How far need a bank in merger talks go to steer its officials clear of insider-trading charges?
Rochester Community Savings Bank in upstate New York says it did its homework. Nevertheless, three former officials have been charged.
The bank says it advises officers and directors of securities laws as a matter of policy. And court papers filed by the Securities and Exchange Commission confirm it.
In late 1980s, the documents say, Robert Frame, Thomas Farrell, Timothy Moriarty signed acknowledgements that they had been so advised. Mr. Frame and Mr. Farrel were outside directors; Mr. Moriarty was vice president of financial management.
Indeed in 1993, when talks began on a merger with First Empire State Corp., Buffalo, the three were reminded of the rules, the documents say.
But the SEC says all three made illegal trades related to those failed talks.
Mr. Frame settled the charges against him without admitting guilt. Mr. Farrell faces civil and criminal charges. Mr. Moriarty was charged this month.
In the last analysis there's no way a bank can illegal insider trading by its officials, especially in an era of frequent mergers, experts say.
"Even if there's a policy in place and it was adopted and people were made aware of it, there's no way an institution can ensure 100% compliance," said David H. Baris, executive director of the American Association of Bank Directors. "If someone's willing to violate the policy and the law, you can't stop that person."
Despite the difficulty of enforcement, however, banking consultants stress that banks and thrifts should still maintain policies against insider trading, and should ensure that all directors, officers, and employees are aware of them, particularly when the institution is involved in confidential merger discussions.
Institutions also should periodically update their educational programs for officers and directors to reflect changes in company policies and the law, said Joseph I. Goldstein, partner at Crowell & Moring in Washington and former associate director of enforcement at the SEC.
"It's a very difficult process to ensure secrecy and confidentiality when you're negotiating with a company that could acquire the institution," Mr. Baris said. "But it's one that is essential for the institution involved and the board members."
Mr. Baris said the key for banks is to limit the number of people in the loop about merger discussions and other confidential information, and clearly discourage officers, employees, and directors from trading at all during such times. Legal counsel should be present at relevant meetings to remind insiders of their responsibilities - and potential repercussions against them.
Mr. Baris also noted that even privately held companies should have such policies in place. In fact, the problem can be especially prevalent among small community institutions whose stock isn't widely traded and whose officers and directors don't have much experience with insider trading issues.
"You only do a merger once," Mr. Baris said. "It's not exactly like they have life experiences and are familiar with these situations. They really need qualified people advising them in this area as to how to go about it."
Having good policies in place is also the best defense for an institution against liability for insider trading by employees, Mr. Goldstein said. Federal law includes consequences for an institution's top executives if they don't take steps to prevent insider trading by subordinates.
