Caught in the act: managing insider dealing risks when working from home

Alongside the benefits, it is no surprise that the rise of hybrid working in the corporate world has created new challenges for companies and employees alike. One of those challenges is the protection of confidential information, and thoughts may turn automatically to the cyber risks in running devices remotely. But what may be more surprising are the recent cases of risks lurking within the home environment itself.

In a recent US decision, the husband of a BP mergers and acquisitions executive was ordered to pay a total of $1,845,600.06 for violating insider trading laws.

The case commenced in February 2024, when the Securities and Exchange Commission (SEC) charged Tyler Loudon with insider trading. Loudon had allegedly overheard his wife’s discussions regarding a planned BP takeover of TravelCenters of America Inc while they were both working remotely. Loudon had then used that information to make a profit of $1.76 million (£1.34 million) by trading the target’s shares. According to the SEC, the BP acquisition was reportedly worth $1.3 billion.

Not only did Loudon allegedly eavesdrop on his wife’s calls, it was alleged that he also accessed her laptop and email account without her permission. He acquired around 46,000 shares of TravelCenters’ stock ahead of the public announcement of the deal in February 2023. After the announcement, with TravelCenters’ share price surging nearly 71 per cent, Loudon reportedly immediately sold all of his newly acquired shares for a significant profit. Upon Loudon’s confession, his wife reported his trades to BP, who terminated her employment despite finding no evidence that she knowingly leaked the deal.

The SEC alleged that “Loudon knew, or was severely reckless in not knowing, that information regarding potential BP deals, including the acquisition of TravelCenters, was material, non-public information that he had a duty to keep confidential.” [1]

According to the SEC, Loudon did not contest the accusations and agreed to pay a penalty of $1.76 million. He also pleaded guilty to one count of securities fraud.

On 28 May 2024, the judge ordered Loudon to pay a total of $1,760,000 plus interest of $85,600.06. In parallel criminal proceedings, Loudon was sentenced to two years in federal prison and fined $10,000.

Insider dealing: the English legal position

Whilst the Loudon case obviously engages US law, insider dealing is an offence in England and Wales and carries serious consequences if the law is breached.

The law on insider dealing in England is set out in section 52 of the Criminal Justice Act 1993 and in the onshored aspects of the EU Market Abuse Regulation [2] that has applied in the UK since the end of the Brexit transition period (UK MAR).

The criminal offence of insider trading under section 52 of the Criminal Justice Act 1993 is made out when a person:

• Possesses inside information and deals in price-affected securities on a regulated marked,
• Possesses inside information and encourages another person to deal in price-affected securities, or
• Discloses inside information otherwise than in the proper performance of his / her employment, office or profession.
  
  

Behaviour amounting to the civil offence of insider trading under UK MAR is set out in Article 8(1) of that legislation (also reflected in the Glossary to the FCA Handbook, which defines “insider dealing” accordingly). Under those authorities, the offence of insider trading arises where a person possesses inside information and uses that information by acquiring or disposing of (for its own account or for the account of a third party), directly or indirectly, financial instruments to which that information relates.

Broadly, UK MAR defines “inside information” at Article 7 as information of a precise nature which:

• Has not been made public,
• Directly or indirectly relates to one or more issuers, or to one or more financial instruments, and
• If made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments.
  
  

Article 3(1)(1) of UK MAR defines “financial instrument” as an instrument specified in Part 1 of Schedule 2 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544), read in conjunction with Part 2 of that Schedule.

The FCA Handbook also provides further guidance on behaviours that may constitute insider trading.

Sanctions imposed on individuals who breach insider trading laws can be severe. An individual found guilty under the Criminal Justice Act 1993 is liable to unlimited fines and/or imprisonment (section 61 of the Criminal Justice Act 1993). The Financial Conduct Authority, which is the body responsible for preventing, detecting and punishing market abuse under UK MAR, can impose unlimited fines, order injunctions or prohibit regulated firms or approved persons.[3]

Comment

Hybrid working is now a mainstream fact of life and has brought with it the requirement to understand and mitigate the risks involved. The Loudon case highlights the risks which arise where members of the same household carry out their work (for different employers) in a common workspace. Some considerations which may mitigate the risks of insider trading in the hybrid working environment, are as follows:

• Companies and firms will already have in place training and policies to prevent insider trading, not least due to the wholescale upheaval of standard working practices brought on by the pandemic. The FCA has emphasised the ongoing necessity for robust surveillance measures to uphold compliance standards.[4] It is important to ensure training and policies are up to date with the current law.
• The FCA also stressed recently that market abuse offences are not limited in application to individuals working in the financial services industry.
• Everyone must comply with the insider trading framework. Any individual in receipt of inside information who trades while in possession of that information, or induces someone else to, is guilty of market abuse.
• It is an obvious point that individuals have a duty not to use inside information (which they have obtained from their relatives or flatmates by working from home) for their own or another’s benefit. Whilst the hybrid working environment may have made confidential information protection more challenging, by contrast, the identity of the perpetrator is obvious.
  
  

This is not limited to the Loudon case. The SEC has brought multiple cases involving spouses, family members or friends who engaged in insider trading based on information they overheard while working remotely. We expect the FCA to remain vigilant for similar cases, keeping them at the forefront of its mind as remote working continues to be a standard practice for many in the UK.

[1] SEC Civil Action No. 24-cv-622 [10]. Link to complaint can be found here.

[2] Market Abuse Regulation - Financial Conduct Authority

[3] See section 123(2), section 381 and sections 55J and 55Q of the Financial Services and Markets Act 2000.

[4] Market abuse in a time of coronavirus - Financial Conduct Authority

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, September 2024