Insider Trading: A 124k Penalty and Other Insights

The SEC announced last week that it had settled insider trading charges against a contract accountant working for Illumina. The basis for the insider trading charges was fairly typical – company insider uses material, non-public information to make trades to their advantage before and after an earnings announcement. It is the type of scenario that most insider trading policies are aiming to prevent.

What’s unusual about this particular instance is that the accountant self-reported her insider trading violation to the SEC. The earnings announcement was made in July 2019. Her trades occurred shortly before and after the announcement, and she reported her actions to the SEC the following month, in August 2019. While we can only speculate as to the motivation for her desire to come clean, it is possible she felt immediate regret for her actions.

How did the SEC respond to her admission of wrongdoing? She seems to have avoided the most serious penalties - like jail time. However, the poor decision by the accountant to trade on inside information, even though she subsequently turned herself in, is not without heavy repercussions. In addition to gorging $249,227 in ill-gained profits, she also must pay a penalty of $124,613 (about half of the amount of the profits). In addition, she is denied the privilege of appearing practicing before the SEC as an accountant. She may appeal that decision after two years.

While no company wants their name in the spotlight for insider trading, this case presents a good opportunity to demonstrate to employees that there really isn't a "way out" of the consequences of trading on inside information. Even with best efforts, a company doesn't control the personal decisions of their employees, contractors and vendors. What the company can do is have solid policies, follow them consisently, and be proactive and frequent communicating about them. The message: It's far better to not to make the mistake in the first place than to have to deal with the messy clean up and probable penalties.

New Workplace Norms: Questions to Identify Potential Insiders

On that note, a few thoughts on operating within the new workforce dynamics brought about by COVID-19. Companies should evaluate their insider trading policies and list of routine “insiders” in the context of changes in work and meeting environments. Some questions to evaluate whether the insider list needs to be adjusted or expanded are:

• Has the “who” of meeting access changed? Many meetings are taking place online - who has access to those meetings?

• Is an admin tasked with monitoring or facilitating the web meeting?

• Are there IT employees who now have access to meeting recordings or archives?

• Are meetings more easily overheard by family or household members?

If there are changes in who has access to information, consider sending those people a copy of the policy. In addition, guidelines for “working from home” should be communicated to all employees who are participating in meetings containing material, non-public information.

While we can’t always prevent a poor decision, I’m an advocate for doing everything possible to mitigate the potential for that situation. In the Illumina case, we may never know what spurned the self-report of insider trading to the SEC, but I’d like to think that education about the policy and prohibited actions may have contributed to a feeling of regret.  Maybe that's the case, or maybe not. I believe the best cure for for insider trading is prevention, so take a moment to ensure your new workplace norm incorporates insider trading guidance that contemplates this reality.