The most recent example, the SEC announced insider trading charges against a former systems administrator at Vermont-based Green Mountain Coffee Roasters who repeatedly obtained quarterly earnings data and traded in advance of its public release. According to the Commission, they traded out of the money options before earnings announcements and gained $7 million dollars in profits. The Commission alleges that they communicated with each other by voice and text messages using their wives' cellphones.
Pretty clever. No one would ever think of issuing a subpoena for my wife's cell phone in an insider trading investigation!
None of this works. First, let's keep in mind that the Commission and the exchanges have extensive records of trading activity. The regulators know, at a minimum, which brokerage firm had clients purchasing stock, or options, in the days, weeks, or even months leading up to an event. It is not difficult for the regulators to issue requests to the firms for the identity of the customer who made suspicious purchases.
From there the SEC Staff issues a document request to the customer, his brokerage firm, and ultimately his bank, his telephone company and any other entity, following the money. Ultimately the Staff takes the customer's testimony under oath,
At that time, the customer is faced with a choice - assist the investigation and testify, or refuse to testify and assert his rights under the Fifth Amendment. The latter choice is not always the right choice, and there are complications in doing so, but it is an option, and one that we sometimes recommend to our clients. Of course,there is a third choice - testify and lie - but that is not an option, as many targets of investigations have found, including Martha Stewart. She did a year for obstruction, and then settled the insider trading case.
The reality is that if you are going to trade on inside information, you are probably going to get caught, and if you are not trading on inside information, you don't have to go through hoops to hide your activity. In this case, this team of investors correctly predicted the company's stock price reaction to 12 of the past 13 quarterly earnings announcements. I once had a federal court judge tell me, during an insider trading trial, that "you don't pull a royal flush in 4 out of 5 poker hands." So too here.
But what I found interesting was the that the SEC alleges that as an information technology employee, McGinnis had access to shared folders on Green Mountain Coffee’s computer server where drafts of pending press releases and earnings announcements were stored. He also had access to other employees’ e-mail accounts. Both sources provided McGinnis with details about upcoming Green Mountain Coffee earnings announcements before they became public.
Plus, although the technology officer lives in Vermont, and his partner lives in Connecticut, according to the SEC, much of the insider trading in their online brokerage accounts occurred through McGinnis’ home Internet service. They communicated frequently around earnings announcements, but infrequently otherwise.
But I am sure they thought they were being clever, according to the SEC, around trading times, they exchanged numerous phone calls and text messages using cell phones belonging to their spouses.
It doesn't work. The SEC will figure it out eventually, and when they do, the penalty is THREE TIMES your profits. Not three times your net trading profits; three times the profit on the trades that the SEC says were made with inside information. They ignore the losers, by the way.
The solution? The obvious one is not to trade on inside information. More importantly, be careful when you trade on tips received from friends or colleagues, and document the trades that you do make. And if you are in the unfortunate position of being investigated for insider trading, retain an experienced securities attorney at the start of the investigation. Do not go it alone, the downside, which can include criminal charges, are simply too great.
SEC.gov | SEC Charges Former Green Mountain Coffee Employee And Friend In $7 Million Insider Trading Scheme
The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of insider trading investigations and enforcement actions. We represent investors, financial professionals and investment firms nationwide. For more information contact Mark Astarita at 212-509-6544 or at email@example.com