IndustryInsights

ARTICLE FIRST PUBLISHED AUGUST 2009 - IR MAGAZINE

Q We’ve always thought our firm was watertight but the Galleon affair has rattled us. What can we do to prevent leaks of sensitive corporate information?

A The plain fact is, stuff leaks. After virtually every deal we work on, we get a letter from an enforcement agency investigating a run-up (or down) in the shares of the acquirer or target, listing various names and asking whether we know them. Occasionally, we recognize one or two.

In Silicon Valley, techie types trade gossip all day long. Inevitably, some of it is material inside information, although it’s not clear that either the talker or the listener actually knows this; it’s just part of the culture.

Go to any trade show or investor conference and you’ll overhear an astounding amount of stuff that, if true, would be material inside information. I use the word ‘stuff’ because a lot of what circulates is exaggeration, misinterpretation, fantasy or good old-fashioned lies.

The second plain fact is, stuff leaks more – and faster and more anonymously – in the era of the internet. The simple response from Reg FD land is that the crime isn’t leaking the information, it’s trading on the information. As former SEC commissioner Harvey Goldschmid has said, it’s very hard to stop people from yakking, or even to find out that they’re doing it, but trading activity leaves a trail.

So what should you do if you’re an IRO wondering whether something bad is looming? Well, you’re not going to find the one really bad apple before he drops off the tree, but you can determine whether your corporate culture is encouraging or discouraging loose lips.

Ten years ago, when the internet was in its relative adolescence, I watched a team from risk consultants Kroll, in just 24 hours, spending no money and breaking no laws, gather a stunning amount of supposedly non-public information from the web about one of our clients. If it were my company, I’d go to the nearest university and hire myself half a dozen websavvy young geeks for a few days. I’d give them free rein to cruise the net and the blogosphere, and see what they came back with.

By the end, I’d have a pretty clear sense of whether my corporate environment was leak-enabling. I’d probably also have learned about all sorts of things I had no idea were in the public domain, some of which could probably use my attention. (Regrettably, few of the mainstream web and social media monitoring services seem to range far enough afield to really surprise their clients.)

Galleon and similar scandals are like sun flares – the potential is always burning inside, but only occasionally does it burst into significant visibility. The main thing you can do is determine whether yours is the kind of company where a sun flare is more likely than normal and, if so, try to make it a little less so.

To discuss this thought piece and related issues about guidance please contact James MacGregor, vice chairman or Lex Suvanto, managing director of the Abernathy MacGregor Group. They can be reached at (212) 371-5999, or at jtm@abmac.com and lex@abmac.com.