SEVERE PENALTIES FOR INSIDER TRADING INCLUDING FINES AND CRIMINAL CHARGES
We all know that insider trading is against the law, but it's worthwhile reviewing an actual case of insider trading to see how the SEC treats it, and also how it likely involves criminal charges brought by the Department of Justice (DOJ).
Oh, and by the way, the Series 66 Exam includes questions on Insider Trading. How do I know this? I know it because NASAA's Test Specifications for the Series 66 include Section IV (H) (4) (4.4) on Insider Trading.
Here is a recent SEC Press Release dated February 22, 2024, on an Insider Trading case:
"Spouse purchased stock using non-public information about planned merger"
FOR IMMEDIATE RELEASE
2024-24
"Washington D.C., Feb. 22, 2024 —
The Securities and Exchange Commission today charged Tyler Loudon of Houston, Texas, with insider trading ahead of a February 2023 announcement that London-based oil and gas company BP p.l.c. agreed to acquire TravelCenters of America Inc., a full-service truck stop and travel center company headquartered in Ohio. Loudon allegedly made $1.76 million in illegal profits from his trading.
"According to the SEC’s complaint, Loudon allegedly misappropriated material, nonpublic information about the proposed acquisition from his wife, a BP mergers and acquisitions manager who worked on the planned deal. The SEC alleges that Loudon overheard several of his wife’s work-related conversations about the merger while she was working remotely. Without his wife’s knowledge, Loudon purchased 46,450 shares of TravelCenters stock before the merger was announced on February 16, 2023. As a result of the announcement, TravelCenters stock rose nearly 71 percent. Loudon allegedly immediately sold all of his TravelCenters shares for a profit of $1.76 million.
“We allege that Mr. Loudon took advantage of his remote working conditions and his wife’s trust to profit from information he knew was confidential,” said Eric Werner, Regional Director of the SEC’s Fort Worth Regional Office. “The SEC remains committed to prosecuting such malfeasance.”
"The SEC’s complaint, filed in U.S. District Court for the Southern District of Texas, charges Loudon with violating the antifraud provisions of the federal securities laws. Without denying the allegations in the SEC’s complaint, Loudon consented to the entry of a partial judgment, subject to court approval, permanently enjoining him from violating the antifraud provisions of the federal securities laws, imposing an officer and director bar, and ordering that he pay disgorgement with prejudgment interest and a civil penalty in amounts to be determined by the Court.
"In a parallel action, the U.S. Attorney's Office for the Southern District of Texas today announced criminal charges against Loudon."
Bob Eder discusses Insider Trading in his Study for the Series 66 Exam. Here is a sample of Bob Eder's treatment:
"EXAMPLE
"Jason, a hedge fund manager, is managing several billions of client monies. He asks for and receives confidential information about XYZ Corp.’s forthcoming earnings from Bill, a friend, who happens to be on XYZ’s board. Bill tells Jason that XYZ will unexpectedly report very good earnings. Five minutes after his conversation with Bill, Jason instructs his traders to purchase 100,000 shares of XYZ. Later, investigations show that many of the investors who sold XYZ shares to Jason’s firm were small mom and pop investors. Would they have sold their XYZ shares to Jason if they had known of the forthcoming earnings bonanza?"
Here is the link to NASAA's Test Specifications for the Series 66 Exam. See Section IV (H) (4) (4.4) covering Insider Trading.
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