A consulting firm partner who was advising a global bank on the acquisition of a FinTech loan processing firm was charged by the U.S. Securities and Exchange Commission on two counts of securities fraud for illegal trading using material nonpublic information (MNPI). In a parallel action, criminal charges were also filed in the state of New York that bring a maximum sentence of twenty years in prison.
According to Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, the partner “breached duties to his employer and his client by misusing their confidential information for his own financial gain.”
The partner used his insider knowledge of MNPI to purchase shares in the acquisition company without getting pre-clearance from his firm, which he sold right before the merger to make a profit of roughly $450K. Following media reports of suspicious trading, the partner sought permission to trade in the acquisition company by his firm and was denied. The partner also used his work computer to research the trades as well as to seek out details on previous SEC enforcement for insider trading brought against individuals at his firm in advance of buying and trading.
The SEC’s complaint charges the partner with violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The SEC flagged the illicit behavior using trading analysis tools. Neither the consulting company nor the bank has been charged with a violation in regards to the incident. A spokesman for the consulting firm announced the partner’s termination of employment for “a gross violation” of the firm’s policies and code of conduct.
Most companies won’t be faced with such an egregious betrayal of trust from a senior executive. But the situation reminds firms that code of conduct issues can happen across all levels of an organization, and that firms should have robust controls in place to flag suspicious behavior.
Policies and procedures are critical to maintaining compliance, but policies and procedures alone can’t stop an employee who decides to go rogue. Firms need the right controls—and the right data—to flag when employee activity is going off the rails. A system that compares preclearance requests with actual trading data can highlight gaps in compliance so the firm can take proactive action. Having the right technology in place can also help demonstrate to regulators that a violation was due to an absence of ethics on the part of the individual and not an absence of compliance on the part of the firm.
Watch the On-Demand webinar Insider Trading and Safeguarding Material Non-Public Information featuring Todd Ehret from Thomson Reuters Regulatory Intelligence.
Another recent SEC order involved an affiliate of the consulting company that offers investment options exclusively to current and former employees agreeing to pay an $18 million penalty for compliance failures regarding policies and procedures around the management of MNPI. The SEC alleges that the dual roles of partners who were involved in investment choices meant that some consultants were “routinely privy to confidential information like financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management.”
“Allowing individuals who may possess or have access to material nonpublic information also to have oversight over investment decisions that may benefit them economically presents a heightened risk of misuse,” said Gurbir S. Grewal, director of the S.E.C.’s Division of Enforcement in a press release. “It is crucial that investment advisers have robust compliance policies and procedures in place to address the risks inherent to their organizational structures.”
Would you like to have a conversation about how MCO can help you mitigate the risk of code of conduct violations? Contact us today for a demo.