This week, the S.E.C. announced a record-breaking penalty of $1.8 billion US dollars for insider trading violations. I suspect many ethics officers who are far removed from Wall Street may take little notice. That would be a mistake. There are important takeaways from these cases for every ethics and compliance officer, in every industry.
When I help companies develop their Codes of Conduct I am surprised how often I’m told, “we’re not investment bankers, it doesn’t apply to us … we don’t need it in the Code. Besides that’s only a risk for a handful of corporate ‘insiders’.” One key lessons we're learning is that third parties, including hedge funds and advisers, are very much subject to insider trading laws.
The assumption that insider trading risk is limited to “a handful of corporate insiders” is an extraordinarily dangerous assumption to make. And further, you don’t need to be a publicly traded company to have this kind of exposure. If your employees have access to information about any company – their own, a business partner, a supplier, a customer – and that information is not yet public and could impact share price, then they are an insider trading risk.
If they trade on that information or leak it to someone else, they’ve crossed the line. It’s hard to imagine any company of any size – public or private – that doesn’t have this type of exposure. And, given that governments have made insider trading an enforcement priority, it’s clear that you really do need to get ahead of this risk.
While updating your Code and policies is a good first step, as with any risk area, the next step is to identify any employees who might be at heightened risk. And remember, these employees don’t have to be ‘insiders’ or executives to be exposed. Employees in purchasing or supply chain management – or legal or accounting – may be especially well positioned to hear about material, inside information regarding your company or other companies.
Don’t forget to also be on the alert for third parties who have access to your company’s information. If a supplier is dragged into an insider trading investigation, it may implicate your employees and – even if it doesn’t – it can still damage your reputation.
Once you’ve identified the high-risk employees or third parties, provide additional training to them. You may even want to consider requiring annual acknowledgement that they understand and abide by your insider trading policy.
Finally, we should note that, for the first time since the indictment of Arthur Andersen in 2002 – which destroyed the firm and penalized thousands of innocent employees – the government once again seems willing to hold organizations culpable. No one in recent cases – at least so far – is going to jail. The findings have been against the organization. Prosecutors have pointed to “institutional failures” as they announced that they are once again willing to seek indictments of organizations despite the impact on employees and others who may have had nothing to do with the wrongdoing.
It may be time to dust off your copy of the Federal Sentencing Guidelines for Organizations.