By: Chris Montagnino, Director of Regulatory Affairs, Eventus
The year 2022 has been dominated by a high number of traditional insider trading actions brought by the Securities and Exchange Commission. The number of such cases has well exceeded the number of similar cases filed in 2020 and 2021. Cases range from corporate insiders trading while in possession of material non-public information (MNPI), individuals being tipped with such information or employees utilizing such information obtained through their employer to trade. Below is a brief summary of a few cases from the past two months:
- Securities and Exchange Commission v. Ann M. Dishinger, Jerrold I. Palmer, and Lawrence M. Palmer – insider trading in connection with the Equifax data breach announcement in 2017. Dishinger obtained the MNPI about the data breach via her employment with the public relations firm employed by Equifax. Dishinger tipped Jerrold Palmer and he tipped his brother Lawrence Palmer. Both Palmer brothers effected their trades through former clients or business associates to purchase out-of-the-money puts and realized profits of $35,000 and $73,000. Jerrold Palmer reimbursed his client for the transactions with a personal check and the words “Blue Horseshoe” written in the memo field, an apparent reference to the insider trading scheme employed in the 1987 film Wall Street. The Palmer brothers paid approximately $100k each in fines and disgorgement to settle the matter.
- Securities and Exchange Commission v. John P. Mendes – insider trading by a registered representative who was tipped with MNPI by a corporate insider of Granite Construction as to their impending purchase of Layne Christensen (“Layne”). Mendes purchased shares of Layne for the accounts of his wife, parents and 17 of his customers before the announcement and collectively realized total profits of approximately $170k. Mendes paid fines and disgorgement of over $90k to settle the matter.
- Securities and Exchange Commission v. Harpreet Saini and John Lester Mandac Natividad – insider trading by two Canadian software engineers who obtained MNPI via their employment with a newswire distribution company. By trading ahead of over 1600 news announcements, the duo reaped profits exceeding $1.6 million over a three year period. Case is still pending resolution.
- In the Matter of Sheng Fu and Ming Xu – insider trading by the CEO and President of Cheetah Mobile while in possession of MNPI. Both sold shares with knowledge of a steep drop off in revenue from the company’s largest advertising partner which ultimately negatively impacted Cheetah’s overall revenue. They avoided losses of $200k and $100k, respectively. To settle the matter, both parties agreed to penalties of $550k and $200k, respectively.
- United States v. Ishan Wahi, Nikhil Wahi and Sameer Ramani – first ever insider trading related case concerning the cryptocurrency markets. The brother of a former product manager at Coinbase traded on MNPI concerning the listing of cryptocurrency assets on Coinbase prior to the public announcements. Defendant pleaded guilty but has not been sentenced yet. Faces a maximum prison sentence of up to twenty years for wire fraud.
The five actions mentioned above were all finalized within the last 60 days and represent a small sample of the insider trading cases brought by the SEC this year. With advanced analytics at their disposal, the SEC is able to complete their investigations quickly which lead to more expedient resolutions. From the sample above, it is clear that the SEC is pursuing cases of all shapes and sizes even where the profit amounts were below six figures.
ViP: Broker dealers must have effective procedures and controls to monitor and identify potentially suspicious transactions implicating insider activity. Specifically, FINRA’s supervision rule (3110) requires each member to establish written procedures to supervise the types of business in which it engages and that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules. Further, each member shall include in its supervisory procedures a process for the review of securities transactions that are reasonably designed to identify trades that may violate the provisions of the Exchange Act or FINRA rules prohibiting insider trading and manipulative and deceptive devices that are effected via firm accounts or accounts of its associated persons. Finally, FINRA’s AML Compliance Program rule (3310) prescribes that firms must include appropriate risk-based procedures for conducting ongoing customer due diligence, to include, but not be limited to conducting ongoing monitoring to identify and report suspicious transactions. This includes potential insider trading.
Validus maintains a package of procedures dedicated to the identification of suspicious transactions, including those potentially indicative of insider trading. In particular, there are specific procedures to monitor anomalous activity in symbols where there have been precipitous stock price movements in the account’s favor. Such procedures are complemented with relevant news for the particular symbol(s) in question. Additional procedures are also included to cover manipulative scenarios such as pump-and-dump and trash-and-cash. In order to satisfy the supervisory obligations of FINRA Rule 3110, firms must be mindful that the procedures and controls they have established are reasonable for their business.
Eventus is a leading global provider of multi-asset class trade surveillance and market risk solutions. Its powerful, award-winning Validus platform is easy to deploy, customize and operate across equities, options, futures, foreign exchange (FX), fixed income and digital asset markets. Validus is proven in the most complex, high-volume and real-time environments of tier-1 banks, broker-dealers, futures commission merchants (FCMs), proprietary trading groups, market centers, buy-side institutions, energy and commodity trading firms, and regulators. The company’s rapidly growing client base relies on Validus and Eventus’ responsive support and product development teams to overcome its most pressing regulatory challenges. For more, visit www.eventus.com.