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You Might Be an Inside Trader If…: Insider Trading and Breaches Part I

Earlier this year, the SEC released cybersecurity guidance addressing, among other things, the risk of insider trading in the event of a data breach.  The insider trading risk includes risk that the intruder will trade on stolen information and risk that insiders will trade on the knowledge of the breach itself.  In this manner, the SEC has added itself to the ever-growing pool of potential regulatory enforcers who may be quick to act in the event of a data breach.

Following this guidance, the SEC charged (and the DOJ indicted) the CIO of Equifax’s United States Information Systems business unit with securities fraud and insider trading.  The case arose after Equifax suffered a major cybersecurity breach.  The company launched a complex structure of teams to respond to the breach.  Only one was informed that Equifax was the victim of the breach.  The other teams were told they were working on a “business” or “breach” opportunity for an unnamed client.  Initially, Equifax instituted a trading blackout, but only for its employees who were told of the breach.

The SEC complaint alleges that the CIO, who was not on the team that was informed of the breach, nonetheless concluded that the “unnamed client” was actually Equifax.  The CIO subsequently exercised all of his vested options to buy Equifax shares.  The day after exercising his Equifax options, the CIO was informed of the breach by Equifax’s counsel, and instructed not to trade on that information.  Following an internal investigation several months later, the CIO’s conduct was discovered, and he was asked to resign.

The CIO is facing civil and criminal liability not for trading on information he obtained, but for independently figuring out his employer was the victim of a breach.  Here, the SEC and DOJ are applying a very broad interpretation of the insider trading knowledge requirement.  Under Rule 10b5-1, a trade is “made ‘on the basis of’ material non-public information…if the person making the purchase or sale was aware of the material nonpublic information when the person made the purchase or sale.”

Putting it into Practice:  If you are a public company, consider revising your incident response plan to include provisions for issuing trading blackouts — when to issue, to whom, by what process, and for how long. 

Copyright © 2018, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Kari Rollins Intellectual Property Lawyer Sheppard
Partner

Kari M. Rollins is a partner in the Intellectual Property Practice Group in the firm's New York office.

Areas of Practice

Ms. Rollins focuses her practice on privacy and complex commercial litigation matters. She has successfully represented clients in the financial services, audit and accounting, food services, retail, and fashion industries before state and federal courts, as well as in front of state attorneys general, federal regulators, and U.S. and international commercial arbitration forums....

212.634.3077
Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Associate

Sarah Aberg is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's New York office.

Areas of Practice

Ms. Aberg’s practice encompasses securities regulation, compliance, and litigation as well as internal investigations and white-collar defense. She frequently represents broker-dealers and associated individuals who are the focus of SEC, FINRA, and other regulatory investigations. She has conducted numerous internal investigations into a wide variety of allegations, including insider trading, unauthorized trading, and other retail brokerage sales practice violations. Ms. Aberg has also represented banks, broker-dealers, securities professionals and individuals in connection with investigations and inquiries by the Department of Justice, FINRA, and the New York Attorney General’s and District Attorney’s Offices.

Experience

Representative Experience 

  • The Private Bank division of a global investment bank in connection with ongoing FINRA, SEC and state securities regulatory inquiries and investigations.
  • Senior mortgage finance professionals in RMBS-related investigations and litigations.
  • Financial advisors in connection with SEC investigation into Forex trading platform.
  • A securities broker in DOJ/SEC investigation regarding bond trading practices.
  • A federal savings bank charged with mortgage and securities fraud by the Manhattan District Attorney.
  • An international retailer in a federal civil asset forfeiture action concerning structuring allegations.
  • Skaarup Shipping International in successfully defeating a $50 million prejudgment attachment in the District of Connecticut.
  • CIT Financial Services, Inc. in a New Jersey arbitration over breach of contract.
  • General Dynamics Corp. in filings with the US. Maritime Administration.

Practices

  • Government Contracts, Investigations & International Trade
  • Litigation
  • White Collar Defense and Corporate Investigations
212-634-3091