The tentacles of the Covid-19 pandemic left no corner of American life untouched. Now they have even entered the annals of insider trading. Recent insider-trading charges brought by the Securities and Exchange Commission (SEC) and federal criminal prosecutors offer jolting lessons for all employees and executives who learn confidential corporate information and may then be tempted to trade the company’s stock. (Long story short, don’t.)
What Is Insider Trading?
Insider trading, which is illegal, occurs when someone trades a company’s stock or other securities when he or she knows what is termed material nonpublic information (MNPI) about the company. MNPI is confidential knowledge about a company that will affect its stock price either positively or negatively when it is publicly disclosed. A related behavior known as insider tipping is also illegal. It means sharing MNPI with others.
The insider-trading laws apply to everyone, not just to executives and other company insiders who receive stock compensation, such as grants of employee stock options or restricted stock units. Moreover, the laws apply to MNPI not only about a company you work for but also about any company you may know through a professional or personal relationship, e.g. a vendor or client of your employer or a family member affiliated with a different company.
Covid-19 Drug Offers No Immunity From Prosecution
A recent SEC complaint and federal criminal indictment present a classic lesson in what not to do when you know MNPI about a company.
In 2021, at the pharmaceutical giant Pfizer, Amit Dagar was employed as a senior statistician working on the team running the clinical trial of the company’s Covid-19 treatment Paxlovid, an antiviral drug. According to the SEC’s complaint, on the day before Pfizer announced the success of the clinical trial, Mr. Dagar learned the good news via a chat message from his supervisor and expressed excitement about it.
The SEC complaint alleges that just hours later Mr. Dagar bought out-of-the-money Pfizer call options, including options set to expire the next day. The SEC claims that he then tipped a friend, who purchased similar call options in Pfizer on the same date.
On the following day, November 5, Pfizer publicly announced the success of the Paxlovid clinical trial. The company’s stock price jumped almost 11%. According to the SEC’s allegations, Mr. Dagar made $214,395 and the friend he tipped made $60,300 via their purchase of Pfizer call options on the basis of the information before it was made public.
On June 29, 2023, the SEC charged both men with insider trading and stated it was seeking civil penalties. That wasn’t all. On the same day they were also arrested and criminally indicted with multiple counts of securities fraud by prosecutors in the US Attorney’s Office for the Southern District of New York (SDNY). According to the SDNY press release on the indictment, each charge carries a maximum sentence of 20 years in prison.
If true, the allegations represent an egregious case of insider trading and tipping on the basis of material nonpublic information. The story especially shows the importance of timing. It doesn’t matter if a stock trade prompted by MNPI occurs just hours—or even minutes—before the confidential information is made public. As long as the news is not yet available to the investing public, it’s illegal insider trading.
According to the SEC’s press release on its complaint, the case originated from the Analysis and Detection Center of the SEC’s Market Abuse Unit. That SEC team applies sophisticated data analytics, including pattern recognition, to detect suspicious stock trading. It wields technology to spot, track, and examine links between people involved or connected with suspicious stock-trading activities.
Alert: The fact that the SEC’s detective work prompted a criminal referral to federal prosecutors should be enough to scare anyone into not trading stock while possessing MNPI. “Today’s announcement serves as a reminder to anyone attempting to tilt the balance in their direction using insider trading,” warned Michael J. Driscoll, the FBI assistant director in charge of the case, when announcing this indictment and several others (including the case described below). “Investigating this illegal behavior is a top priority of the FBI,” he asserted.
Covid-19 Remote Work Gets Criminally Complicated
As I mentioned earlier, it isn’t just employees of a company who can commit insider trading. Anyone who learns MNPI about a company is in a position to be accused of insider trading if they buy or sell that company’s stock before the information is made public. That applies even to MNPI acquired via the most personal relationships, as our next horror story shows.
On June 29, 2023, an SEC complaint and two separate SDNY indictments brought insider-trading charges against Jordan Meadow, a registered rep for a New York broker-dealer, and Steven Teixeira, the chief compliance officer of a big payment-processing company. According to these charges, Mr. Teixeira furtively accessed the laptop of his girlfriend, an employee of a major investment bank who was working at home amid the Covid-19 pandemic. The charges claim he used this access to steal information on potential future mergers and acquisitions (M&A) of public companies.
The SEC and SDNY allege that this knowledge motivated Mr. Teixeira to buy call options in several of those M&A companies before those deals were made public, and that he tipped the information to his friend Mr. Meadow. According to the SEC’s press release on its complaint, “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 case against him, Mr. Meadow was arrested and indicted by SDNY on charges including seven counts of securities fraud that carry the potential for decades of prison time. SDNY indicted Mr. Teixeira separately and said in a statement that he “pled guilty pursuant to a cooperation agreement.”
The case against these men also originated in the SEC’s Market Abuse Unit. The SEC’s ability to trace stock-trading activity to MNPI allegedly stolen from the girlfriend’s laptop shows how committed the agency is to both digital analysis and old-fashioned real-world detective work. With such serious allegations, a criminal referral to federal prosecutors was inevitable.
If the allegations are true, they represent a brazen insider-trading scheme by two people (a compliance professional and a stockbroker) who very clearly know that the theft of confidential information and stock trading on the basis of it are illegal activities.
However, no larcenous conspiracy is needed to commit insider trading. Even if you accidentally learn MNPI about a company from, say, a family member or a company vendor and then trade the company’s stock before the information is public, you can be charged with insider trading—and the person who let slip the information could be charged with insider tipping!
Be Careful When Working Remotely
Working remotely at home greatly increases the risk of insider tipping that can lead to insider trading. For further cautionary tales from SEC cases in which remote-work employees revealed MNPI to people in their personal lives, see an article from attorneys at the law firm King & Spalding: Working From Home? Stay Alert To Avoid Insider Trading Or Tipping Liability!.
“Even when surrounded by the ones we love,” the authors warn, “it is important to keep confidential information away from them. Others may not realize that they should not trade after overhearing interesting comments—or worse, they may try to listen, intending to trade if they learn something exciting.”
More Resources
The website myStockOptions.com has an extensive section with articles, FAQs, and a podcast on all aspects of preventing insider trading and tipping. The coverage includes information about prearranged Rule 10b5-1 trading plans, which when correctly created can provide a legal affirmative defense against charges of insider trading. Meanwhile, an interactive quiz at myStockOptions.com tests your knowledge of insider trading to help you stay out of trouble!