SEC Charges Corporate Insider with Insider Trading for Passing Information
The SEC brought insider trading charges against a technology firm’s accounting manager for relaying material nonpublic earnings information to his hedge fund trader friend. The defendant agreed to settle charges by agreeing to a $30,000 fine and an industry bar from serving as an officer of public company. The SEC charges that the defendant passed inside earnings information to a hedge fund trader with whom he played poker. The SEC alleges that the friend passed the information to several hedge funds that traded on the information. The SEC asserts that the defendant is liable for the trading profits earned by the downstream hedge funds and that he violated the antifraud rules. Sanjay Wadhwa of the SEC’s New York Regional Office stated that: “Insiders at public companies who are entrusted with confidential information are duty bound to protect it” and that the defendant “violated that sacred duty.”
OUR TAKE: This case expands tipper liability because the SEC never charges that the defendant actually received any financial benefit from passing the information. If the defendant never benefitted financially, how can he be charged with violating the antifraud rules in connection with the purchase/sale of a security? Is a tipper liable for downstream profits or just his own?