Insider Trading: Who Monitors the Compliance Officer?

Just two weeks ago I wrote a blog perusing the question of whether or not insider trading is still a “thing” ("Insider Trading: Still a Thing?" - January 31, 2019). The ultimate conclusion I made was that because often the underlying driver behind illegal insider trading is greed, it’s likely that even in these modern times of stricter policies, compliance procedures and emerging technology, there will still be those who break the rules and attempt to engage in insider trading.

Little did I know that less than two weeks later, my inbox would be flooded with headlines reporting that Apple’s former compliance officer (you know, the person in charge of communicating about and enforcing the insider trading policy) has been criminally charged in a New Jersey federal court with – yep, you guessed it - insider trading. The SEC has also filed a civil suit in the matter, seeking to retrieve hundreds of thousands of dollars in profits and avoided losses that resulted from his alleged insider trades.

Mr. Levoff was the Senior Director of Corporate Law at Apple until his departure in September 2018 (when he was apparently fired after an investigation into his trading). He also sat on Apple’s compliance committee for over a decade and routinely had access to material information in advance of public disclosure. One of his tasks was enforcing the trading window and insider trading policy. An article in The Wall Street Journal (“Former Apple Lawyer Charged in Insider Trading” – Dave Michaels and Tripp Mickle, February 13, 2019) describes the following:

“The alleged illegal trades over the years by Mr. Levoff often came after he emailed Apple employees to notify them of blackout periods for selling Apple stock. For example, in 2011, the SEC said he emailed staff to say that they shouldn’t sell shares until 60 hours after earnings were released. ‘REMEMBER, TRADING IS NOT PERMITTED, WHETHER OR NOT IN AN OPEN TRADING WINDOW, IF YOU POSSESS OR HAVE ACCESS TO MATERIAL INFORMATION THAT HAS NOT BEEN DISCLOSED PUBLICLY,’ he wrote in all caps.”

Having monitored insider trading cases for years now, my personal conclusion is that even with education, even with policies, even with reminders – there will be some who will circumvent it all. I’m not generally a pessimist, and I don’t really see this as a pessimistic outlook. I think it’s the reality of human nature. The best thing we can do is to mitigate, mitigate, mitigate.

Many companies do have strict pre-trading clearance procedures, which is a great first step. Our role as stock plan administrators often puts us in between compliance and the brokers who place the trades, especially for officers. This puts us in a position to check and balance the procedures that are in place. Here are some steps to consider in beefing up checks and balances around trades. These are suggestions, and any changes to practices and policy should be discussed with counsel and other internal stakeholders.

 

Nobody pre-clears their own trades. I know many companies where simple expenses often can’t be approved by the spending party. For example, managers may not be able to approve their own expense reports. So why would obtaining approval to trade the company's stock be any different?

Consider a dual approval process for pre-clearing trades. Let’s face it – most compliance officers are ethical and law abiding citizens. Regardless, we often tout the benefits of a second set of eyes on something, and this is definitely an area where another layer of review and approval may be effective in maintaining the integrity of the pre-clearance process.  

Restrict trades on the brokerage side. Most public companies implement some form of blackout period and trading window that can be implemented on the brokerage side to restrict or permit trades.

Time to revisit captive brokers? While many companies use captive brokers for the majority of their stock plan participants, sometimes executives are the exception. Consider whether there is too much distance between the executive’s trading accounts and the company. If so, perhaps it’s time to consider a more captive arrangement where the company can enforce trading restrictions.  This provides an added buffer against trades that shouldn’t occur, in case they slip through the pre-clearance process.

Implement 10b5-1 plans. A 10b5-1 plan sets forth a trading plan that executes automatically based on parameters that are defined in an open trading window and when the executive is not in possession of material, non-public information.  This puts trading on autopilot and places arm’s length distance between insider information and trades. This is something that should be considered for all executives, board members, and really anyone who routinely has access to material, non-public information.

I’m encouraged by the fact that these cases are identified and pursued by the SEC and the law. Although most compliance officers are excellent at what they do and won't go rogue, this is still a good prompt to once again revisit our internal pre-clearance procedures and blackout window controls to ensure we are doing the maximum at the company level to prevent insider trading.