On June 28, 2023, the Wall Street Journal reported that the Manhattan U.S. Attorney’s Office had opened an investigation, and issued subpoenas, regarding a unique case of insider trading, which involved material non-public information related to potential mergers and acquisitions transactions.
While the publicly available information is scant at this time, there are enough details to consider how your financial firm might shore up its compliance program to defend against similar activities by a bad actor.
What firms can learn from this case of alleged insider trading
In this case, a registered representative of an unaffiliated broker-dealer is alleged to have accessed the e-mail account of an executive assistant at an investment bank, using the information to illegally profit from advanced notice of mergers and acquisitions.
According to the article, neither the broker-dealer, the investment bank nor the executive assistant are targets of the investigation. However, a few key lessons remain to take away from the ongoing investigation.
For the investment bank:
How did an outsider access an employee’s e-mail account?
Given the amount of sensitive data, which firms often have access to, compliance and IT teams should be checking network security protocols, password policies and conducting employee security training, among other security tactics. Firms may also want to consider encrypting and protecting documents with sensitive information even if the documents are within the security perimeter. Finally, the firm’s security and infrastructure teams should implement ways to detect any and all unauthorized incursions.
For the broker-dealer:
Are there procedures in place to detect such activity by a registered representative?
Even with the support of an employee trade monitoring solution, trades like those by the employee under investigation would not have raised an alarm because securities traded were unrelated to the broker-dealer’s activities. However, is there a manner in which your firm can detect a pattern of very profitable trades placed in advance of merger and acquisition news?
Broker-dealers should review their policies and procedures for employee trade monitoring for any improvements which would help uncover similar wrongdoing. Thanks to the nature of the internet, even if the firm in this investigation did nothing wrong, their name is now forever linked to a news article regarding insider trading, likely causing individual and brand reputational damage, which will take time and effort to recover from.
As an aside, the registered representative in question has a clean record on BrokerCheck with the exception of a $245K IRS tax lien issued in January of this year, and it will be interesting to see how that factors into this case as more details are uncovered.
This may be a case where a lone bad actor successfully perpetrated some illegal activity despite the existence of well-designed and executed compliance programs at the investment bank and broker-dealer. Nonetheless, it is an opportunity for all of us to review our compliance programs in light of the novel actions at the heart of this case.
Have questions about insider trading or other regulatory compliance topics? Schedule time to speak with an expert!