COVID-19 has injected significant uncertainty into our daily lives and enormous volatility into our markets. In the last two weeks alone, many major domestic and international indices have experienced their largest daily point gains and losses, and the prices for stocks of individual companies have seesawed even more dramatically.
Boeing shares, for instance, had at one point in March lost more than 70 percent of its peak value, only to rebound by more than 50 percent last week. These swings are likely to continue as the longer-term impacts of the virus on company operations and the government stimulus bill come into sharper focus.
In this environment, corporate insiders have a tremendous incentive and opportunity to trade on nonpublic information that will dramatically impact share value. Indeed, there already are media reports that public officials privy to nonpublic information about the impact of the coronavirus may have traded based on this information. There is little doubt that unscrupulous insiders will seek to take advantage of material nonpublic information as some did during the 2008 financial crisis.
Despite COVID-19’s disruptions to government and business, we expect the SEC to act quickly to regulate violations of securities laws, specifically insider trading, through aggressive high-profile litigation. In fact, the SEC’s Enforcement Division already has issued a statement emphasizing the importance of “maintaining market integrity and following corporate controls and procedures.” The SEC’s statement specifically notes how COVID-19 has increased the agency’s concerns regarding insider trading:
[I]n these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access—including, for example, directors, officers, employees, and consultants and other outside professionals—should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.
Insider trading by dishonest employees poses a significant risk to publicly traded companies in the form of negative public attention, increased legal costs, distracting governmental investigations, and possible legal ramifications. Indeed, the SEC’s statement regarding COVID-19 notes that public companies’ “disclosure controls and procedures, insider trading prohibitions, [and] codes of ethics” as well as “Regulation FD and selective disclosure prohibitions” are particular areas of concern. As public companies adapt to virus-related challenges, they must devote adequate resources to address the heightened risks posed today by insider trading. Important steps companies can take to minimize risks from insider trading include:
Importantly, implementation of all of these steps, including setting up training sessions, can be accomplished remotely while employees remain out of the office.