25 January 2019
There are many ways to report possible instances of insider trading, should you become aware of them. First, it is important to know exactly what constitutes illegal insider trading. Once you are relatively sure that you have observed an instance of trading that might violate insider trading regulations, the next step is to consider when to report the violation. If you simply know that there is intent to commit insider trading, this is a gray area. If you know that an act of potential insider trading has taken place, then you must consider how you wish to report it, and weigh the pros and cons of the various ways in which you could. For some people, reporting is done on principle; for others, there are potential rewards to acting as a reporter or whistleblower. With that in mind, here is the why, when and how to report insider trading:
What exactly is insider trading?
In order for insider trading to have taken place, a quite literal interpretation of the phrase is necessary – an “insider” must be involved. So who is an insider? An insider is anyone who is in possession of either access to valuable nonpublic information about a corporation or who owns greater than 10% of a financial firm’s equity. This usually connotes high-level employees –executives, members of boards of directors, inside counsel, etc. – but is not strictly limited to these positions. Once these criteria have been met by an individual involved, the next consideration is whether the insider trading taking place is legal or illegal. While it may seem silly, given the popular understanding of “insider trading” as something that is always illegal, there is such a thing as legal insider trading. When an insider does any trading of securities involved in their own firm, it still may be a legal transaction. What defines the illegality of the trade is whether or not the insider trading is based off of exclusive (i.e., nonpublic) information, sometimes referred to as insider information.
One of the more high-profile recent insider trading scandals involved NFL player Mychal Kendricks and an investment banker who alerted Kendricks in advance to corporate acquisitions that would allow them both to profit to the tune of $1.2 million. In this case, the investment banker, Damilare Sonoiki, would qualify as the insider, since the information was available through the financial firm at which he worked. Although Kendricks was a high-profile defendant, the person who does the trading only needs to operate based on the information they received – this just as easily could have been Sonoiki’s barber, were he to have received the information and traded based on it. This is a textbook example of many of the cases of insider trading that are prosecuted.
Factors to consider before reporting insider trading
There are several important factors regarding timing to consider if you are mulling over whether to report a possible case of insider trading. The first is whether or not the potential trade has taken place. If you know of plans to commit illegal insider trading, this, unfortunately, cannot be reported, as there is always an incredible amount of privileged information available to those who seek it – the key is always whether or not the insiders act on it prior to the information no longer being privileged. The next factor to consider is whether the information you have is original information, meaning that the regulatory body, internal process or watchdog organization you report it to does not have prior knowledge of the information you are reporting.
Occasionally, this can be a crucial factor in the decision, because while it is beneficial for firms to know of any insider trading and there are laws in place to protect whistleblowers from reprisals, it is an unfortunate reality that not every business will be grateful to learn that one of their insiders has committed fraud or a related securities crime. Adjacent to this issue is the consideration of intent – there are many instances in which an insider trading violation occurred not because of malicious intent but through simple ignorance. Carefully weighing your options about when to report is a part of the process that cannot be overlooked.
Options for reporting insider trading
Once you have decided to provide original information on an instance of illegal insider trading, you have several options on how to report:
Option #1: The first, and generally easiest, option, although it is not available in every instance, will be reporting to an internal process. Many companies have a function dedicated to preventing and investigating instances of insider trading, and while much of their work is designed to be preventative, it is beneficial for these firms to launch their own investigations into fraud before regulatory agencies and watchdogs become involved. Most often, these processes are facilitated by the office of the chief legal officer, so this is a good place to start if there is not an obvious function that has been highlighted in training or in a company manual.
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Option #2: In the media, the most prominent watchdog organization that is active regarding insider trading is the Project On Government Oversight (POGO). Recently, POGO asked the Securities and Exchange Commission (SEC) to investigate Carl Icahn after he jettisoned millions in steel-related securities ahead of an announcement from the President on a new 25% tariff on foreign steel, which caused the market for steel to decline, as demonstrated by a 6% drop in the value of the company in which Icahn sold his stock. There are other watchdog options available for reporting insider trading, and they can be a good intermediate step between internal processes that may be “too close to home” and becoming a government informant.
Option #3: Last, the most obvious option is reporting to a regulatory body such as the SEC. There are legal incentives and protections for whistleblowers signed into law, so this is the path most traveled. The best way to initiate contact with the SEC in this manner is to submit information through their online “Tips, Referrals and Complaints” questionnaire.
Technology assists in reporting insider trading
The best way to avoid illegal insider trading and other financial regulatory violations is to have a robust internal compliance process or auditing program. The maintenance of these programs begins with a quality program for tracking and collating your business documents, the most cutting edge of which would be an entity management software program. If you are interested in having the best possible outcome in the compliance arena, consider Blueprint’s customized suite of powerful entity management solutions available at your fingertips with dedicated service professionals only a telephone call away. Please give us a call or email us today to schedule a demo.