documented.
 big boy letters as a means to limit in-       situated creditors); SEC v. Baker, Case
 sider trading liability.                      No. 93-7398 (S.D.N.Y.)(charging com-
                                               mittee member with breach of duty to
                                               the committee member’s shareholders         John D. Hogoboom is a
 Committee Member                              and the committee itself). To mini-         member of Lowenstein Sandler
 Insider Trading Liability                     mize the risk of such liability, many       PC and a founding member of
                                               committee members rely on big boy           the Lowenstein Sandler Specialty
 Creditor committee members run the                                                        Finance Group.
 risk of incurring insider trading liability   letters when they trade in the debtor’s
 under the misappropriation theory.            securities.
                                                                                           Sharon L. Levine is a member
 Since committee members often ob-                                                         and S. Jason Teele is an
 tain access to confidential information                                                   associate of Lowenstein Sandler
 regarding the details of a debtor’s op-       Committee Members’                          PC practicing in the firm’s Bank-
 erations, business plans, and reorgani-       Use of Big Boy Letters                      ruptcy, Financial Reorganization
                                                                                           & Creditors’ Rights Department.
 zation plans, most debtors require            To satisfy their duties, committee
 committee members to sign confiden-           members seeking to trade in securities
                                                                                           They may be reached by calling
 tiality agreements at the outset of the       of the debtor often enter into big boy      973.597.2500 or via e-mail at
 case and before any information is ex-        letters with their trading partners only,
 changed. Additionally, most creditor          after disclosing their intent to trade to, or
 committee by-laws, which each mem-            the debtor. Trading restrictions im-
 ber signs, provide that committee de-         posed by bankruptcy courts, in many

To top