Imagine you are 28 years old and your friend has just asked you to go for a swim in their palatial looking pool. What could be wrong with this picture? Well, your only problem is that you are wearing a wire for the FBI in hopes of catching your friend admitting to committing insider-trading violations…and you believe he has caught on. Suddenly the idea of going for a swim on a hot day could mean life or death.
For Tom Hardin, he faced this reality when in 2008 he became an informant for the FBI, known as “Tipper X”, in one of the largest insider-trading cases of our generation. Recently ComplySci’s Chief Revenue Officer, Scott Roberts, had a chance to sit down with Tom to learn more about his experience and the advice he would give to others to avoid a similar fate.
For compliance officers, Tom offered three key areas that compliance needs to keep an eye on, to avoid having violations occur at their organizations.
1. Know who your people are talking to
How does a young trader get away with making bad decisions? Answer, his supervisors and compliance department did not know how he was getting his information. During his interview, Tom stated that he kept getting insider information from the same few people. Tom recommends that in order to prevent bad behaviors, especially in smaller firms, that compliance looks into the five people that their analysts speak to the most. Having transparency into who employees are speaking to is key in understanding where they are getting their information. When a firm is caught for a violation, “I did not know” is not an exonerating excuse.
2. Keep your office door open, encouraging culture of compliance
According to Tom, the majority of bad behavior for insider trading begins in isolation. When making his first unethical deal, he did so without consulting his compliance officer or others at his firm. Tom strongly believed that if he had a strong relationship with his CCO, that he might have thought twice about what he was doing. It is imperative that as a CCO, we keep our doors and approach open – trying to break that common belief that compliance always comes from a place of “no”. By encouraging employees to approach to compliance with questions about trading, you have the opportunity to catch violations before they happen. Additionally, by developing relationships across the organization, you also have the opportunity to reinforce a culture of compliance that helps remove isolationist decision making.
3. Leverage RegTech to identify and prevent
At the time of Tom’s insider trading experience, RegTech solutions were still at an embryonic stage. However, when asked if he thought if a RegTech solution would have made a difference in his behavior – Tom’s quick answer was “yes”. If employees are aware there is a solution in place to find suspicious or wrong behavior, they are less likely to participate in such activities. Investing in a RegTech solution also gives compliance the ability to become more proactive and save time on labor-intensive processes – thus freeing their time to build important relationships with employees within the firm.
Throughout the time spent with Tom, one thing is clear – it only takes one bad actor to bring down a firm. The trades that Tom made were small but none-the-less cost himself and others dearly. For compliance teams, it is important to establish relationships with employees to drive not only a culture of compliance but also an environment where insider training is not given a first thought.