Cutting the Party Line: How the SEC Can Silence Persisting Phone Call Tips

The fundamental premise of the U.S. federal securities laws is full and fair disclosure to all investors regardless of status or number of shares in their portfolios.1 Then why, after more than seventy years of prohibition, are there still blatant incidents of corporate favoritism and selective disclosure to those privileged few with access to the party line?2 In 2008, the chief executive officer (“CEO”) of a publically traded company, Mamma.com, personally called one of its most prominent investors to relay material, nonpublic information.3 The investor allegedly used that information, which he received only by virtue of his status, to avoid a substantial loss.4 The Securities and Exchange Commission (“SEC”) 5 brought charges against the investor for, among other infractions, violation of ยง 10(b) of the Securities Exchange Act of 1934 (“1934 Act”). However, mysteriously missing from the SEC’s complaint was a cause of action against the CEO who selectively disclosed the material, nonpublic information in the first place.7 This is a classic example of selective disclosure, explicitly prohibited by the securities laws and yet no action was initiated against the disclosing CEO or his company. In light of SEC v. Cuban, it must be asked: where did the law get lost?

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