We can all learn startling lessons about securities law from recent SEC proceedings and federal criminal indictments for alleged insider trading during the pandemic.
No area of American life was spared by the Covid-19 pandemic’s tentacles. They have now even made it into insider trading history.
The Securities and Exchange Commission (SEC) and federal criminal prosecutors’ recent insider trading cases provide startling lessons for all employees and executives who obtain proprietary corporate information and may later feel tempted to trade the company’s stock. (Short version: don’t.)
Insider Trading: What Is It?
When a person trades a business’s stock or other securities while knowing what is known as material nonpublic information (MNPI) about the firm, this is known as insider trading, which is against the law.
MNPI is secret information about a company that, if made public, could have a beneficial or negative impact on the stock price. Insider tipping, a comparable action, is likewise prohibited. It entails distributing MNPI to others.
Not just executives and other corporate insiders who get stock remuneration, such as grants of employee stock options or restricted stock units, are subject to the rules against insider trading.
Additionally, the regulations cover MNPI regarding any company you may be aware of due to a personal or professional connection, such as a family member who works for a separate company or a vendor of your employer.
Drug Covid-19 Does Not Grant Immunity from Charges
Recent federal criminal charges and an SEC complaint offer a good example of what to do and what to avoid doing when you have MNPI about a corporation.
Amit Dagar was employed in 2021 by the pharmaceutical behemoth Pfizer as a senior statistician on the group in charge of the company’s Covid-19 therapy Paxlovid’s clinical trial.
The day before Pfizer reported the clinical trial’s success, the SEC’s lawsuit claims that Mr. Dagar received excellent news about the outcome via a chat message from his supervisor and exhibited delight about it.
According to the SEC complaint, Mr. Dagar purchased out-of-the-money Pfizer call options, including those that would expire the following day, just hours later.
The SEC asserts that after doing so, he advised a friend to buy comparable call options in Pfizer on the same day.
The clinical trial for Paxlovid was successful, and Pfizer officially stated this the next day, on November 5. Stock in the corporation increased by roughly 11%. The SEC claims that by buying Pfizer call options based on the knowledge before it was made public, Mr. Dagar made $214,395 and the buddy he informed made $60,300.
The SEC accused both men of insider trading on June 29, 2023, and said it was pursuing civil penalties. Not only that.
They were also detained on the same day and legally charged with many charges of securities fraud by the US Attorney’s Office for the Southern District of New York (SDNY).
Each accusation carries a maximum punishment of 20 years in prison, according to a press release from the SDNY regarding the indictment.
If confirmed, the charges show a shocking instance of tipping and insider trading based on important nonpublic knowledge. The narrative demonstrates the value of timing in particular.
Whether a stock transaction spurred by MNPI happens merely hours—or even minutes—before the private information is made public doesn’t matter. It is prohibited insider trading as long as the news has not yet been made known to the investing public.
The case, according to the SEC’s press release on its complaint, came from the Market Abuse Unit’s Analysis and Detection Centre.
To identify questionable stock transactions, that SEC staff uses advanced data analytics, including pattern recognition. It uses technology to identify, follow, and investigate relationships between those involved in or affiliated with shady stock trading operations.
A criminal referral to federal prosecutors as a result of the SEC’s investigation ought to be enough to scare anyone into refraining from trading stocks while in possession of MNPI.
When announcing this indictment and numerous others (including the case recounted below), Michael J. Driscoll, the FBI associate director in charge of the case, cautioned anyone trying to tip the scales in their favour via insider trading. “Investigating this illegal behaviour is a top priority of the FBI,” he said.
Covid-19 Criminally Complicated Remote Work
The act of insider trading can be carried out by anyone, as I have explained. If they buy or sell that business’s stock before the information is made public, anyone who learns MNPI about a company may be charged with insider trading. That holds true even for MNPI obtained through the most intimate relationships, as our following horror story demonstrates.
On June 29, 2023, Jordan Meadow, a registered representative for a New York broker-dealer, and Steven Teixeira, the top compliance officer of a significant payment-processing company, were charged with insider trading as a result of an SEC complaint and two separate SDNY indictments.
These accusations state that Mr. Teixeira secretly entered the laptop of his fiancée, a large investment bank employee who was working from home due to the Covid-19 outbreak. He is accused of using this access to steal details on prospective future public company mergers and acquisitions (M&A).
The SEC and SDNY claim that Mr. Teixeira used this knowledge to acquire call options in a number of those M&A firms before the deals were made public and that he also told his friend Mr. Meadow about the information. According to the press release from the SEC on its lawsuit, “Meadow recommended trades to his brokerage customers based on the material nonpublic information from Teixeira, resulting in millions of dollars in profits for them and hundreds of thousands of dollars in commissions for Meadow.”
In addition to the SEC complaint against him, Mr. Meadow was detained and charged by the SDNY with seven counts of securities fraud, each of which carries a sentence of up to 20 years in prison.
Mr. Teixeira was charged separately by the SDNY, who stated in a statement that he “pled guilty pursuant to a cooperation agreement.”
The SEC’s Market Abuse Unit also developed the case against these men.
The SEC’s ability to link stock trading to MNPI, which was reportedly taken from the girlfriend’s laptop, demonstrates how dedicated the organization is to using both digital analysis and traditional, in-person detective work.
A criminal referral to federal prosecutors was unavoidable given the gravity of the allegations.
If the claims are true, they show a brazen insider trading plan by two individuals (a compliance specialist and a stockbroker) who are well aware that stock trading based on the theft of confidential information is unlawful.
However, insider trading can be done without a cunning scheme. You could be charged with insider trading even if you unintentionally obtain MNPI about a company, such as from a family member or a vendor, then trade the firm’s stock before the information becomes public. The source of the information could also be charged with insider tipping.
When working remotely, use caution
The possibility of insider trading grows significantly when working remotely from home.
See this post from lawyers at the company King & Spalding for more sobering examples of SEC instances where remote workers disclosed MNPI to people in their personal lives: Using a Home Office? Keep Your Eyes Open To Avoid Tipping Liability Or Insider Trading.
The authors caution that it’s crucial to keep private information away from loved ones, even while they are there. Others who hear fascinating comments may not understand that they should not trade, or worse, they may try to listen with the intention of trading if they discover something new.
The discussion touches on pre-arranged Rule 10b5-1 trading plans, which, when done right, can offer a legal affirmative defence against accusations of insider trading. To keep you out of jail, an interactive quiz on myStockOptions.com examines your understanding of insider trading.