In his keynote address to Securities Enforcement Forum West 2020, SEC Enforcement Co-Director Steven Peikin discussed some of the efforts of the Division of Enforcement to detect misconduct arising out of the COVID-19 pandemic and related market disruption, including the formation of a steering committee to proactively identify and monitor areas of potential misconduct. Of particular interest here are the focus on insider trading and financial and disclosure-related fraud.
First, Peikin observed, market volatility, together with a "regular stream of potentially market-moving announcements," has led to "increased opportunities for insider trading and market manipulation." He noted that the steering committee is monitoring trading activity around issuer announcements "in industries particularly impacted by COVID-19" and "other suspicious market movements for possible manipulation."
SideBar
Peikin and Co-Director Stephanie Avakian have recently cautioned that the pandemic has resulted in a substantial amount of particularly valuable new inside information to which more than the usual numbers of people are privy, signaling that corporate insiders need to be mindful of their obligations not to trade in securities on the basis of that inside information:
"[I]n these dynamic circumstances, corporate insiders are regularly learning new material nonpublic information that may hold an even greater value than under normal circumstances. This may particularly be the case if earnings reports or required SEC disclosure filings are delayed due to COVID-19. Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access - including, for example, directors, officers, employees, and consultants and other outside professionals - should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading. Trading in a company's securities on the basis of inside information may violate the antifraud provisions of the federal securities laws."
They also stressed that, to protect against the improper dissemination and use of material nonpublic information, companies must follow their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Reg FD and selective disclosure prohibitions. (See this PubCo post.)
In addition, historically, the stresses of economic downturns have led to increased risk for investors from financial and disclosure-related fraud
"in two ways: exposing pre-existing accounting or disclosure improprieties, or leading issuers to engage in improper conduct. As a result, structural risks such as excessive debt, extreme leverage, and possible liquidity disruptions, could be indications of potential issues. Recognizing that the economic impacts of any downturn may vary across different industries and sectors, the Steering Committee has developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry."
The committee is also on the hunt for "disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related."
Originally published May 13, 2020.
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