How NOT To Go To Prison For Insider Trading While Working From Home: 5 Tips
Mar 27, 2024
As millions transitioned to remote work in recent years, an unexpected phenomenon began surfacing: An increase in insider trading incidents involving spouses and romantic partners working from home together.
While working from home is a welcome change for many, the intimacy of a shared work/living space has turned it into fertile ground for discovering material nonpublic information (MNPI)—often overheard during confidential calls or glimpsed on screens or documents left unattended.
The result? Enforcement actions from the Securities and Exchange Commission (SEC) targeting illegal insider trading. Penalties include fines—and jail time when the Department of Justice (DOJ) gets involved.
If you work from home and may come into possession of MNPI, take note of the following five insider tips.
Insider Tip No. 1: Assume You Will Get Caught
Trading based on MNPI, which is to say information that is likely to move a stock’s price once the public learns what you know, is illegal.
This is true regardless of how you came across the MNPI—whether you accidentally or intentionally overheard or saw something, or had a casual conversation with your partner.
Most people understand this; some people decide to trade anyway thinking they won’t get caught.
After all, one study estimated that the prevalence of insider trading was four times greater than the number of prosecutions.
However, organizations like the SEC and the Financial Industry Regulatory Authority (FINRA) actively work to squash insider trading, and they employ technology to figure it out.
For example, the SEC uses data analytics to identify suspicious trading activity; FINRA has its own version, too. In other words: Regulators are watching, and they are getting better every day and ferreting out illegal insider trading.
Insider Tip No. 2: Learn from the Mistakes of Others
Here are two recent cases, each one a cautionary tale, involving couples working from home.
SEC v. Taylor Loudon
A Houston-based married couple worked from home together while the wife, a mergers and acquisitions manager at BP, was engaged in a potential acquisition.
They frequently overheard and witnessed one another’s work meetings and discussed aspects of the acquisition during the normal course of marital communications.
In secrecy, the husband liquidated his investment and retirement accounts to purchase shares in the target company. After the acquisition announcement, he profited nearly $2 million.
When his wife found out what he had done, she told her boss, moved out and initiated divorce proceedings. BP conducted an investigation and determined its employee had not knowingly leaked the MNPI. Nevertheless, she was fired.
The SEC charged Loudon with insider trading. In addition to returning his gains, he must pay penalties of up to $250,000 and faces up to five years in federal prison. His wife was not charged.
SEC v. Jordan Meadow and Steven Teixeira
A New York-based couple worked from home in their shared apartment where the woman served as an executive assistant for an investment bank. She frequently held MNPI involving dozens of confidential transactions including M&A deals.
The woman often left her apartment during the day and asked her boyfriend to watch for any important emails while she was away from her laptop. The man subsequently snooped to discover MNPI and began making opportunistic trades.
He tipped a friend, who tipped a broker who also traded on the information and subsequently tipped his clients. Together, the men and others involved made millions of dollars.
The SEC charged the boyfriend and the broker with insider trading. In addition to returning gains, they faced penalties as well as criminal charges in a parallel action brought by the DOJ. As a reminder, illegal insider trading carries a penalty of up to 20 years in prison.
When working from home, conduct your meetings in as private a space as possible. A private office is ideal, but of course, not everyone has that luxury. If you don’t have a separate room for calls, consider using code names to protect certain information.
There are other small steps you can take to safeguard privacy such as:
● Wearing headphones or earbuds during remote meetings to protect the other side of the conversation.
● Installing anti-glare screens on your computer for added privacy when others are working close by.
● Password protecting your work devices—and never sharing those passwords, including with members of your household.
Insider Tip No. 3: Have a Candid Conversation
Remind people in your home, including your spouse, partner, children, nanny, cleaners, handyman—or anyone else who is routinely around the house—that they may overhear confidential information.
Discuss the fact that it is illegal to tip or trade in your company’s stock based on that information and highlight the consequences of insider trading. You might even have regular workers in your home sign a non-disclosure agreement.
Insider Tip No. 4: Implement Corporate Policies
If you are in a position to influence policy at your company, you may be obligated to do so. More specifically, remember that companies are obligated to supervise their employees when it comes to illegal insider trading.
If one of your employees seems to have blown it, as a company you will hope you can show regulators your insider trading policy that addresses how employees should be handling confidential information, including not tipping or trading.
Insider Tip No. 5: Use 10b5-1 Trading Plans
Less a tip about working from home and more a very good personal practice: Use 10b5-1 trading plans to sell your stock at predetermined times. 10b5-1 plans use formulas that set the amount, price and date of the trades ahead of time.
When directors, officers and other insiders sell stock in this manner, it is less likely they would profit from trading while in possession of MNPI, which translates to less liability exposure.
The SEC adopted new rules in 2022 on 10b5-1 trading plans with some important updates. You can read more about that in my article on the Woodruff Sawyer corporate blog (the company I work for), here.
In the United States, we are innocent until proven guilty—but the win isn’t “winning” your insider trading case after years of litigation. The tips in this article will go a long way to helping you stay off the SEC’s radar altogether.
[Forbes]
