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Insider Trading: Still a Thing?

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January 31, 2019 | Jennifer Namazi

Insider Trading: Still a Thing?


Insider Trading is a topic I follow, and often find myself thinking that (with so many cases and many decades worth of examples to show insider trading gone wrong) I will soon run out of things to say about it. Each time I entertain that thought, some SEC action breathes new life into what would otherwise be old news. The New York Times recently published an article: “Insider Trading Remains a Fixture for SEC Enforcement,” (Peter J. Henning, January 1, 2019) which basically sums up the current landscape when it comes to the SEC’s enforcement of insider trading rules: “Trading on confidential information remains hard to resist despite a decade of criminal enforcement and prison terms for those who get caught and prosecuted.” In December 2018 alone, the SEC brought four cases involving insider trading.” Henning continues, “The government often portrays insider trading as motivated by greed, and the opportunity to make money can prove irresistible when the only real victim of the violation is the faceless securities market.

It’s one (very bad) thing when an employee goes to the open market and places trades on the basis of material, non-public information that they’ve encountered. The cases that grab me the most, though, are the ones where an employee used company channels to execute illegal insider trades. One recent case involving that approach centers on the former chief information officer at Equifax, Jun Ying, who exercised all of his vested stock options and sold the shares just one week before Equifax announced a massive data breach (their database had been hacked) back in September 2017. Subsequent to the announcement, Equifax’s stock price dropped 15%. Mr. Ying was indicted on insider trading charges in the spring of 2018 and recently attempted to have his charges dismissed, something that the Federal District Court in Atlanta rejected in December 2018. His case is still pending.

One interesting thing I learned in following Mr. Ying’s case is that the government is looking beyond just the trades themselves to build their case. Seeking to understand more about the intent of Mr. Ying, the government evaluated Internet searches that he conducted before exercising his stock options (it appears Ying had searched for information on how hacks had affected the stock price of other credit reporting companies) – something prosecutors maintain suggests that the exercise of his stock options was not just an unfortunate coincidence.  

It continues to surprise me that with ongoing enforcement actions, better insider trading detection technology and abilities on the part of the SEC, stiff financial penalties, jail time and all the other consequences that the SEC actively pursues (often with success) in these cases, they still happen. The one point that comes to mind centers on the concept of greed – the idea that for some individuals, even knowing the potential consequences (via a policy, communication, and other means we used to instill the pitfalls of illegal insider trading) isn’t enough to quell inner greed. And, because of that, there will always be the potential for insider trading.

This brings me back to consideration around what companies should be doing to limit the possibility that one of their employees gives into greed and trades on material, non-public information. Many companies have insider trading and pre-clearance policies in place. Though I am no lawyer and offer no formal advice, the logical part of my brain thinks that having the policy is one (good) thing, but we must do more. Shoring up compliance checks and balances seems like one way to limit scenarios where greed takes over and slips through the cracks. Do our pre-clearance policies and processes have enough controls to prevent someone from using company channels (such as exercising a stock option or selling shares acquired via the stock plan or an ESPP) to facilitate illegal insider trades?

The SEC is certainly getting better at identifying suspect trades that were potentially based on material, non-public information. However, the best case scenario is that the trade never happens in the first place. Although there likely isn’t a control that is 100% foolproof, companies should be looking internally to determine if current protocols are strong enough to limit the pathway to make such trades.

-Jennifer
 
 

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