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Fordham Journal of Corporate & Financial Law Volume 22 Issue 1 Article 2 2017 Private Investor Meetings in Public Firms: The Case for Increasing Transparency Martin Bengtzen University of Oxford Follow this and additional works at: https://ir.lawnet.fordham.edu/jcfl Part of the Law Commons Recommended Citation Martin Bengtzen, Private Investor Meetings in Public Firms: The Case for Increasing Transparency, 22 FORDHAM J. CORP. & FIN. L. 33 (2017). This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Journal of Corporate & Financial Law by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. PRIVATE INVESTOR MEETINGS IN PUBLIC FIRMS: THE CASE FOR INCREASING TRANSPARENCY Martin Bengtzen* ABSTRACT While developments in the law of insider trading usually attract significant scholarly interest, far less attention has been paid to the design and effects of the Securities and Exchange Commission’s complementary Regulation Fair Disclosure. Yet, this Article argues that the SEC’s current quandaries relating to insider trading enforcement are largely self-inflicted and could have been avoided if it had better aligned its Reg. FD with the Supreme Court’s insider trading jurisprudence. Introduced sixteen years ago to prevent senior officers of public firms from leaking material information to preferred investors and financial analysts, Reg. FD was designed to function as a backstop for undesirable favoritism that insider trading law, as developed by the Supreme Court, could not reach—in particular, the situation where a corporate manager divulges valuable information to a preferred investor not for any obvious personal benefit (which would trigger insider trading law) but for the ostensible benefit of the firm. This Article analyzes Reg. FD through the lens of private investor meetings—personal conversations between corporate managers and investors they select—to find that Reg. FD should not be expected to deter selective disclosure. The regulation was disjointed from the * DPhil Candidate, Faculty of Law, University of Oxford and the Oxford-Man Institute of Quantitative Finance. I would like to thank Jennifer Arlen, Dan Awrey, Paul Davies, Luca Enriques, Merritt Fox, Stavros Gadinis, Edward Greene, Charles Nathan, Giovanna Nicodano, Andrew Tuch, Kristin van Zwieten, and especially John Armour, for helpful comments and discussions. This Article has also benefited from the opportunity to present earlier drafts at workshops at Columbia Law School, the University of Oxford, the Sapienza University of Rome, and the Oxford-Man Institute of Quantitative Finance, and from helpful and careful review by the editors of this Journal. I appreciate financial support from the Torsten Söderberg Foundation. All views and errors are my own. 33 34 FORDHAM JOURNAL [Vol. XXII OF CORPORATE & FINANCIAL LAW outset and professional market participants rationally appear to have taken advantage of its permissive design to obtain preferential access to inside information. For example, through one recently introduced service offering, “corporate access,” selected investors spend billions of dollars on private access to corporate managers in return for the opportunity to lawfully trade on valuable information before it is released to the public. This Article argues that the design of Reg. FD causes undesirable effects and that the SEC should redraft the regulation to follow the Supreme Court’s classification of corporate information as firm property. The SEC could then regulate selective disclosures as transactions in this property that require public disclosure, similar to how insiders must report their personal transactions in firm stock. By increasing transparency to inform investors of selective disclosure events, concerns recently expressed by the SEC and the Department of Justice relating to insider trading enforcement could be alleviated and their requests for Supreme Court intervention in insider trading law reconsidered. TABLE OF CONTENTS INTRODUCTION ...................................................................................... 35 I. OVERVIEW OF PRIVATE INVESTOR MEETINGS ................................. 43 A. REGULATORY BACKGROUND: DISCLOSURE AND DISCRETION ..... 43 B. DETAILS OF PRIVATE INVESTOR MEETINGS ................................. 48 C. THE FUNCTION OF PRIVATE INVESTOR MEETINGS ....................... 52 1. From the Perspective of Firms ............................................ 52 2. From the Perspective of Participating Investors ................. 53 3. From the Perspective of Non-Participating Investors ......... 57 a. Market Efficiency Benefits? .......................................... 