Insider Trading Risk During the COVID-19 Outbreak

Rahul Mukhi and Jonathan S. Kolodner are partners and Shannon Daugherty is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Mukhi, Mr. Kolodner, Ms. Daugherty, Francesca Odell, and Joon Kim. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

On March 20, 2020, news outlets reported that four U.S. Senators sold millions of dollars in stock following classified briefings to the Senate on the threat of a COVID-19 outbreak. Three days later, the Co-Directors of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement, Stephanie Avakian and Steven Peikin, issued a statement reminding market participants of their obligations with respect to material non-public information (“MNPI”) and of the SEC’s commitment to protecting investors from fraud and ensuring market integrity. [1]

The statement stressed that in the current crisis, MNPI “may hold even greater value than under normal circumstances” and a “greater number of people may have access to [MNPI] than in less challenging times.” The Co-Directors urged insiders to comply with prohibitions on illegal securities trading and with obligations to keep MNPI confidential, and they reminded public companies and other market participants to “be mindful” of their established controls and procedures designed to prevent the misuse of MNPI—including disclosure controls and procedures, insider trading prohibitions, codes of ethics and Regulation FD policies.

The Co-Directors’ statement follows the SEC’s recent suspension of trading in the stock of two companies due to concerns about public misinformation. [2] Together, these actions suggest that the SEC remains focused on securities fraud, even during the global health crisis. The SEC may defer bringing enforcement actions while the government’s resources are stretched and focused on responding to the crisis, but companies should anticipate that the SEC and other law enforcement authorities will look back at this period in search of potentially illegal trading once markets stabilize. There is also a risk of private shareholder suits alleging insider trading under Section 20A of the Exchange Act. [3]

The volatility in securities markets and the crisis atmosphere might lead to riskier behavior by insiders, particularly as more people have access to confidential information, with some of them being less accustomed to having access to and properly handling MNPI. The large number of employees handling MNPI while working remotely also raises concerns about securing such information from family members and others who might have access to shared working spaces. In anticipation of these risks, companies should consider the following in being “mindful” of their existing controls and procedures to safeguard MNPI and protect against insider trading:

  • Providing virtual training. In addition to refreshing training for employees that have already been trained on how to manage MNPI, companies should consider training employees who are not ordinarily in possession of MNPI but who might come into possession of MNPI as a result of the COVID-19 outbreak. Regular reminders about the importance of keeping information confidential (and not trading while in possession of MNPI) are also recommended.
  • Updating insider trading policies and training materials. In the absence of a specific insider trading statute, the prohibition against insider trading has developed through courts, prosecutors and regulators applying general anti-fraud statutes. As a result, quite a bit of uncertainty surrounds the specific elements of the offense. [4] It is important, therefore, to keep employees and policies up to date on what conduct is lawful and unlawful, and where the gray areas may lie, including with respect to what constitutes MNPI. It may also be appropriate to remind employees that non-public information from the government can be MNPI and that the STOCK Act creates a duty of confidentiality that members of Congress and other federal employees owe with respect to MNPI they receive through their positions, including potentially market-moving decisions such as the extent and timing of any government assistance to industries. [5]
  • Expanding SEC Rule 10b5-1 trading plans. For employees other than officers and directors, who did not ordinarily come into possession of MNPI prior to the outbreak of COVID‑19, companies could offer, to the extent practicable, to facilitate their entry into Rule 10b5-1 trading plans in an open window.
  • Exercising good cyber hygiene. In a post last week, we discussed managing cyber risk during the COVID-19 response, including reminding employees to exercise good cyber hygiene and ensuring adequate resources for IT staff to avoid inadvertent employee exposure or hacking of market sensitive information. [6]


1See Statement from Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Division of Enforcement, Regarding Market Integrity, U.S. Securities and Exchange Commission (Mar. 23, 2020), back)

2See SEC Coronavirus (COVID-19) Response, U.S. Securities and Exchange Commission, (last updated Mar. 26, 2020).(go back)

3A shareholder of Wyndham Hotels & Resorts Inc. filed a lawsuit earlier this week in federal court in Washington D.C. alleging that North Carolina Republican Senator Richard Burr’s sale of $1.7 million in Wyndham stock after receiving confidential briefings about the potential impact of COVID-19’s spread violated Section 10(b) of the Exchange Act, SEC Rule 10b-5 and the 2012 Stop Trading on Congressional Knowledge Act (“STOCK Act”), Pub. L. No. 112-105, § 1, 126 Stat. 291 (codified at 5 U.S.C. App. 4 § 101). See Complaint, Jacobson v. Burr, No. 1:20-CV-00799 (D.D.C. Mar. 23, 2020).(go back)

4A bill proposed by Congressman Jim Himes specifically prohibiting insider trading has passed the House and is pending in the Senate. Other commentators, including in a report by the Bharara Task Force on Insider Trading headed by the former U.S. Attorney for the Southern District of New York Preet Bharara, have noted the need for the clarification of the elements of insider trading and recommended insider trading legislation. See Task Force Led By Preet Bharara and Cleary Gottlieb’s Joon H. Kim Issues Report Recommending Reforms to Insider Trading Law, Cleary Enforcement Watch Blog (Jan. 28, 2020), back)

5See Superseding Indictment, United States v. Blaszczak, No. 17-CR-308 (May 23, 2017). Relatedly, trading based on confidential, non-public government information can serve as the basis for Title 18 securities fraud and wire/mail fraud charges without the need for the government to prove a “personal benefit,” as it must for SEC Rule 10b-5 charges. See United States v. Blaszczak, 947 F.3d 19, 37 (2d Cir. 2019).(go back)

6See SEC v. Dorozhko, 574 F.3d 42, 51 (2d Cir. 2009) (holding that insider trading based on MNPI obtained by cyber intrusion is prohibited under Section 10(b) of the Exchange Act if the method of hacking is “deceptive”).(go back)

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