Panelists voiced their concern about the increase in insider trading charges brought against "gatekeepers" including attorneys and accountants.
The chief counsel in the SEC’s Division of Enforcement was joined by private litigators to review trends in the enforcement of insider trading laws and the tools used by the government, including data analytics, to catch wrongdoers. The panel discussion took place at the Securities Docket 2019 Enforcement Forum in Washington, D.C.
Observations from the SEC. Enforcement Division Chief Counsel Joseph K. Brenner made several observations about the current state of insider trading enforcement. According to Brenner, the Commission’s insider trading docket is increasingly data-driven through the use of data analytics. As an example, he pointed to recent charges against two investment bankers and a trader in an international insider trading scheme. The SEC Market Abuse Unit's Analysis and Detection Center used data analysis tools to detect suspicious trading patterns that netted the trader over $2 million in illicit profits.
Brenner expressed concern that a "disturbing" increase in the number of insider trading cases involving gatekeepers such as accountants and attorneys. He also observed that a significant number of insider trading cases pursued by the SEC involve parallel criminal charges. Virtually all of these either involved the use of data analytics evidence or involved wrongdoing by gatekeepers. Parallel criminal cases are important due to the need for deterrence, he added.
Individuals being investigated for insider trading can make things better or worse for themselves, Brenner advised. For example, by self-reporting and cooperating with the government, defendants can receive less or no jail time or decreased monetary sanctions. On the other side, defendants who lie to government investigators or destroy documents will not receive such leniency, he stated, pointing to former Rep. Christopher Collins’s guilty plea to insider trading charges. Collins had initially denied wrongdoing and lied to FBI agents.
Data analytics and insider trading. Daniel M. Hawke, who spent 16 years in the Enforcement Division and is now a partner at Arnold & Porter, discussed how the analysis of data has changed the landscape for spotting insider trading. According to Hawke, insider trading investigations used to be issuer-based. The staff would investigate who bought stock in a particular company prior to a major news or earnings announcement and then manually cross reference account statements, he explained.
With data analytics, the staff was able to take the issuer-based approach and "flip it upside down," Hawke said. Instead of starting with the issuers, the investigation would use a trader-based approach in which the staff would look at traders and which securities were common to them. The SEC gets this information from its Advanced Relational Trading Enforcement Metric Investigation System, or "ARTEMIS," which uses statistical metrics to identify suspicious trading activity, he said.
Hawke ask Brenner how data analytics has benefited the SEC’s enforcement of laws against insider trading. Brenner said that it has made the staff more efficient and more effective. It allows the staff to focus on the most serious violators and allocate the SEC’s limited resources more efficiently. It also helps the Division bring cases more quickly, Brenner added.
Role of gatekeepers. Returning to the subject of gatekeepers, former Enforcement Division attorney William E. White, now a partner at Allen & Overy LLP, said that there has recently been an abnormally large number of insider trading cases involving gatekeepers. One particularly egregious case involved a senior attorney at Apple, Inc. who used his high-ranking status at the company to inside trade Apple stock on three occasions between 2015 and 2016. Of particular note, the attorney in this case was responsible for securities laws compliance at Apple, including compliance with insider trading laws, White said.
In another recent case involving a gatekeeper using inside information to trade, White described charges against the associate general counsel and assistant secretary of SeaWorld, who purchased stock in the company after receiving a favorable confidential earnings report. He sold his stock after the report was made public, netting $65,000 in profits.
White recommended that companies and firms reevaluate their policies and procedures about insider trading and rethink them to determine if they are effective. He also advised that companies keep up with technology developments that can allow them to monitor their employees’ trading activity for unusual trading ahead of a public announcement.
Former SEC Senior Trial Counsel R. Daniel O’Connor, now at Ropes & Gray, added that when the gatekeeper is outside counsel for a company, it can be like "salt in the wound" for the law firm when one of its attorneys faces insider trading charges. The law firm will likely see its reputation take a hit. He also noted that when insider trading charges involve outside counsel, it is not the law firm’s data that has been compromised; it is the client’s—that is, the company’s—data.
MainStory: TopStory DirectorsOfficers Enforcement FiduciaryDuties
Interested in submitting an article?
Submit your information to us today!Learn More
Securities Regulation Law Daily: Breaking legal news at your fingertips
Sign up today for your free trial to this daily reporting service created by attorneys, for attorneys. Stay up to date on securities regulation legal matters with same-day coverage of breaking news, court decisions, legislation, and regulatory activity with easy access through email or mobile app.