Monday, March 12, 2018

Martha and Carl: Untying U.S. Insider Trading's Gordian Knot

As I read recent news reports (starting a bit over a week ago and exemplified by stories here, here, here, and here--with the original story featured here) about Carl Icahn's well-timed sale of Manitowoc Company, Inc. stock, I could not help but associate the Icahn/Manitowoc intrigue with the Stewart/ImClone affair from back in the early days of the new millennium--more than 15 years ago.  As many of you know, I spent a fair bit of time researching and writing on Martha Stewart's legal troubles relating to her December 2001 sale of ImClone Systems, Inc. stock.  Eventually, I coauthored and edited a law teaching text focusing on some of the key issues.  A bit of my Martha Stewart work is featured in that book; much of the rest can be found on my SSRN author page.  For those who may not recall or know about the Stewart/ImClone matter, the SEC's press release relating to its insider trading enforcement action against Stewart is here, and it supplies some relevant background.  (Btw, ImClone apparently is now a privately held subsidiary of Eli Lilly and Company organized as an LLC.)

In reading about Icahn's Manitowoc stock sale, my thoughts drifted back to Stewart's ImClone stock sale because of salient parallels in the early public revelations. Just as Icahn had personal and professional connections with U.S. government officials who were aware of material nonpublic information regarding the later-announced imposition of steel tariffs, Martha Stewart had personal and professional connections with at least one member of ImClone management who was aware of impending negative news from the U.S. Food and Drug Administration regarding ImClone's flagship product.  We know from the law itself and Stewart/ImClone fiasco not to jump to conclusions about insider trading liability from such scant facts.  Stewart's insider trading case ended up being settled.  (No, that's not why she went to jail . . . .)  And I have argued in a book chapter (Chapter 4 of this book) that the facts associated with Stewart's stock sale may well have revealed that she did not violate U.S. insider trading prohibitions under Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, as amended.

The Supreme Court's decisions in Dirks v. SEC and Salman v. United States advise us that a tippee trading while in possession of material nonpublic information only violates U.S. insider trading prohibitions under Section 10(b) and Rule 10b-5 if:

  • disclosure of the material nonpublic information in the tippee's possession breached a duty of trust and confidence because it was shared (directly or indirectly) with the tippee improperly--typically (although perhaps not always--as I note and argue in a forthcoming essay) because the duty-bearing tipper benefitted in some way from disclosure of the information; and
  • the tippee knew or should have known that the tipper breached his or her duty of trust and confidence.

See, e.g., Dirks v. SEC, 463 U.S. 646, 660 (1983).  

Thus, there is much more to tease out in terms of the facts of the Icahn/Manitowoc scenario before we can even begin to assert potential insider trading liability.  Among the unanswered questions:

  • what Icahn knew and when he knew it;
  • whether any information disclosed to Icahn was material and nonpublic;
  • who disclosed the information to Icahn and whether anyone directly or indirectly making disclosures to him had a fiduciary or fiduciary-like duty of trust and confidence;
  • whether any disclosures directly or indirectly made to Icahn were inappropriate and, therefore, breached the tipper's fiduciary or fiduciary-like duty of trust and confidence; and
  • whether Icahn knew or should have known that the information he received was disclosed in breach of a fiduciary or fiduciary-like duty of trust and confidence.  

Icahn denies having any information about the Trump administration's imposition of tariffs on the steel industry.  (See,  And the nature of the duties of trust and confidence owed by government officials is somewhat contended (although Donna Nagy's work in this area holds great sway with me).  Regardless, it is simply too soon to tell whether Icahn has any U.S. insider trading liability exposure based on current news reports.  I assume ongoing inquiries will result in more facts being adduced and made public.  This post may serve as a guide for the digestion of those additoonal facts as they are revealed.  In the mean time, feel free to leave your observations and questions in the comments.

Current Affairs, Joan Heminway, Securities Regulation, White Collar Crime | Permalink


The possible imposition of steel tariffs has been public since some time in the campaign. Given the impulsiveness of the President and the uncertainty about exemptions, Icahn's having any meaningful and precise information about what would happen seems exceedingly unlikely. (I wonder how much advance notice Rex Tillerson had before this morning's firing.)

Posted by: Craig Sparks | Mar 13, 2018 9:08:22 AM

Yes, Craig. I hear you on the widely public nature of the potential tariff imposition and the president's unique, unpredictable leadership style. Those factors affect both the materiality and nonpublic nature of any tariff information Icahn may have had, don't they?

But Icahn may have had other information that was relevant to his Manitowoc stock sale that is not impacted by those factors. In the Stewart/ImClone case, Stewart did not know about the impending FDA action, as it turns out. What she knew about were significant stock sales ImClone's founder wanted to make. So, I am sitting and waiting . . . .

Posted by: joanheminway | Mar 13, 2018 9:40:49 AM

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