Blurred Lines Between Public and Private Trading Information During the COVID-19 Pandemic

May 21, 2020Alerts

COVID-19 has transformed the financial market, prompting increased oversight of insider trading. While not all insider trading is illegal, illegal insider trading refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading is a concern for anyone whose jobs entails access to secrets. Typically, when you think of insider trading, the classic theory comes to mind: an insider in a corporation possess material nonpublic information, by virtue of his or her role in the corporation, and uses it for personal gain. An insider here is defined as someone who, by virtue of a relationship to a company, has access to information that he or she is duty bound to keep confidential (corporate officers, lawyers, accountants, etc.).

Insider trading can also occur in a tipper-tippee relationship, where the insider (tipper) tips off another (tippee) to material, non-public information for personal gain. Finally, insider trading can exist when someone misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information. With COVID-19, material nonpublic information is being discussed in closed-door meetings every day, and presents multiple avenues of insider trading concerns.

Increased Monitoring of Insider Trading Triggered by COVID-19

During the 2008 economic crisis, the SEC reminded CEOs that companies must be vigilant and proactive in preventing, detecting and correcting problems that could occur due to the transformed financial market. Since mid-March 2020, the SEC has again issued several statements about the prohibition on insider trading and the increased monitoring by the SEC.

On March 23, 2020, Stephanie Avakian and Steven Peikin, Co-Directors of the U.S. Securities and Exchange Commission’s Division of Enforcement, issued a public statement, confirming that COVID-19 had impacted the securities markets in unprecedented ways. Avakian and Peikin emphasized “the importance of maintaining market integrity and following corporate controls and procedures.” They cautioned, “[t]rading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws.” Further, the Enforcement Division announced it was committed to protecting investors and maintaining confidence in the fairness and integrity of our markets.

On March 25, 2020, the SEC issued guidance regarding securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The guidance emphasized the need for companies and other related persons to consider their market activities, including the issuance or purchase of securities, in light of their obligations under federal securities laws. If a company becomes aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of such information must refrain from trading in the company’s securities until such information is disclosed to the public. The SEC further cautioned that when companies do disclose material information related to the impacts of COVID-19, they must take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public. Companies should evaluate, on a continuous basis, whether it needs to edit or update previous disclosures to the extent that the information becomes materially inaccurate.

On April 24, 2020, the SEC announced the formation of an internal, cross-divisional COVID-19 Market Monitoring Group. This temporary senior-level monitoring group is set to assist with analysis related to the effects of COVID-19 on markets, issuers, and investors as well as respond to requests for information, analysis and assistance from fellow regulators and other public sector partners.

The SEC further announced that it was engaging in numerous COVID-19 initiatives. Clearly, the SEC remains focused on securities fraud and especially vigilant during this COVID-19 pandemic. Additionally, individuals and businesses can anticipate that once the markets stabilize, the SEC and law enforcement agencies will review this pandemic period and examine it for illegal trading activity.

Use Caution and Seek Legal Assistance

Because of the pandemic, corporate and government insiders continue to have access to material nonpublic information regarding COVID-19 that could have a significant impact on the markets. Companies should remind employees of their obligation to keep nonpublic material information confidential. The company’s policies, code of conduct, relevant laws, industry standards and training materials should be distributed to all employees. Insiders should be required to review their company’s policies and analyze whether they are trading based on material nonpublic information using a high level of scrutiny. Companies and insiders should carefully monitor the information that remains confidential, and what information is disseminated to the public.

If you are an insider and have already traded under circumstances that could be viewed as insider trading, it is important to be proactive rather than reactive. You should prepare for a potential investigation. Such preparation should include retaining counsel and collecting and preserving all relevant documents surrounding the trade. The pandemic has created new liabilities based on insider access to COVID-19 information. It is best to be prepared for what the future holds and to seek legal counsel for any questions that arise.