SEC Closely Monitoring Insider Trading Opportunities During Volatile Market
Amidst the harrowing stories of human loss, the COVID-19 pandemic has brought with it extreme fits of market volatility, with the values of many securities fluctuating wildly, even intra-day. While this volatility may be a constant stress for long-term investors, it presents significant opportunity to informed market participants who can reliably predict price movements. Fortunes can be made—or lost—in minutes.
But even the most sophisticated market participant is no match for the corporate insider in possession of material information that has not yet been made public. Often, such corporate insiders may hold stock in their employers, having received it or stock options as part of their compensation. When those same insiders became aware of some future news—say, that the COVID-19 pandemic is affecting earnings far more negatively than market analysts currently forecast—or other nonpublic information which may impact stock price, then they may be incredibly tempted to sell their stock holdings before that news hits. The market volatility only increases the potential value of such information by tending to amplify the impact material information will have on share price once it is made public.
The Securities and Exchange Commission (“SEC”) is certainly attuned to these changing market ynamics and, no doubt, watching closely for instances of potential insider trading. In the wake of the most extreme market fluctuations, where very rare trading halts were triggered multiple times, even in the same day, the SEC’s Co-Directors of Enforcement, Stephanie Avakian and Steven Peikin, released a public statement to “emphasize the importance of maintaining market integrity and following corporate controls and procedures.” Their statement (available here: https://www.sec.gov/news/public-statement/statement-enforcement-co-directors-market-integrity) specifically addresses the fact that “corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances,” and notes further that may be even more opportunities for corporate insiders to learn material nonpublic information due to COVID-19 related delays in the filings of earnings reports or other required disclosures.
The SEC cautions all individuals with access to material nonpublic information to “be mindful of their obligations and keep th[at] information confidential and to comply with the prohibitions on illegal securities trading.” Such cautions recognize that the insiders may commit securities fraud both by trading on material nonpublic information themselves or by relaying such information to another market participant who trades on it before it is made public.
Separate cautions are given to the officers and directors of publicly traded companies, to “be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information.” Companies that fail to exercise such controls and procedures might themselves face SEC scrutiny and possible penalties should multiple employees or other corporate insiders be found to have violated the securities fraud statutes.
Given the turbulent moment created by the COVID-19 pandemic, and in particular the increased risks such market volatility poses to less sophisticated “Main Street investors,” market participants can and should expect the SEC to move quickly and loudly in response to suspected instances of insider trading and other violations of the securities fraud statutes.
Whether COVID-19 related or not, if you or your company has been contacted by the SEC about suspected violations of securities laws, or if you have any reason to anticipate being contacted by the SEC, it is critical that you speak with an experienced, savvy attorney who can counsel you as to how best to proceed in order to avoid or at least mitigate possible penalties.