SEC Crackdown on Insider Trading by Investment Professionals

SEC Crackdown on Insider Trading by Investment Professionals

The Securities and Exchange Commission (SEC) has really been cracking down on insider trading lately. They’ve brought a bunch of cases against hedge fund managers, analysts, and other Wall Street types for illegally trading on confidential information. This article will give you the lowdown on what laws the SEC is using to go after insider traders, what some of the recent cases have been about, and what it all means for investment professionals working today.

What exactly is insider trading?

Insider trading is when someone buys or sells stocks or other securities based on important non-public information that gives them an unfair advantage. For example, if the CEO of Company X finds out ahead of time that Company X is about to be acquired by a bigger company, and then goes and buys a bunch of Company X stock before the news is announced, that’s insider trading. It’s illegal because it violates the idea that all investors should have equal access to important information about a company.

There are a few laws the SEC uses to go after insider traders. The main one is Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. These make it illegal to buy or sell securities using manipulative or deceptive tactics, including trading on material non-public information. The SEC also uses Section 20A of the Exchange Act, which says traders who illegally profit from insider info have to give their profits back.

There are a few defenses people can try if they get accused of insider trading. For example, they can claim the information they had wasn’t really “material” or important enough to affect the stock price. Or they can say they didn’t actually use the inside information for their trades – tough to prove! But usually these defenses don’t work and people end up settling with the SEC and paying fines.

Recent SEC cases and tactics

The SEC has really ramped up its insider trading investigations and charges over the last few years. They’ve brought cases against all sorts of investment industry folks, including portfolio managers, analysts, and bankers. And they aren’t just going after individuals – they’ve also charged some big hedge funds and private equity firms with failing to properly control insider trading by their employees.

Some of the SEC’s recent insider trading cases include:

• Charging a former Coinbase product manager and two others with trading crypto assets based on confidential information about new assets being added to the Coinbase platform (Release No. 2022-127)
• Charging a former Congressman from Indiana with trading on non-public information about a biotechnology company that he got from a friend who was the CEO (Release No. 2022-128)
• Charging a group of 7 people in California with running an insider trading ring where they traded on confidential information from Silicon Valley companies (Release No. 2022-55)

The SEC seems to be using some new investigative tactics to catch insider traders lately. For example, they created a special unit called the Market Abuse Unit that uses data analysis to look for suspicious trading patterns and relationships. This data-driven approach helped them bring some of the recent charges against rings of connected traders.

The SEC also appears to be getting better at spotting insider trading by investment managers. In the past, they focused more on big trades by individuals. But now they are digging deeper into hedge funds and private equity firms to try and find illegal activity. For example, in the case against the former Indiana Congressman, they said part of the reason they caught him is because they were looking closely at his hedge fund’s trading patterns.

Effects on investment professionals

This SEC crackdown has definitely made investment pros more nervous about compliance. Nobody wants to end up charged by the SEC with insider trading – it can ruin your career and lead to huge fines or even jail time in criminal cases. That’s why most hedge funds and private equity firms are beefing up their compliance procedures to try and prevent insider trading by employees.

For example, many firms are expanding insider trading training and requiring employees to certify in writing that they understand insider trading laws. Some are also implementing automated monitoring programs to flag any suspicious trading across the firm. And they are restricting access to sensitive information on a “need to know” basis.

Individual analysts and portfolio managers have to be a lot more careful too. They should never trade based on material non-public information, even if they “owe a friend a favor” who asks them to. And they need to avoid even the appearance of improper trading, like trading around the same time as someone who may have access to confidential data.

The SEC crackdown has also made investment professionals think twice about using 10b5-1 trading plans. These plans can be a defense against insider trading charges, since they automate trading decisions ahead of time. But the SEC is now scrutinizing these plans closely, so any sloppy 10b5-1 plan could actually draw suspicion.

What’s next for insider trading enforcement?

The SEC has said it will continue to prioritize insider trading cases. We can expect them to pursue charges against analysts at expert network firms, employees at pre-IPO tech companies, and against individuals for “tipping” others with inside information. They are also likely to bring more cases against investment firms for failure to supervise trading. And we may see them use data analysis tools even more to spot questionable patterns.

For investment professionals, the key will be staying up-to-date on SEC rules and being very careful about compliance. Firms will keep tightening their controls and procedures to prevent any slip-ups. No one wants their fund or career to become the next target of the SEC insider trading crackdown.

The SEC definitely seems determined to catch insider traders, so it’s risky to even think about trying to get away with it. For now, investment pros will need to play it safe and make sure they know where the ethical lines are drawn when it comes to trading.

References

• Guide to Insider Trading – SEC
• US Government Continues to Crack Down on Insider Trading – Morgan Lewis
• SEC Press Releases
• SEC v. Adondakis et al.
• Insider Trading, the Buy Side, and the Coming Crackdown – Traders Magazine
• Trading Places: The SEC’s Crackdown on Insider Trading Continues – Vinson & Elkins LLP