WASHINGTON -- Those who think the municipal securities market is immune to insider trading scandals had better think again, a prominent attorney warned securities lawyers.
"It's a thing of the past, a dinosaur" to think the market does not have insider trading problems and will not be the subject of federal enforcement action, said Oliver Lee, a partner specializing in public finance at the Atlanta law firm of Troutman, Sanders, Lockerman & Ashmore. Mr. Lee made his comments at the American Bar Association annual meeting that was recently held in Atlanta.
Although there is almost no case law on municipal insider trading and even little discussion of it, the former Securities and Exchange Commission staff member said the potential for trouble has grown as the municipal market has evolved, especially as state and local governments have experimented with more instruments that were not backed by the full faith and credit of the issuer.
"Fifteen years ago there wasn't a thought that underlying credit enhancers like insurance companies may go bankrupt," he said. "But today that's a very real concern. If there are rumblings about the credit enhancer that become known to a select group, then you have a secondary market trading problem."
Another scenario that deserves caution, Mr. Lee said, is when an issuer decides to do a follow-up issue, and the bond counsel determines the city cannot do so because the initial issue should not have been done in the first place. If that new information becomes known only to a select group of people who then sell their securities short, there could be an insider trading violation, he said.
In another example, he asked what happens when a research department learns of an undisclosed problem with an issue the firm is trading. "How much of a Chinese wall is necessary within the firm?" Mr. Lee asked.
He also said that as state and local politics become more volatile -- such as with the enactment of Proposition 13 in California -- there may be interruptions in cash flow that need to be disclosed as soon as possible.
"The question becomes of what point should that information be publicly disseminated and to whom," particularly if there is no central repository for the data, Mr. Lee said. "Is a press release sufficient? These are some of the serious questions that issuers and trustees and underwriters' counsel are dealing with today." He said they "bear some addressing by the SEC and industry in general."
Richard Roberts, a member of the SEC, earlier in the meeting told the association he thinks the agency is moving in that direction. "If I'm here next year, I'll hopefully be able to speak specifically about an example where we've completed an enforcement action in insider trading in corporate debt as well as the municipal bond area."
Mr. Roberts was responding to audience complaints that, while technically, information is available from states or local governments, traders or analysts often need a contact in those governments to obtain it. "It's a struggle," said one participant.
Edward Pittman, an aide to Mr. Roberts, noted that the commission has moved away from the concept that eveyone always has to get the same information. "If you maintain an open door policy and are willing to discuss recent developments with anyone that happens to call, and you are not specifically giving information to one analyst and not the other with the expectation of obtaining some kind of advantage for yourself," then there will not be a problem with insider trading, he said.
He asked Mr. Lee whether he sees any problem with the idea that some analysts can get information more easily than others. "If you are smart enough to know where it is, [and] you ask for it and get it" while someone else does not, asked Mr. Pittman, would that be a problem?
Mr. Lee said all that matters is that the information be available in some repository, and that it will be provided upon request. He said the repository can simply be a "cubbyhole back in some state office."
"I think in the main, the problem comes where someone goes out and gets information that's not generally available -- such as there is a default of some sort -- and goes out and sells the securities," Mr. Lee said. "That's the kind of thing I believe is going on now that the commission and the industry is trying to make an effort to police."
