Silicon Valley Not Immune to Insider Trading

 What is Insider Trading?

Insider trading is an illegal practice that threatens the integrity of our markets and our economy.  While some may claim the crime is victimless, it in fact creates numerous victims who are the ones playing by the rules while insiders take advantage of their connections and access to gain and trade on information. Insider trading fundamentally consists of individuals knowingly and intentionally using material and nonpublic information about a company in order to gain an edge – they may buy knowing the stock is about to soar due to some major decision, or may sell knowing that the stock is about to crash so that they can avoid those losses. Insider trading is patently unfair, particularly in this delicate time in an economy rebounding from a slew of alleged and sometimes proven financial frauds in terms of currency, interest rates, and the now infamous toxic mortgage-backed securities scandals.

Who Polices It?

The Justice Department and Securities and Exchange Commission have gone after alleged offenders to seek criminal punishment and civil fines and penalties, respectively, and some high profile cases have resulted in once prominent financiers and bankers landing behind bars.

Recent Case in Silicon Valley

While the images of insider trading convicts have typically shown lower Manhattan and the courts there as a backdrop, insider trading has become an issue in California’s Silicon Valley, though at this stage only in a civil context. The Securities and Exchange Commission has alleged that four individuals, including at least two financial analysts, of insider trading for trades related to stock of two different companies for both of which one of the analysts worked. This particular analyst worked in-house at both companies, and due to his positions had access to confidential information. He and the other three, who he is friends with or associated with professionally, used that information which was not yet announced publicly about those companies, to trade ahead and gain an edge. As New York Times Dealbook describes it, the scheme included “using stock options; trading in someone else’s name; using prepaid cellphones as disposable ‘burners,’ and making carefully structured cash withdrawals to try and avoid detection.” The analyst had in-house access at Applied Materials, and at another company named Rovi. One example of the type of information would be a lead on a planned acquisition, and acquisitions – even proposed or spoken of publicly – can shift stock prices. Call options, which would allow the holder the ability to buy stock at a certain price and at a certain point in time, would be a key mechanism to make this happen, just as it was here. The defendants allegedly had that information before the public did, and traded on it. As reported, the overall insider trading scheme netted the defendants close to $750,000 since the end of summer 2009.

Settlements without Prosecution

The SEC picked up on the trading activity, which commonly starts out with a tip, or some detection of trading that fits certain parameters of timing (such that they consistently occur before a major announcement or major move that would substantially affect the price of a company’s stock). The defendants have agreed to a settlement with the SEC in which they will not admit liability, but it will require them to give back their profits (such recovery is known as ‘disgorgement’) as well as pay penalties. All in all, this will total $1.7 million for the group. One of the analysts will be banned from the securities industry for life, and another cannot be an officer or director at a public company for ten years.