Wyly Update: Insider-Trading Charge Is "Edgy"

Insider Charge Is "Edgy." I am always surprised to find a report more sympathetic than I am to businessmen facing legal persecution--and when the report comes from the NYT I am simply flabbergasted. But so it is. The Times quotes a law professor as calling the insider-trading charge "edgy," and as involving a novel and suspect legal theory.

The reason, it seems, is that--assuming the Wylys did what the SEC charges--they were not acting on inside information, strictly speaking; they were acting on the basis of plans that they were making as chairman and vice-chairman of Sterling Software. Here is the Times report:

"Other legal scholars say that the S.E.C. could have trouble proving at least parts of its case. Jonathan R. Macey, a professor at Yale Law School who is not affiliated with the case but who was recommended as an insider-trading expert by the Wyly legal team, said he believed the insider trading portion of the S.E.C. charges rested on a novel and suspect legal theory.

“The question is whether it is possible to engage in insider trading when the information you are trading on is something that you thought up yourself,” Professor Macey said. “They had an idea to talk to other companies about a merger. It’s a pretty edgy notion.”

If an executive knows that his company is in undisclosed merger negotiations, trading on that information would clearly be illegal, Professor Macey said. The Wyly case, however, does not allege that the company, Sterling Software, was in merger negotiations. It claims that the Wylys, who served as chairman and vice chairman of the company, “had agreed and resolved that the sale of Sterling Software to an external buyer should be pursued.”The idea came in June 1999, the S.E.C. claims, but formal discussion about a possible sale by company executives did not occur until November 1999. Between those periods, Mr. Macey said, “the S.E.C. is acting as thought police.”

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