General counsel should be taking steps to ensure their company is geared up to prevent insider trading that may arise from pandemic-related information – particularly given the government’s recent use of a statute that makes prosecuting certain cases easier, according to Robert Frenchman, partner with litigation firm Mukasey Frenchman & Sklaroff.
The SEC’s top enforcers last month warned directors and executives against taking advantage of developments arising from Covid-19 to engage in insider trading.
‘[I]n these dynamic circumstances, corporate insiders are regularly learning new material non-public information that may hold an even greater value than under normal circumstances,’ Stephanie Avakian and Steven Peikin, co-directors of the SEC’s division of enforcement, said in a statement. ‘This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to Covid-19.’
Frenchman advises general counsel to check that their company’s insider trading policies are sufficiently robust. He notes that current market volatility means more trades are likely to look suspicious – and attract the SEC’s attention – even if they are entirely legitimate.
In this environment, he tells Corporate Secretary, general counsel should make sure that insider trading policies cover not just the typical areas of potential material non-public information such as earnings, M&A and clinical trial results but also pandemic-related government assistance and other forms of ‘political intelligence’ that may be material to the company
Those policies should cover the usual elements, including allowing disclosure only on a need-to-know basis, strict prohibitions on tipping and stiff consequences for breaches.
Frenchman says general counsel should not assume that executives and directors are frequently looking at their company’s compliance manual. It would be ‘very appropriate’ to send those groups an email pointing to the SEC’s warning and featuring a link to the company’s insider trading policies as a reminder, he adds.
He also points to a source of potential legal liability for insider trading that takes on greater significance in the context of the pandemic because it is based on taking advantage of non-public information from government agencies, or political intelligence. Specifically, USC §641 makes it illegal to embezzle, steal or convert federal government property. The statute traces its roots to the 19th century but Frenchman explains that in recent years prosecutors in the Southern District of New York have used it for a new purpose: allegations of insider trading.
The statute gives the government more weapons in pursuing such cases than it possesses if it goes after an individual via the usual route of insider trading as securities fraud. It is therefore ‘one more reason for people to be nervous,’ Frenchman says.
The statute does not include many of the most challenging elements of proof required in securities fraud cases, in which the government must prove that the information disclosed by the tipper was material and non-public, the tipper had a duty to maintain the information’s confidentiality and violated that duty, the tipper received personal benefit from the tippee and the tippee knew there was a breach.
By contrast, Frenchman explains in an article on the statute that under USC §641 the government need only prove that the defendant knowingly stole or converted a ‘thing of value’ belonging to the federal government or that the defendant knowingly received a stolen or converted ‘thing of value’ with the intent to convert it to his or her gain.
A ‘thing of value’ includes intangible property such as confidential government information. That might include inside knowledge that the government is planning to offer a company a bailout or information about a potential vaccine for the coronavirus, Frenchman notes.
Asked about potential disruption of government oversight due to the pandemic, Frenchman says the SEC appears to be operating as usual on investigations where his firm is representing clients. He notes that US exchanges supply regulators with a great deal of trading data and that regulators have effective ways of analyzing this data that are not likely to be affected by the current situation. ‘I don’t think they’re handicapped at all,’ he says.
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
