November 28, 2020

Volume X, Number 333


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 © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume VIII, Number 171



About this Author

Kari Rollins Intellectual Property Lawyer Sheppard

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....

Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Special Counsel

Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering,...