Virus Market Mayhem Makes Insider Info More Valuable Than Ever

(Bloomberg) --

The coronavirus pandemic may present an opportunity for insider trading -- and a challenge for those trying to prevent it.

The disruption means executives and back office staff may fall through the cracks of compliance operations and employees given new areas of responsibilities to cover for ill colleagues.

Billions of people are out of work or stuck at home as the number of global infections approaches 1 million, with 43,500 deaths. The economic uncertainty means companies will be adjusting earnings outlooks and markets are volatile, a perfect recipe for mayhem.

“Given the global market turmoil, such information is likely to be more valuable now than in normal circumstances,” attorneys at Dechert LLP, including Maria Sit in Hong Kong and Jeffrey Brown in New York, said in a note to clients.

Dechert said some may try to take advantage of the situation even as supervision of staff and trading teams working remotely -- likely without recorded phone lines -- slackens. There may also be new people to watch as substitutes are added added to insider lists to replace sick staff.

Just last week, the U.S. Securities and Exchange Commission issued its own warning to corporate insiders reminding them to “be mindful of their obligations to keep this information confidential.”

Still, market-abuse regulators are aware of the temptations, and will continue to monitor trading and the reporting of financial data.

In France, the Autorité des Marchés Financiers remains very active in monitoring markets, according to Stéphane Bénouville, a lawyer at Freshfields Bruckhaus Deringer LLP in Paris. He expects cases will be brought.

“Post-crisis there’s always a wave of investigations and reviews by market regulators of transactions that took place during the crisis,” the attorney said. “That’s what happened after the 2008 crisis, that’s what happened in relation to Greece’s woes.”

Former Goldman Sachs Group Inc. director Rajat Gupta was famously convicted for passing tips in 2008 about Berkshire Hathaway Inc.’s $5 billion investment in the bank to his friend Raj Rajaratnam. The hedge fund manager was also found guilty.

Bénouville also expects regulators will closely review whether companies made adequate disclosures concerning the impact of the coronavirus pandemic on their business.

In a similar vein, the U.K.’s auditing watchdog last week cautioned the Big Four auditors that although many of their staff will be working remotely, making paper trails harder to trace, there is no excuse for not securing sufficient evidence to complete a thorough audit and to avoid fraud.

To mitigate the risks, Dechert suggests companies conduct additional mandatory market-abuse training electronically covering the specific concerns posed by the outbreak. Firms should also test their market-abuse surveillance systems and make sure insider lists are up-to-date.

Working from home isn’t a total game changer, according to Bénouville. He said large financial institutions are already well equipped to handle the situation.

“Working remotely isn’t very different from a typical situation where compliance officers are on one floor and the trading desk is on another floor and internal surveillance is centralized electronically,” he said.

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