1. May 2005BIICL - Market Abuse Program Market Abuse: A US Perspective Mark S. Bergman Partner and Head of Global Capital Markets

2. May 2005BIICL - Market Abuse Program Overview Corporate disclosure obligations Insider trading Selective disclosure Market manipulation US does not have concepts of "market abuse" per se or "close periods" The US does have a broad range of rules and regulations that serve as a basis for addressing:

3. May 2005BIICL - Market Abuse Program Disclosure Obligations in the US Disclosure duties generally Duty to correct Duty to update Duty to comment on rumors Protection for forward- looking statements Selective disclosure Rules on use of pro formas Filing obligations for earnings releases Insider trading issues Responsibility for analyst reports Rules for analysts What do US companies worry about when they issue public statements?

4. May 2005BIICL - Market Abuse Program When Must One Speak? Silence absent a duty to disclose is not misleading (includes “no comment”) When a company does speak it must do so in a truthful manner (anti-fraud rules) Key is whether there is a duty to disclose: –Voluntarily statement that is misleading –SEC filings –Trading in own stock –Live statement becomes misleading –Rumors from the company Stock exchange rules stricter, but not controlling

5. May 2005BIICL - Market Abuse Program No Comment “No comment” inappropriate if company issues prior inaccurate statements (no merger talks at a time when there are) “No comment” may be inappropriate if company’s prior correct statements later become misleading at a later date (no merger talks followed by talks)

6. May 2005BIICL - Market Abuse Program When One Does Speak SEC filings must cover mandated disclosure items, which include forward-looking statements Public statements will be subject to the anti-fraud rules as well –Press releases –Earnings calls –Conference participation RSA Security: “achieved analyst expectations in a difficult economic environment” -- misleading

7. May 2005BIICL - Market Abuse Program Regulation FD Selective Disclosure

8. May 2005BIICL - Market Abuse Program Selective Disclosure Intentional vs unintentional disclosure Can cure unintentional disclosure (SEC filing) Applies to statements made by senior officials and regular spokespersons Applies to material information Applies to statements made to broker-dealers, other investment professionals, securityholders Exceptions: NDAs, insiders, rating agencies, registered public offerings Guidance is “material”

9. May 2005BIICL - Market Abuse Program Enforcement Actions SEC serious about monitoring compliance and will enforce Individuals risk liability if active role in violation Non-intentional disclosure must be remedied right away and no further disclosure other than a press release Senior officers must be vigilant in monitoring disclosure and acting on violations Issues can arise from release of positive news as well as bad news

10. May 2005BIICL - Market Abuse Program Enforcement Actions Guidance remains a dangerous area Selective after-the-fact communications to clarify statements that were misunderstood is a problem Cannot use code words to convey guidance

11. May 2005BIICL - Market Abuse Program Trading on Basis of Inside Information Rule 10b-5 Violation

12. May 2005BIICL - Market Abuse Program Insider Trading No specific statutory prohibition; no statutory definition – instead regulators rely on Rule 10b-5 1980: Supreme Court holds that Rule 10b-5 imposes duty to disclose or refrain from trading on inside information only when trading is a breach of duty 1983: Supreme Court restated rejection of “possession” theory and extended fiduciary duty theory to tippee liability; tipper had to breach fiduciary duty unless could show “personal gain” SEC tries to advance position that CEO that disclosed information to analyst did so to enhance reputation, to establish “personal gain”

13. May 2005BIICL - Market Abuse Program Insider Trading 1997: Supreme Court establishes misappropriation theory – need to find duty of trust and confidence SEC adopts Rule 10b5-2 to facilitate actions based on misappropriation: –Agree to keep information confidential –History, practice or pattern of sharing confidences resulting in reasonable expectation of confidentiality –Family relationship Resolution of “possession” vs “use” – evolution of 10b5-1 plans

14. May 2005BIICL - Market Abuse Program Possession vs. Use – Rule 10b5-1 SEC rejected a straightforward “use” test as well as more balanced “use” test with a strong inference of use from “possession.” Instead, adopted “knowing possession” standard, balanced with affirmative defenses As a general principle, insider trading liability will arise when a person trades while “aware” of material nonpublic information. Several exceptions from liability where person is not likely to have used the inside information: namely, where trade resulted from a pre-existing plan, contract or instruction that was made in good faith. Affirmative defenses intended to cover situations where defendant can show that information possessed was not a factor in a trading decision

15. May 2005BIICL - Market Abuse Program Short Swing Profits Rules Officers, directors and 10% shareholders subject to reporting of ownership and trades and liability for profits made on "sales and purchasers" or "sales and purchases" within six months 5% shareholders subject to reporting obligations – intended to address tender offer abuses not insider trading

16. May 2005BIICL - Market Abuse Program Other Aspects of Manipulation

17. May 2005BIICL - Market Abuse Program Market Manipulation Section 9(a)(2) – creating appearance of a trading market Rule 10b-5: basis for insider trading actions; actions in respect of inadequate disclosure (including misleading the market) Regulation M – proscribes purchases at the time of a "distribution" Regulation SHO – regulates short sales Rule 10b-18 – safe harbor for corporate repurchases

18. May 2005BIICL - Market Abuse Program Areas of Concern/Focus PIPES Market – trading ahead of deals –Criminal action against head trader at investment bank (April 2005) –Civil action against manager of hedge fund (May 2005) Toxic converts and "naked" shorts Grant of options had of release of positive earnings Number of financial fraud actions have also had an element of profiting through insider trading

19. May 2005BIICL - Market Abuse Program Analyst Conflicts SRO rules (round I) SRO rules (round II) Global Settlement with 10 firms Regulation AC SRO rules on IPO allocation practices

20. May 2005BIICL - Market Abuse Program Contact Mark S. Bergman 7367-1601 mbergman@paulweiss.com www.paulweiss.com