SEC and FINRA Warn Against COVID-19 Insider Trading and Market Fraud

By Jovalin Dedaj

On March 23, 2020, the Securities and Exchange Commission issued a stern warning against trading on nonpublic information related to the COVID-19 pandemic.  In a joint statement from the SEC’s co-directors of enforcement, the SEC emphasized that “a greater number of people may have access to material nonpublic information than in less challenging times.”  The message makes clear that corporate controls and procedures remain paramount in these challenging times.  But, with this announcement, the SEC is also putting the investing public on notice that it recognizes “these dynamic circumstances” present a greater risk of violating the federal securities laws.

The SEC’s statement follows reports that several U.S. senators executed substantial trades after a private Senate briefing on January 24, 2020 with public health officials from the Trump administration.  Senate disclosure forms show that Senator Kelly Loeffler, whose husband is the chairman of the New York Stock Exchange, sold up to $3 million worth of securities in the weeks before stock market indexes dramatically plunged in value.  The disclosures made by Senator Loeffler show that accounts owned by her and her husband made nearly 30 trades since that January 24 meeting with White House health officials.  Stock sale disclosures by three other U.S. senators have also come under scrutiny because of their timing with reports that the FBI has opened a probe into the trades.

The message from the Enforcement Division is an indication that the SEC is doubling down on its policing responsibilities.  They are not alone in this enforcement mission.  FINRA announced that it is fully operational during the COVID-19 outbreak and is committed to executing its “ongoing and robust risk monitoring market surveillance and enforcement programs, prioritizing matters that present the most risk in this current environment.”  FINRA also issued a regulatory notice to members last week, reminding them to bolster their business continuity plans and seek extensions of time, if needed, for their regulatory filings or responses to FINRA inquiries and investigations

The extraordinary turmoil in the financial markets caused by the COVID-19 outbreak is unprecedented.  It presents, however, a greater opportunity for fraud and misconduct.  Corporate insiders are regularly learning new material nonpublic information by the minute that may hold an even greater value than under normal circumstances given the volatility of global markets.  And, as the SEC explains, this may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19.  Individual and institutional investors must exercise greater care and due diligence during these times if and when they choose to trade.  And companies need to make sure their insider trading policies are sufficiently robust and comprehensive.  The SEC and FINRA have made it clear that they are committed to monitoring the markets and exposing any fraud stemming from the current global health crisis.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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