Thursday, May 31, 2007

Barclays Settles SEC Insider Trading Case

Insider trading can happen in lots of different ways, and Barclays Bank PLC chose an interesting one: using information from the creditors committees of bankrupt companies to trade in their debt securities.  Steven Landzberg, a defendant in the case along with Barclays, was the bank's representative on the creditors committees for six different companies, and as a member received private information about the financial condition of the debtors.  Landzberg's more important job at Barclays was as head of its U.S. Distressed Debt Desk, which traded the bonds of companies in bankruptcy, making it very hard to resist the opportunity to trade.  According to the SEC Litigation Release (here):

The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported "big boy letters" to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as "Chair" of two of these bankruptcy committees at the time of its illegal insider trading.

The complaint further alleges that Barclays' senior management authorized Landzberg to buy and sell securities for Barclays' account while he served on bankruptcy creditors committees. Barclays' Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.

The reference to "big boy letters" concerns an agreement between parties to a private securities transaction in which they acknowledge that one side may have superior information and the counter-party will hold them harmless for taking advantage of the informational disparity -- it has nothing to do with hamburgers.  The letters do not bind the SEC, however, and whether such an agreement could protect against a claim for illegal conduct in a transaction is very much an open question.  As trading becomes more sophisticated, the use of such devices is likely to increase, although how much cover they provide is something that will only be clarified over time.

Barclays settled the case by agreeing to pay over $10.9 million: $3,971,736 in disgorgement plus prejudgment interest of $971,825, and a civil penalty of $6 million. The bank has a strong incentive to settle the case because it is pursuing a deal to buy global bank ABN Amro, and will need clearance from U.S. regulators and the SEC, among others, if it wants to move forward with that deal.  Landzberg agreed to a permanent injunction barring him from participating in creditor committees in federal bankruptcy proceedings for companies that have issued securities and to pay a $750,000 civil penalty. (ph)

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Civil Enforcement, Insider Trading, Securities | Permalink

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