Poker GameSay you own shares of stock in Podunk Corp. Perhaps you won them in a poker game. You can't sell them on a stock exchange; no one has done what federal securities law requires in order to "register" the stock.

You know almost nothing about what Podunk has done in the last five years. You think it has something to do with energy, but you don't get income statements or balance sheets from the people who run the thing. But for some reason those guys offer to buy your shares for $15 a pop. They of course know all about Podunk's finances, but they tell you bupkes. Take the deal or leave it, they say.

You take it.

A couple years later, you find out that Podunk had hit it big in the Bakken shale play! Your shares really had a value of $1,500 each!! Boy do you feel stupid!!!

But do you have a federal securities law claim for insider trading?

Yes, the Second Circuit affirmed in Steginsky v. Xcelera Inc., No. 13-1327-cv (2d Cir. Jan. 27, 2014). As the panel noted:

[T]he duty of corporate insiders to abstain from trading or to disclose material inside information applies to unregistered securities. Section 10(b) explicitly applies to “any security registered on a national securities exchange or any security not so registered.” 15 U.S.C. § 78j(b) (emphasis added). We have explicitly stated that “closed corporations that purchase their own stock have a special obligation to disclose to sellers all material information.” Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001).

Id., slip op. 9.

The holding came as a bit of a surprise to Blawgletter. We knew that claims under sections 11 and 12 of the Securities Act of 1933 give a civil remedy for hanky-panky that results in a purchase or sale of securities but only ones that trade publicly. An insider trading claim, on the other hand, falls under the Securities Exchange Act of 1934, and while that Act applies most often to big-time securities that have a public market, it also reaches no-name stocks like Podunk. Now it makes total sense!

Kudos by the way to the lawyer who won in the Second Circuit — the one and only Jeffrey S. Abraham. Way to go, Jeff!