United States: Insider Trading Around Private Placements: Was Tom Price's Investment Down Under Above Board?

Article by Alexander Porcaro, James Thompson and Michael Tu

On February 10, the Senate confirmed Representative Tom Price (R-GA) as Secretary of Health and Human Services, where he will oversee the U.S. Food and Drug Administration (FDA). His nomination has not been without controversy, including several Senators and a coalition of public interest advocacy groups demanding an investigation into whether Price violated insider trading laws when he invested in an Australian pharmaceutical company last summer.  This highlights some basic precautionary steps that public companies can take when considering private placements.

The company Price invested in, Innate Immunotherapeutics, is working to develop a single product. The company is essentially a bet that the drug will succeed in clinical trials and receive FDA approval.  Price was introduced to the company by Representative Chris Collins (R-NY), who sits on the company's board and is its largest shareholder.  The introduction was regarding a private placement that Innate was offering to select U.S. investors to raise additional working capital for a clinical trial and to "seek approval from the United States Food and Drug Administration for an Investigational New Drug programme in the United States," among other purposes.  The private placement was priced at $0.18 USD per share, a 12% discount to the stock's market price in early June 2016 (the stock is publicly traded on the Australian Securities Exchange).  Even though both Price and Collins sit on committees that oversee the health care and pharmaceutical industries, both invested in the private placement last summer.

President Trump nominated Price to head HHS on November 29, 2016.  By then, Innmate's share price had risen to $0.58 USD.  The stock peaked at $1.39 USD on January 25, 2016, representing a 670% increase on the congressmen's investments.  Last Friday, when the Senate confirmed Price, the stock closed at $0.71 USD.

Given these eye-popping returns, some have questioned whether the congressmen invested in the private placement based on non-public information about Innate and its prospects for FDA approval – in other words, whether they committed insider trading. No investigation has been announced, and there is no public evidence of any wrongdoing, but individuals have been ensnared in the past for alleged insider trading around private placements.

Most notably, the SEC sued celebrity businessman and Dallas Mavericks owner Mark Cuban in 2008, alleging that he sold 600,000 shares of the company Mamma.com based on material, nonpublic information that he learned when he was invited to participate in a private placement in public equity ("PIPE").  The case turned on an eight minute and 35 second phone call between Cuban and the company's CEO, during which Cuban allegedly agreed in advance to keep the PIPE offering information confidential.  At the end of this call, Cuban allegedly said, "Well, now I'm screwed. I can't sell."  Nonetheless, he sold his entire stake in the company the next day, avoiding around $750,000 in losses.  Cuban ultimately prevailed at trial.

The Cuban case involved the SEC's selective disclosure rule, known as Regulation FD.  Reg FD provides that when a company discloses material nonpublic information to someone who may trade on that information, the company must publicly disclose the information.  17 C.F.R. § 243.100.  There is an exception where the person receiving the information agrees to maintain it in confidence – the rationale being that that person's misuse of the information would be covered by insider trading law.  17 C.F.R. § 243.100(b)(ii); SEC Release Notice, Release No. 7881 (Aug. 15, 2000).

Regulation FD and the Cuban case highlight two simple precautionary steps that a public company can take when considering a private placement. First, the company should have potential investors and analysts sign a confidentiality agreement before sharing information about the private placement.  This confidentiality agreement should include an agreement not to trade on non-public information.  Second, the company should publicly disclose the private placement as early as possible, and ideally before discussing it with potential investors.  While public companies should have formal disclosure policies that ensure compliance with Regulation FD, these two simple steps should be at the core of a more rigorous compliance program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.