On July 2, the SEC and DOJ both announced charges against a Canadian trader for entering into trades based on the knowledge of upcoming trades by the trader’s employer, a large Canadian asset management firm.  The trader is alleged to have made trades in tandem with upcoming trades of his employer which would impact the market price, leading to profits from the trades in accounts in the names of the trader’s relatives.  The trader allegedly traded in the same direction as the management firm prior to the much larger trades by the firm in violation of insider trading and confidentiality policies in place at his employer.  The trader also took advantage of his knowledge of the impending rise or fall in the stock prices.  His alleged actions led to more than $3.6 million in profits, which the government alleges were obtained illegally.  

The trader is alleged to have made many of the trades in the relatives’ accounts himself rather than simply providing the information to his relatives.  Additionally, the government alleges that, on occasion, the trader would conduct the trades on behalf of both the relatives’ accounts and his employer.  In total, more than 700 trades were allegedly made as part of this scheme.  The government further alleges that hundreds of thousands of dollars were transferred from the accounts of the relatives back to the trader and to relatives of the trader’s wife.  These sorts of trades can be seen as both insider trading and market manipulation and can be subject to prosecution as securities fraud.  The trader has been charged with both securities fraud and wire fraud.

These charges are significant for two reasons.  First, many often labor under the misconception that insider trading cases are only premised on trading based on material non-public information in the company whose securities have been traded. However, that is not the case.  Insider trading can be premised on trading based on knowledge of material non-public information concerning the trading strategies of other market actors.  This conduct is considered fraud because front-running trades can alter the prices that will ultimately be paid when the larger trades are executed.  In that case, the fraud is against the trader or firm executing the later, larger trades.  Second, the charges are notable because the alleged illegal conduct was only detected because of sophisticated data analytics tools utilized by the SEC.  More and more, these tools are being used to identify suspicious trading that would not otherwise be detected.  In the past, trading in the accounts of relatives might have shielded a trader from the consequences of illegal trades, but with the growing use of data analytics, that sort of covert conduct is being discovered and prosecuted more and more.

The attorneys at Chilivis Grubman represent clients of all types and sizes in connection with SEC investigations and related securities litigation.  If you need assistance with such a matter, please contact us today.