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SEC on the Lookout for Insider Trading During the Bailout

“Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws,” the officials said in the statement.

Source: Wikipedia/United_States_Capitol_-_west_front.jpg: Architect of the Capitolderivative work: O.J. / Public domain

On Monday this week, the U.S. Securities and Exchange Commission (SEC) issued a stern warning to corporate executives against insider trading during disruption caused by the coronavirus.

“Trading in a company’s securities on the basis of inside information may violate the antifraud provisions of the federal securities laws,” the officials said in the statement.

The warning came as news broke from multiple outlets that the chief executive of the New York Stock Exchange and his wife, a U.S. senator, sold off millions in stock holdings since January. NYSE CEO Jeff Sprecher nor his wife, Sen. Kelly Loeffler (R-GA), were mentioned directly in the report by the SEC. Additionally, Loeffler stated last Friday that the trades detailed in Senate disclosure forms were made by third-party financial advisors, without input or the knowledge by either her or Sprecher. The SEC has not accused either of wrongdoing.

In a joint research report published in The Journal of Finance by the University of Pennsylvania’s Wharton School, Stanford University, University of Cambridge and IESE Business School found that insider trading profitability increased dramatically during the turmoil surrounding the 2008 financial crisis especially ahead of the infusions from the Troubled Asset Relief Program (TARP).

“Anytime the government picks winner and losers, there is a greater opportunity for insider trading by connected individuals,” said Daniel Taylor, an associate professor at University of Pennsylvania’s Wharton School and one of the authors of the report, to Reuters

The researchers examined open market purchases and sales by officers and directors at 497 publicly traded institutions between 2005 and 2011. They then compared the trades placed by insiders who appeared to have identifiable connections at regulators, the Treasury and Congress, with the trades placed by insiders who appeared to have no such connection.

An excerpt from the report reads:

Over the nine months after the creation of TARP (i.e., the period over which TARP funds were disbursed), we find a sharp increase in the predictive ability of insider trades for future performance. During this period, the average one-month-ahead future return following purchases (sales) is 1.84% (–2.87%), a difference of 4.71%. Strikingly, we find that the increase in predictive ability is concentrated almost entirely in the trades of politically connected insiders…During
the period over which TARP funds were disbursed, the difference in one-month-ahead future returns
between the purchases and sales of insiders with (without) political connections is both
economically and statistically significant, at 8.89% (2.81%).

As the private sector has become more involved in coronavirus pandemic relief, there are rising worries that corporate insiders are regularly learning new information of great value.

“I hope we can avoid repeating it this time around, but I am not optimistic,” Taylor concluded.

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Source: Equities News