Saturday, July 5, 2014

Dimon and Disclosure

The blogosphere has been a-twitter with commentary on Jamie Dimon's revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it.  From the public news, his prognosis sounds good.  For that, I am sure all are grateful.

As some of you may know, my interest in issues relating to disclosures of facts from executives' private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited).  After co-writing the book about the basic concerns in Stewart's insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case.  Two of these works covered the disclosure of private facts.  Among the types of private facts covered are those relating to executive health concerns.

The first of the two articles, published in the Wake Forest Law Review, covered the securities regulation issues in some depth.  Steve Bainbridge already has a nice piece up on that aspect of the Dimon matter.  In essence, because of a lack of line-item mandatory disclosure requirements for a many of the issues relating to executive's private lives, the weight falls on gap-filling disclosure rules (i.e., Rule 408 under the Securities Act of 1933 and Rule 12b-20 under the Securities Exchange Act of 1934) and the antifraud and misstatements liability provisions in both acts, including principally Section 10(b) of and Rule 10b-5 under the 1934 Act.  

As Steve points out, this reduces the analysis to a question of materiality (about which I have written before in the insider trading context, here and here).  Steve appropriately highlights the tensions between personal privacy and the firm's disclosure obligations.  (Like Steve, I have a question about how HIPAA affects the privacy question in this context.)  I argue in my article that the materiality question, as difficult as the materiality standard is to apply in cases like this, is more likely to be resolved in favor of disclosure when the executive at issue is a well-known, integral member of the C-suite--someone who is a founder or who is iconic (or both). On balance, I favor the SEC tackling this head on with disclosure or helpful guidance.

I also address, in a separate paper published in Transactions: Tennessee Journal of Business Law, the possibility (albeit remote) that state law fiduciary duties might compel an executive to disclose an illness or other private facts either to the public or to the firm's board of director's (or equivalent managing body for entities that do not have boards of directors).  Said another way, when is it bad faith or not in the best interests of the firm for an executive to withhold disclosure?  This work reminded me that we most often need to focus on two stages of disclosure--the executive to the board of directors and the board of directors to the public.  Truly, this paper is but a "poke" at the issue, but it was designed to offer food for thought.

I like teaching these fact pattern.  Students seem to "get" them, and stories like these enable them to see how a single set of facts involving a corporate manager can lead to so many legal issues--involving different, and sometimes conflicting, legal rules.  Also, the disclosure questions help students grapple with materiality assessments, which practitioners have to make (often, uncomfortably) all the time.  (I assign a chapter from my book on materiality as reading for that class.)  Great class discussions can be started if you ask students whether disclosure is required and then require them to justify their disclosure judgment.  After hearing out the student's answer and reasoning, you then can, together with classmates, play devil's advocate to great effect.  As some of us begin to think about the fall semester, I offer this up to readers in the law academy as an idea, in case it works for one of your courses.

 

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Business Associations, Books, Current Affairs, Joan Heminway, Securities Regulation | Permalink

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