Selling Stock Through the President’s Desk Drawer

by Butler Snow LLP
Contact

Look inside the desk drawer of many, if not most, community bank presidents and you will find a list of the names of individuals who want to buy or sell the bank’s stock.  We bank lawyers get asked about these “desk drawer” lists on occasion (often preceded by caveats like: “I’m not sure if this is a great idea but… ” or “Every small bank president has this list in a desk drawer …”).

On one hand, all bankers want to provide shareholders with value and service. On the other hand, you don’t need to understand the intricacies of securities laws to sense that a desk drawer list has the potential for abuse by unscrupulous company insiders or that the list of laws that might apply to a desk drawer system is long. So while these desk drawer lists are a common practice among community banks, they do pose a legal risk to even the most scrupulous and careful presidents who administer them.

Best Practices

If you want to have a desk drawer list of potential buyers or sellers, proceed carefully and follow some best practices, including:

  • Keep your involvement to “clerical and ministerial” functions only.

  • Potential buyers and sellers should contact each other directly; you should not be involved in communications between the parties.

  • The price for the stock should be negotiated by the parties, and you should not be involved in that process in any way. Have a board-approved policy in place for responding to the inevitable question, “What do you think my stock is worth?” Encourage potential sellers and buyers to talk to their own advisers. Refer potential buyers, sellers, and their advisers to the bank’s call reports, audit, or a board-authorized valuation by an independent third party.

  • You should never handle funds or be involved in payment for securities bought or sold after being matched through the desk drawer.

  • Directors, officers, and employees (including and especially you) should never profit from the desk drawer system or receive compensation based on connections made from the desk drawer.

  • Directors, officers, and employees (including and especially you) should not be involved with buying or selling stock through the desk drawer. If an insider wants to purchase or sell stock through the desk drawer, talk to counsel first.

  • Transactions from the desk drawer should remain occasional and isolated.  If the practice becomes common, it may be time to evaluate whether a better, safer system exists, such as the over-the-counter market. 

This is not meant to be a bulletproof checklist, but rather some best practices that might make the desk drawer system less likely to subject you to broker-dealer regulation and/or penalties under securities laws.

Consequences of Violating the Law

There are serious potential consequences to acting as an unregistered broker-dealer, both to you and to the bank. Individually, if you act as a broker-dealer without registering with federal and state authorities, you face fines and penalties. Additionally, you face potential liability in court from the buyers or sellers that you matched.  Section 29(b) of the Securities Exchange Act of 1934 renders void any contract made in violation of that act or its rule and regulations. Arguably, this provision gives the parties to a transaction arranged by an unregistered broker-dealer a right to void the transaction agreements and unwind transactions that have previously closed. In other words, if you involve yourself too heavily in a desk drawer transaction, or worse use the desk drawer to buy/sell stock individually (or allow bank officers or directors to buy/sell stock individually), the innocent parties may have the right to unwind the transaction because the transaction was arranged by an unregistered broker-dealer.

For the bank, the use of an unregistered broker-dealer in a transaction could cause the bank to lose any exemption from the registration requirements of the Securities Act of 1933 (as well as from applicable state law qualification requirements). Accordingly, the bank may have a difficult time obtaining a legal opinion from its counsel in connection with a future stock offering. It also may subject the bank to civil and criminal penalties, including pursuant to Section 20(e) of the Exchange Act on the theory that the bank aided or abetted the unregistered broker-dealer. Finally, the SEC may bar the bank from conducting private placement offerings in the future, thereby risking its ability to raise capital.

Insiders and the Desk Drawer

Directors and officers buying or selling stock through the desk drawer raises particularly complicated issues.  Any time anyone buys or sells stock in any American company (whether public or private) on the basis of material “inside” information that is not publicly known, it is a violation of Rule 10b-5. Breaking that rule is what sent Martha Stewart to jail, and it is a common cause of action in cases by disgruntled buyers/sellers on the theory that the insider-party had material information that he or she did not disclose.  Because directors and officers frequently know material, non-public information about the company, insiders should always be cautious when conducting a transaction in that company’s stock. Insiders should certainly never use the desk drawer to “buy low and sell high.” Also, the desk drawer should never be used to send a good deal to a friendly insider at the expense of a non-insider. Any manipulation of the desk drawer in that way could expose the bank and the insider to liability, and perhaps even criminal penalties. In addition to Rule 10b-5 issues, there may be state and federal securities law restrictions on the sale of stock by insiders. To summarize a very complicated topic: contact counsel before insiders buy or sell stock, especially if those insiders have passed through the desk drawer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Butler Snow LLP | Attorney Advertising

Written by:

Butler Snow LLP
Contact
more
less

Butler Snow LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.