Frozen assets

Companies limiting or restricting employees from actively trading in their stock is nothing new. In fact, most firms enforce blackout periods several times a year, usually immediately preceding and during the release of financial reports. The current situation is very different from this norm and the latest moves by Fannie Mae (FNMA), Freddie Mac, General Motors (GM) and others may forever change the scope and effect of the practice. 

Traditionally, insider-trading restrictions have applied exclusively to those with regular access to sensitive material financial information – typically the executives, board members and some of the more senior management. At FNMA, however, this is not currently the case. All 5,000 employees of the financial services firm have been banned from transacting in the company’s shares until after the company issues its delayed and restated financial reports. Industry professionals describe the move as highly unusual. 

Freddie Mac, FNMA’s sister company, also has a long-term insider-trading ban in place that reaches beyond the board and executive suites. Some 800 employees at Freddie Mac have been restricted from trading the company’s stock. 

The expansion of such blackouts to employees beyond the executive suite has implications for many other firms. Indeed, GM has recently implemented an indefinite freeze on its senior management team on trading the company’s shares. GM would not confirm exactly how many people are involved, but it is believed the management suite includes approximately 400 staff members. This is more significant when we consider that, unlike FNMA and Freddie Mac, GM is up to date with all required filings and is not at this point experiencing any formal legal or regulatory investigations. 

Employee protection 

The problem at FNMA is the pending restatements. A FNMA spokesperson explaines that, since the company is not releasing any periodic financial statements, press releases or advisories, any information could be considered by some as sensitive. A large number of employees is said to have access to information that is now non-public when, under regular circumstances – of full and current disclosure – they would not. 

It was decided, therefore, to implement the trading suspension until all filings are up to date in order to avoid any possible allegations of impropriety in terms of insider trades. The spokesperson explains that it is more to protect the employees than anything else.
 
Chris Bartoli, a partner of the corporate and securities practice at Baker & McKenzie, agrees with this assessment. ‘FNMA is a unique situation in that, with the restatement and much publicized problems, the management may be taking the measure [of an enforced companywide trading ban] to protect employees from possible legal actions. This may be considered necessary because the last few years have seen plaintiffs become far more aggressive.’ He continues to explain that ‘As there are no current figures, any and all information is more sensitive. The public and the investment community at large have no reliable, up-to-date information to rely upon. For this reason an employee farther down the management tree who would not usually be considered as having access to material non-public information may now be considered as doing so.’ 

GM’s situation is very different and in many ways potentially more important. The company is not delinquent in any regulatory filings and yet the senior management remains in the blackout period. 

Jerry Dubrowski, GM’s financial communications director, explaines that, similar to FNMA, ‘the rationale behind the move to broaden the pool of people [who] are affected by the trading ban is basically to protect the individuals and the company from allegations of impropriety.’ He continued, ‘When the earnings guidance was withdrawn earlier in the year it was decided to implement the trading blackout. It will stay in place until new guidance is issued and possibly for an extended period after that. There is no timeline for lifting the ban.’ 

Under GM’s structure, there are a lot of people who could be considered as having access to material sensitive information. For example, GM has an extensive finance department, not to mention the GMAC operation. While these mid-managers will not have access to all the information they will each have access to parts of it. 

Trading bans make people nervous, and rightly so. More than a few companies that have famously and spectacularly collapsed in recent years instituted bans while assets and funds were manipulated away from the public eye. These were exceptional cases and the public should not be overly concerned. 

The protections put in place following the collapse of firms like Enron and the birth of Sarbanes-Oxley Section 306 go a long way to preventing investors losing money invested in pension schemes. 

Bartoli suggests, ‘GM may be slightly overzealous in its actions as it is currently up to date with all filings. It has, however, experienced a number of credit downgrades over the past few years and there are market rumors of pending merger or demerger activity.’ 

Often, when a company that is current with all filings implements a measure like this, it is a sign of a pending major financial or corporate transaction. 

A wider problem

The effect of the bans may have more wide-reaching consequences, especially at GM. By saying these people have access to material sensitive information at a period of full disclosure, it is possible that all future trades could be opened up to investigation. If they have access now then what is to say they don’t still have access in the future? It could lead to a dramatic increase in fraudulent trading suits. 

Bartoli suggests that, while this is a possible outcome, it is highly unlikely. ‘[FNMA and GM] are taking a very conservative approach by throwing a blanket over the company rather than selecting which employees might have access to material information. A few companies are taking similar steps, but we are certainly not seeing it happen marketwide and nor do we expect it to.’ 

He explained that there is an issue of size. ‘The FNMA, Freddie Mac and GM moves probably won’t open up the door for broader future lawsuits. There is an enforceability issue in that trades made with material information are only ever discovered if they are of significant volume. Most regular employees do not trade in large enough blocks to make detection likely.’ 

With many companies still struggling with more extensive disclosure requirements, and the more aggressive nature of regulators and plaintiffs, it appears likely that we will witness more companies extending trading blackouts beyond the executive suite.