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1145 of the Bankruptcy Code allows an exemption from registration does it have to follow insider trading rules if its private?
Anonymous1 views2 answers
Insider Trading Prohibitions: Section 10(b) of the Exchange Act and Rule 10b-5 make it unlawful for any person to engage in fraudulent activity in connection with the purchase or sale of any security. Section 10(b) and Rule 10b-5 apply to insider transactions regardless of whether the issuer is private or public.
My interpretation is that a private company that does not have to register its shares issued in a bankruptcy case under 1145 (a) or 1145(b)(1) can not engage in insider trading and would be in violation of 10b-5. Am I correct?
This is an interesting question that would require more research. However, I would say there is a 90% chance your interpretation is correct. I would make the following analogy: You must have a NJ driver's license to drive in NJ but there are numerous exceptions such as having a DL issued by another state or country but you still must follow the rules of the road. The prohibition on insider trading is a fundamental "rule of the road" in American Securities Law. Still, there are exceptions or "insiders" could never sell their shares while still working for the company. There may be another exemption for the situation you describe.
I point out to you, however, that in a bankruptcy ALL financial information, including prospective financial transactions, MUST be disclosed so, if there were some "insider" information being withheld, the person withholding the information would be violating the bankruptcy code too. That is far more likely to result in legal liability than the somewhat serpentine insider trading laws.
Finally, I note that while the insider trading laws do have a criminal component, I doubt criminal charges would result from a private transaction where it was obvious the seller unavoidably had more information than the purchasers (or here former creditors). The seller could also ask for a release from the insider trading laws. But who would accept or purchase shares where the seller was basically saying, "You know, I know quite a bit about this company and I may have forgotten to tell you everything about its financial condition or its future prospects so I want you to waive the protections of the insider trading laws?" I wouldn't, would you? You seem to be a competent researcher and have a good grasp of the legal principles but you need to discuss the EXACT situation (with all details) with a securities attorney because you are at the crossroads of two very difficult area of the law (securities and bankruptcy) which are both riddled with exceptions which frequently raise unexpected issues for the unwary. Good Luck.
As always, this is just a comment on an interesting hypothetical. It is not legal advise and it is not intended to create an attorney-client relationship.
10-b5 does not apply to a privately held corporation because there is no trading on exchanges so i think you are correct but you should explore this with your attorney.
