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Senators’ Stock Sales Raise Corporate Insider Trading Concern (2)

March 20, 2020, 4:38 PMUpdated: March 20, 2020, 10:40 PM

U.S. Senators’ selling of stock after briefings on the new coronavirus raises a similar concern for potential insider trading by corporate executives and directors.

Sen. Richard Burr (R-N.C.), chairman of the Senate Intelligence Committee, and three other senators sold stock following briefings in late January about the Covid-19 virus threat, financial records show. The sales came before stocks collapsed as the virus outbreak became a global pandemic.

Corporate insiders could likewise trade based on advanced knowledge of government relief for airlines or other companies hit hardest by the virus before such measures are made public.

“The pattern we saw with the financial crisis appears to be repeating itself,” said Daniel Taylor, a professor at the University of Pennsylvania’s business school who studies insider trading.

Taylor’s research has shown that politically connected corporate insiders at top financial institutions who had advanced knowledge about bailouts in the wake of the 2008 financial crisis used that information for stock trades anticipating the market reaction.

One executive accused of insider trading at the time was Angelo Mozilo, co-founder and CEO of subprime mortgage lender Countrywide Financial, which faced collapse in 2008 before being purchased by Bank of America. Mozilo paid a multi-million dollar penalty in 2010 to the Securities and Exchange Commission without admitting or denying wrongdoing. The Justice Department also investigated Mozilo’s stock sales in the months leading up to the mortgage bubble bursting but later dropped its case against him.

Insider trading in Congress was also a concern, when then-Rep. Spencer Bachus (R-Ala.) faced an ethics probe for profiting from trades made during bank bailout negotiations. The ethics investigation cleared Bachus of insider trading violations.

There’s likely to be a lag in surveillance over insider trading now as regulators work remotely during the virus outbreak, according to Michael Asaro, a partner at law firm Akin Gump who focuses on white collar crime.

“When the dust settles, they will look at trading patterns,” Asaro said. “It could be happening right now.”

Trading Scrutiny

The current market volatility and sensitivity to news around Covid-19 presents “a heightened opportunity for insider trading and the possibility of more actions down the line,” said Brook Dooley, a partner at San Francisco-based firm Keker, Van Nest & Peters LLP.

“I think there is going to a lot of political will and public demand for accountability for anyone taking advantage of this situation,” he added.

Insider trading issues could come up with government employees overseeing drug approvals or Medicare coverage as companies test out treatments for the coronavirus, according to Kevin Muhlendorf, a partner at law firm Wiley who has represented executives in insider trading investigations.

Muhlendorf said such investigations are “fact-intensive” and cautioned against assuming wrongdoing. “Just because the trading happened doesn’t mean something wrong happened,” he said.

Government Aid

Potential enforcement activity for insider trading occurring during the pandemic could still be years away, attorneys say.

But the likelihood of certain industries receiving government aid packages does increase the amount of private information that corporate insiders could use for personal gain, which could eventually drive an uptick in enforcement.

Government assistance “increases the amount of available non-public information,” said Cory Manning, a partner at Nelson Mullins Riley & Scarborough LLP. “The more there is, the more possibilities there are for insider trading.”

Ultimately, the risk hinges on the character of a company’s directors and board members, he added.

And if any insider trading activity occurring during the pandemic results in future charges and is put before a jury, what can be tough cases for defendants could prove even tougher.

“Given the current atmosphere, there might be increased difficulty in defending these cases,” Manning said. “All of the public information that’s out there” about possible profiting off of the pandemic could weigh on jurors’ decision-making processes.

(updates with additional comment on government aid )

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com; Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editors responsible for this story: Seth Stern at sstern@bloomberglaw.com

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