Last November SAC Capital Advisors became the first large Wall Street firm in twenty-five years to plead guilty to criminal charges brought because of years of systematic insider trading. It took five months, but recently a U.S. District Judge in New York accepted the plea and approved the $1.8 billion settlement.

Many people assume that insider trading laws apply only to investment bankers and large investment firms, but that is not true. In fact, the phrase “insider trading” does not refer only to illegal conduct.

According the information on the U.S. Securities and Exchange Commission (SEC) website, the legal version of insider trading is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. There is nothing wrong with that, although such trades must be reported to the SEC.

Insider trading becomes illegal when insiders and others buy and sell stock “while in possession of material, nonpublic information.” A 1998 speech by SEC Division of Enforcement staff provides further explanation. Illegal insider trading “is the trading that takes place when those privileged with confidential information about important events use the special advantage of that knowledge to reap profits or avoid losses on the stock market, to the detriment of the source of the information and to the typical investors who buy or sell their stock without the advantage of ‘inside’ information.” (Newkirk and Robertson, 1998)

As described on the SEC “insider trading” webpage, the agency has brought insider trading cases against:

• Corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential corporate developments;
• Friends, business associates, family members, and other “tippees” of such officers, directors, and employees, who traded the securities after receiving such information;
• Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
• Government employees who learned of such information because of their employment by the government; and
• Other persons who misappropriated, and took advantage of, confidential information from their employers.

All firms should consider implementing the requirement that is placed on broker-dealers and investment advisors to prevent insider trading – namely, to establish, maintain, and enforce written policies and procedures to prevent the misuse of material non-public information by officers, directors, and employees. It is also worth considering the focus of SEC examiners. They look at such things as whether or not the firm under examination has identified the source and type of non-public information that they and employees may be privy to and whether the firm has developed and implemented adequate procedures to maintain the confidentiality of that information. They also examine whether the firm is implementing those procedures, how the firm ensures that their procedures are working, and what kind of testing is performed. (Richards, 2008)

All organizations with employees who have access to non-public business information from customers, suppliers, business partners, or their own companies could be at risk if employees use that information in an illegal way. Whether or not your firm is in the investment industry, it is worth addressing insider trading in policies, procedures, and ethics training programs.

Contact us today to discuss how Ethical Advocate can help your organization’s ethics team develop or improve ethics programs and communications.

References:

Newkirk, Thomas C. and Melissa A. Robertson. “Insider Trading – A U.S. Perspective,” speech delivered September 19, 1998. http://www.sec.gov/news/speech/speecharchive/1998/spch221.htm

Richards, Lori. “Frequently Asked Questions about SEC Examinations,” speech delivered January 17, 2008. http://www.sec.gov/news/speech/2008/spch011708lar.htm

SEC.gov. “Insider Trading”, http://www.sec.gov/answers/insider.htm