What do a Board member, a Police Chief, and a Chief Compliance Officer have in common?
Perhaps you’d answer that they are senior individuals within organizations. Perhaps you’d suggest they are all individuals employed to instil trust and stability, both internally and externally? Perhaps you’d suggest that they are key decision makers in significant public-facing organizations?
Any of those answers would be true. However, a further thread binds these three individuals: they have all been charged by the Securities and Exchange Commission (SEC) for alleged insider trading.
On June 29, 2023, the SEC published a number of enforcement actions against a string of individuals who took part in a series of separate insider trading violations. Of the four actions announced, three concerned senior individuals and corporate executives.
Amidst a backdrop of increased accountability and emerging frameworks designed to hold individuals to account, the new actions serve as a timely reminder of why regulators are shifting their focus towards a top-down approach to accountability, transparency, and compliant culture.
The Chief Compliance Officer and the Woes of WFH
Steven Teixeira was the Chief Compliance Officer of an international payment processing company, who was in a relationship with an employee at a New York-based investment bank. During the COVID-19 lockdowns, while his partner was working from home, Teixeira accessed her laptop to find material non-public information (MNPI). He subsequently traded on that MNPI and tipped off friends, including a registered representative for a NY-based broker dealer, Jordan Meadow.
Together, the SEC alleges that the pair made in excess of $750,000 – with Meadow recommending trades to his customers off the back of the MNPI, resulting in the lion’s share of the profit.
The Police Chief, the VP, and the Golden Goose
A Vice President of an acquisition team at Alexion provided MNPI about an upcoming acquisition to his friend, a Police Chief. The Police Chief then provided this information to other friends, who spread the information even further afield. In total, the SEC alleges that five individuals purchased stock and/or out-of-the-money call options prior to the announcement of the acquisition. As a result, all five individuals made significant profits, including $72,000 to the Police Chief.
After realizing their profits, two of the defendants incriminated themselves further by texting each other in Russian: “let’s hope our golden goose will continue laying golden eggs!”. Unfortunately, that goose has very much been cooked.
The Chief Strategy Officer and the Rookie Error
A Chief Strategy Officer (CSO) at Rocket One Capital was appointed to the Board of Directors for Digital World Acquisition (DWAC) in September 2021. On joining the Board, he quickly learned of DWAC’s plans to acquire Trump Media & Technology Group Corp. Within a month, the CSO voted on this MNPI and shared the information with his boss – who shared the information with others.
The CSO monetized the access he had to MNPI to make over $20 million in illicit profits. The SEC’s complaint seeks to ban the CSO from future officer or directorship roles, as well as seeking disgorgement of the profits.
Non-compliant connections
In all three of the above cases, the defendants are board members, senior managers, members of the C-suite, or hold other positions in which the expectation of trust and good conduct is heightened.
Speaking about the enforcement actions, Gurbir Grewal, Director of the Division of Enforcement for the SEC, noted:
“Public trust is essential to the fair and efficient operation of our markets.”
This could not be truer of the people entrusted with running organizations. Senior leaders are the decision makers and, as such, they are held to a higher standard of ethical conduct in order to uphold public confidence and make sound decisions that uphold market trust and stability.
In our recent Compliant Communications report, 61.5% of respondents said that their biggest challenge is getting employees to comply with the rules. Some compliance officers said that senior leaders were the biggest issue, as they frequently circumvent the rules, or think they do not apply to them. In one instance, a compliance officer said he hoped to see more enforcement action against individuals as a means to scare them into compliance.
This is a topic that appears to be at the forefront of regulatory attention as part of a wider move towards a more transparent, accountable financial services. This is especially true in the US, whereby the New York Department of Financial Services has recently issued revised vetting rules for Chief Compliance Officers (CCOs) and other members of the C-suite. The foundation for these revisions is that:
“A compromised director, officer, or manager can threaten an organization’s safety and soundness at any time during an individual’s service”.
Similar steps have been taken by the U.S. Department of Justice which, in March 2022, introduced a new Certification Requirement which places a burden on CCOs to certify the capability of a company’s compliance program. The shift towards individual responsibility for non-compliant events is undeniable – though regulations around this must be implemented carefully to avoid becoming a deterrent to individuals taking on senior roles.
The ‘Golden Goose’ that gave it away
Adjacent to the notion of transparency is the idea that there is increasingly “nowhere to hide” when things go wrong. This is a sentiment introduced by the UK Financial Conduct Authority’s new Co-Executive Director of Enforcement and Market Oversight, but one that transcends borders and serves as a fitting warning to individuals who continue to use illicit communications to conceal bad behavior.
As seen above, two defendants used text messages to jointly celebrate their ill-gotten gains. These messages now serve as inescapable indictments of non-compliant behavior.
Time and again, individuals seek to circumvent the parameters of compliance. Time and again, they are caught out. Whether it’s speaking in a foreign language, using emojis as ‘code’, or opting for voice calls – individuals forget that now technology is so advanced, there really is nowhere to hide.
