What would you think if I sang out of tune? What would you think if you were working on a deal involving Company A and I was working on a deal involving Company B and I told you about some confidential stuff about my deal that might help you with your deal? I get by with a little help from my friends. You get by with a little help from your friends. FINRA imposes fines and sanctions if you give too much help to your friends. Not exactly the lyrics for a catchy tune, but, let's see if we can work on it.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Bradley Hildebrand, submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Bradley Hildebrand, Respondent (FINRA AWC 2019064868502 / November 2, 2020)
The AWC asserts that Bradley Hildebrand was first registered in December 2008 and by July 2013, he was registered with Houlihan Lokey Capital, Inc. During his tenure with Houlihan Lokey Capital, Hildebrand was an investment banker in the firm's healthcare group. The AWC asserts that Hildebrand "does not have any relevant disciplinary history."
The Friend and His Holding Company
The AWC alleges that a "longtime friend" of Hildebrand's was the principal in a "small, private, investment holding company that owned Company A," which is characterized as a privately-held specialty-food company. In 2018, the friend purportedly told Hildebrand that his investment holding company was thinking about selling Company A.
The AWC alleges that in January 2019, Houlihan Lokey Capital was engaged to help sell Company B, which, go figure, was another privately-held specialty-food company and a competitor of Company A. Small world, no? Notably, the AWC asserts that Hildebrand "was not involved in the firm's representation of Company B."
Lack of Any Valid Business Purpose
In furtherance of Company B's planned sale, the AWC alleges that Houlihan Lokey:
purchasers, solicited bids, assisted in identifying the ultimate purchaser, negotiated a
letter of intent and closing documents, and assisted in closing the sale of Company B.
As if you didn't see it comin', the AWC alleges that:
Notwithstanding his lack of any valid business purpose, and his certification to the firm,
Respondent accessed and disseminated confidential information related to the Company
B sale. On eight separate days between May 22, 2019 and November 1, 2019,
Respondent accessed from the firm's system and reviewed approximately 30 documents
related to the Company B transaction.
On multiple occasions, Respondent discussed with his friend the status and process of the
Company B transaction and verbally disclosed to him confidential information
Respondent learned from his unauthorized review of documents on the firm's system, but
did not provide to him any of the documents Respondent accessed.
The AWC asserts that on December 12, 2019, Houlihan Lokey Capital filed a Uniform Termination Notice for Securities Industry Registration alleging that Hildebrand was permitted to resign on November 22, 2019, based upon his having "violated Firm policies relating to the handling of confidential information."
In accordance with the terms of the AWC, FINRA found that Hildebrand had violated FINRA Rule 2010 and imposed upon him a $5,000 fine and a two-month suspension with any FINRA member in any capacity.
Bill Singer's Comment
As of November 4, 2020, FINRA's online BrokerCheck discloses that Houlihan Lokey Capital had permitted Hildebrand to reign on November 22, 2019, based upon allegations that:
Through the operation of its internal controls, the Firm determined that registrant
violated industry standards of conduct and Firm policies by disclosing to a third
party outside the Firm confidential client information relating to the sale of a private
company to a private equity firm.
You know, I'm not quite sure what to make out of this case. If we take the AWC at its word, then Hildebrand "accessed from the firm's system and reviewed approximately 30 documents related to the Company B transaction." Okay, sure, that much I got. The guy logged on to his firm's computer and read about a pending deal -- and, sure, he was not involved with that deal. So . . . let's just say he's a curious fellow. The AWC next relates to us that Hildebrand:
discussed with his friend the status and process of the Company B transaction and verbally disclosed to him confidential information Respondent learned from his unauthorized review of documents on the firm's system, but did not provide to him any of the documents Respondent accessed.
For me, this is where things get interesting -- even if only as a matter of nuance.
What appears to have gotten Hildebrand into trouble (and I am NOT sympathetic to him, so don't misunderstand the nature of my professional curiosity here), was that he was poking his nose into a deal with which he had no role and that he verbally disclosed to his friend "confidential information" acquired from his poking his nose into the deal with which he had no role. I'm guessing that FINRA's regulatory ire was invoked by the conjunction rather than the nose-pokin' stuff. Similarly, I'm guessing that FINRA's relatively light sanctions reflect that Hildebrand did not provide the friend with print-outs of any documents maintained by Houlihan Lokey.
All of which raises an interesting hypothetical.
Firm XYZ employs ten investment bankers and at a particular point in time, Firm XYZ is working three deals. XYZ bankers are a collegial and curious bunch and often engage in "shop talk." Shop talk, being what it is, often involves discussions about "how's your deal going?" Professional curiosity being what it is, often prompts each banker to log on to XYZ's computer drive and look over an ongoing or recent deal -- to see, among other considerations, what language we're currently using, how Jane worked out that equity issue that seemed ticklish, and whether Jack used that paragraph and idea that I suggested.
So . . . imagine that Hildebrand was professionally curious and had, in fact, done everything as alleged in the AWC. Also, imagine that the friend told Hildebrand that Company A was seeking, say, 25% equity for $X to be paid according to a specific formula. What do you think, the friend asks Hildebrand? You think that's a fair deal? What if Hildebrand knew that Houlihan Lokey has drafted for its client Company B a proposal of 30% equity for $Y to be paid over 18 months with a balloon payment at the end -- and what if Hildebrand merely mused to his friend that "you know, I'm aware of a recent deal in the food-supply biz where the seller got 30% over 18 months with a balloon payment at the end." Would that have constituted a violation of Houlihan Lokey policies and/or FINRA rules?
Not saying "yes."
Not saying "no."
Just noting that there is often a fine line between improperly divulging confidential information and, in the alternative, drawing upon one's professional experience and offering guidance and opinions. Unfortunately, that fine line is a razor's edge. Walk upon it with extreme care.