SEC Priorities Focus on MNPI, Insider Trading and Crypto

Temperatures are hot across the United States right now – and so is U.S. Securities and Exchange Commission (SEC) enforcement activity. The last few weeks have seen a flurry of Insider Trading actions from the U.S. Securities and Exchange Commission and the Department of Justice against individuals ranging from a Chief Compliance Officer to a Chief of Police.

While the circumstances of each case might vary, one common thread weaves them all together – Insider Trading continues to be a top regulatory priority, and regulators will continue to deploy significant resources including staffing and technology to ensure that there will be severe consequences for anyone misappropriating MNPI.

The actions included:

A pharmaceutical employee who learned about a successful clinical trial through internal communications and bought options and tipped a friend to do the same before the info was released to the public.
A pharmaceutical VP of Global Regulatory Affairs charged with purchasing shares in a company using insider information about a pending acquisition. The action follows a 2022 charge against three other individuals for the same infraction.
A registered representative of a New York City based broker-dealer who accessed material non-public information from the laptop of his girlfriend, who worked for an investment bank, while she was working from home. The stockbroker used confidential data on mergers and acquisitions he found on the laptop to purchase call options for himself and tip friends, including one who used the information to recommend trades to his brokerage clients and who was also charged in the action.

A VP and member of the acquisition team at a pharmaceutical company tipped a friend, who was a Massachusetts police chief, about a pending deal. The police chief in turn tipped another friend, leading to a chain reaction of illegally shared MNPI. Four defendants traded on nonpublic information obtained, directly or indirectly, from the fifth defendant, and realized more than $2.3 million in gains and tipped others who realized more than $1.7 million in trading profits.

A SPAC board member and a venture capital firm owner were among the defendants charged with trading in advance of an acquisition announcement.

Firms should stay vigilant to prevent insider trading and misuse of MNPI. Although recent actions charged the bad actors for their misconduct, the implications go far beyond the individual to impact the integrity of the markets and the reputation and valuation of the firm.

Read the white paper Market Abuse in the Digital Age

The 2023 actions reinforced the agency’s 2022 focus on insider trading and MNPI. The SEC sent strong signals that insider trading and material non-public information (MNPI) were top priorities in 2022. In April of 2022 the agency released the Risk Alert Investment Adviser MNPI Compliance Issues to share notable deficiencies that the Division of Examinations (“EXAMS”) has cited related to MNPI and Code of Ethics Issues. Read more about the Risk Alert and the SEC’s focus on MNPI and Code of Ethics Issues.

Learn how MCO helps firms manage the risk of MNPI and insider information

Actions originated from the SEC Enforcement Division’s Market Abuse Unit’s (MAU) Analysis and Detection Center, which uses data analysis tools to detect suspicious trading patterns. Created in 2011, the Analysis and Detection Center allows regulators to harness the vast array of financial and marketplace data available to detect, uncover and investigate misconduct. 2022 insider trading actions included:

A former Chief Information Security Officer that gave friends tips about two pending corporate acquisitions, netting more than $5.2 million in illicit gain through insider trading.

A former investment banker who made more than $275,000 by illegally trading with insider information in advance of four acquisition announcements

A former FBI trainee secretly misappropriated MNPI from their romantic partner, who was an attorney working from home on a confidential corporate acquisition, sharing the information with a friend and making more than $1.4 million on illegal trades

The agency also filed charges against a former congressman with a consulting business who violated violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by using information he obtained at a golf tournament for insider trading in advance of a telecom merger, netting over $375,000 in illegal profit. Read about the SEC’s Spring 2022 Regulatory Agenda.

Questions remain around the scope of crypto regulation

2022 SEC actions raised questions about the definition of a security and the scope of the agency's oversight of the crypto space.

The SEC filed insider trading charges against a former employee of a crypto exchange platform, alleging that the employee repeatedly shared MNPI about the addition of new assets to be offered for trade on the company’s exchange platform. The complaint alleges that the use of MNPI for insider trading of crypto assets constitutes securities fraud, holding large implications for the industry.

In the release, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement notes "We are not concerned with labels, but rather the economic realities of an offering. In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading”

The complaint alleges that a digital token or crypto asset is a crypto asset security if it meets the definition of security, as defined by the Securities Act as an investment contract that “constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.” The action notes that nine of the securities traded can be considered securities under that definition.

Read the white paper Conduct and Compliance: A Collective Approach to Ethics and Accountability

A parallel action filed by the United States Attorney’s Office for the Southern District of New York (“SDNY”) and described in the release as the “First Ever Cryptocurrency Insider Trading Tipping Scheme Charges” alleged charges of wire fraud and wire fraud conspiracy but not securities fraud.

The crypto company CEO strongly disagrees that the digital assets in question should be considered securities. In a blog post updated after the indictment, he stated “No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.” The blog post also noted that when tipped off about the frontrunning scheme that violated the firm’s global asset digital trading policy, the employee was terminated and information was reported to the Department of Justice (DOJ).

The action has also raised concerns that the SEC is overstepping regulatory boundaries by enforcing when regulations and standards are not clearly defined across both regulators and the industry. SEC Chair Gary Gensler has proposed a shared rule book between the SEC and the Commodities Futures Trading Commission (CFTC) for crypto regulation to ensure there are no gaps in oversight, however lines are not yet drawn. In a statement, Commodities Futures Trading Commission (CFTC) Commissioner Caroline Pham describes the case as "regulation by enforcement" and notes that “the SEC's allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together.”

2023 crypto enforcement continues the rapid pace, but recent court decisions push back on the definition of a security.

The year started with a steady stream of Crypto Assets and Cyber Enforcement Actions, including for the unregistered offer and sale of crypto asset securities, defrauding of equity investors, crypto asset fraud and celebrity promotion of crypto without appropriate disclosure.

In July of 2023 the Southern District Court of New York issued a summary judgment order in the SEC's case against a crypto exchange. The ruling found that the firm did not violate securities law by selling its token on exchanges because purchasers did not have a reasonable expectation of profit that depended on the firm's efforts. It did find however that direct sales to investors should have been registered as securities, handing down a split decision.

The industry can expect continued SEC focus on crypto and digital assets throughout the rest of 2023 and beyond. SEC Chair Gary Gensler has requested “new tools, expertise, and resources” and supported a $2.4 billion plus budget for the SEC for 2024. According to Genlser in testimony before the Subcommittee on Financial Services and General Government U.S. Senate Appropriations Committee, "rapid technological innovation in the financial markets has led to misconduct in emerging and new areas, not least in the crypto space. Addressing this requires new tools, expertise, and resources." Gensler also stated "Cyber threats have placed our financial sector on high alert. As technologies evolve, it is important that the SEC’s information technologies follow suit."

If you'd like to see firsthand how MCO helps firms manage the risk of MNPI and insider information, set up a demo today.