Securities fraud and insider trading

The recent case involving former McKinsey director Anil Kumar highlights the risks that some of the worlds largest companies face from employee leaks and insider trading. Kumar stated he made £1.6m giving inside market information to one of America’s richest men, Raj Rajaratnam. Twenty one people, including employees of IBM and Intel, have been charged in this case. So how do companies large and small protect themselves from breaches and employee misconduct when the rewards are so enticing for those who are providing the tips?

The Securities and Exchange Commission regularly brings insider trading enforcement actions against corporate officers, directors and employees who trade their employer’s securities after learning of significant developments. But insider trading also includes friends, family members, and business associates who trade securities after receiving confidential information. While the SEC is actively trying to shine the light on hedge fund operations in an effort to detect any insider trading, and new technology is available to help staff catch unlawful trading patterns.

Insider trading has been around for, well as long as the stock market basically. Most companies know their securities will be traded when something significant happens. What they don’t want, is employees breaching their duty or confidence to provide non-public information to brokers or analysts in return for compensation. To prevent this, companies need strict policies for secure communications, compliance, and governance.

Communication within large organisations can and should be monitored for suspicious activity. Directors and top executives should communicate externally through secure, authorised networks. With stakeholders, corporate governance should apply to non-public price sensitive information. Discretion is advised with a board of directors where non-public information will impact the decision making process for a company, without putting stakeholders at risk of criminal or civil activity. Insider trading regulations prohibit privileged communications of insider information to individual shareholders or groups of shareholders.

Finally, a few words on corporate transparency. Regulators look to enforce transparency in listed companies to avoid stock manipulation. Transparency builds shareholder confidence, whether in financial reporting, mergers and acquisitions, or in the trading activity of directors and senior level executives.

Laws and technology are working towards identifying insider trading activity and prosecuting the offenders. Companies must do their fair share in preventing it from happening in the first place.

Resources:
Financial Services Authority

Regulatory investigations

FBI Securities Fraud Awareness

Insider trading defence lawyers