By Edel Gonzalez
Illegal insider trading has undermined the trust that investors have in the securities market for many years. It cripples public confidence in the market and hinders growth for investors and companies. In response, the Securities and Exchange Commission (SEC) has strengthened its commitment of investigating and prosecuting insider trading.
The SEC has defined illegal insider trading and what is considered permissive insider trading practices. According to the SEC, illegal insider trading is buying and/or selling a security in breach of a trust relationship and while in possession of nonpublic information, in violation of a fiduciary duty to keep such information confidential. Insider trading is permitted in certain circumstances such as when corporate insiders trade their own securities and report their transactions to the SEC.
The SEC has adopted rules to discourage and prevent such inappropriate behavior. Rule 10b5-1 addresses the knowledge of a trader who is privy to material nonpublic information. Rule 10b5-2 states that a person receiving confidential information through non-business relationships owes a duty of confidentiality and may be found liable for violation of the duty.
The SEC has brought actions under these rules against corporate officers, government employees, friends and business associates of corporate employees, employees of law, and banking and brokerage firms with access to confidential trade information.
Just last month, the SEC charged Michael Anthony Dupre Lucarelli, a director of market intelligence at Manhattan’s Lippert/Heilshorn Investor Relations, with executing trades based on information he obtained through accessing client’s press releases from his firm’s computer network. Sanjay Wadhwa, senior director of the SEC’s New York Regional Office, commented on the investigation stating that Lucarelli knew that he was prohibited from using this information in order to gain advantage over other investors.
Lucarelli has been accused of intentionally falsifying his employment information on brokerage firms’ trading account applications in order to execute these illicit trades. The U.S. Attorney’s Office for the Southern District of New York has announced criminal charges against Lucarelli.
Cases such as Lucarelli’s pose questions as to whether these are isolated incidents in a mostly well regulated and good faith market or whether these are prevalent violations which require stronger reaction.