57 b. Monitoring Benefits? ..................................................... 63 D. CORPORATE ACCESS AS A MEDIUM FOR INVESTOR MEETINGS .... 64 II. THE UNFULFILLED PROMISES OF REGULATION FD ........................ 67 A. THE SUPREME COURT DEVELOPS INSIDER “TIPPING” IN DIRKS V. SEC ....................................................................................... 68 B. THE SEC RESPONDS WITH REG. FD ............................................ 71 C. THE SEC SUES, LOSES, AND RETREATS ...................................... 79 D. MARKET PARTICIPANTS ADAPT .................................................. 87 1. Analyst Research Goes Private ............................................ 88 2. Corporate Access Cuts Out the Implicated Intermediary .... 90 E. THE SECOND CIRCUIT FURTHER RAISES THE INSIDER TRADING THRESHOLD ............................................................... 94 F. REG. FD: “FUNDAMENTALLY DISJOINTED” ................................. 99 2017] PRIVATE INVESTOR MEETINGS IN PUBLIC FIRMS 35 III. INFORMATION AS PROPERTY, ITS DEPLOYMENT, AND THE RISK OF APPROPRIATION ............................................................. 100 A. NON-PUBLIC INFORMATION AS PROPERTY OF THE FIRM ........... 100 B. A TAXONOMY OF METHODS FOR DEPLOYMENT OF INFORMATION ......................................................................... 103 C. THE RISK AND EVIDENCE OF MANAGERIAL APPROPRIATION .... 104 D. COMPARING THE METHODS FOR DEPLOYMENT OF INFORMATION ......................................................................... 110 1. Selective Disclosure Compared to Public Disclosure ....... 110 2. Selective Disclosure Compared to Insider Trading ........... 115 3. Selective Disclosure Compared to Firm Trading .............. 117 4. Concluding Remarks on Deployment Methods .................. 118 IV. RECONSIDERING SELECTIVE DISCLOSURE REGULATION ............ 120 A. SELECTIVE DISCLOSURE AS A TRANSACTION ............................ 120 B. DESIGNING AN APPROPRIATE REPORTING OBLIGATION ............ 122 C. BENEFITS OF INCREASED TRANSPARENCY ................................. 126 D. COSTS OF INCREASED TRANSPARENCY ..................................... 129 E. IMPLICATIONS FOR OTHER RESEARCH ....................................... 130 CONCLUSION ........................................................................................ 131 INTRODUCTION What are the consequences if a senior manager of a public firm selectively discloses valuable non-public information (“NPI”) about the firm (such as details of its next quarterly report) to curry favor with an investor who trades on the information and makes a substantial profit? In theory, they may both be in breach of the insider trading prohibition and the manager may have violated Regulation Fair Disclosure (“Reg. FD”). In practice, however, this Article argues, the development of the federal common law of insider trading, the flawed design of Reg. FD, the enforcement policy and practices of the Securities and Exchange Commission (“SEC”), and the preference and ability of both corporate managers and investors to keep such selective disclosures out of the view of the public and the regulator combine to allow such conduct to occur with impunity. As a result, selective disclosure provides an attractive method for extraction of private benefits from public firms to the detriment of investors without preferential access. As an example of how managers may be able to distribute such valuable information, consider the recent Second Circuit decision in United States v. Newman: an investor relations manager at Dell (at the time, a large public firm) selectively provided non-public information 36 FORDHAM JOURNAL [Vol. XXII OF CORPORATE & FINANCIAL LAW about its upcoming quarterly results that earned two investors trading profits of $62 million. The Second Circuit held that this activity did not constitute unlawful insider trading and the SEC did not even allege a Reg. FD violation.1 Yet, the receipt of $62 million worth of information from a corporate manager would be a meaningful event for any investor and the potential availability of such awards could sway investors’ decisions on parallel matters where they can influence the manager’s position—such as when they vote on executive pay or in director elections. This Article argues that the current regime, which affords corporate managers significant discretion over the allocation of corporate information, requires increased transparency to prevent abuse. As there is no current comprehensive treatment of the regulation and practices of private investor meetings, Part I begins by establishing what is publicly known about these highly private activities and describes