How to Deter the Possibility of Insider Trading by Your Employees

On August 12, 2019, the Securities and Exchange Commission (SEC) announced it had filed civil proceedings against Bill Tsai, a junior analyst at RBC Capital Markets, for alleged insider trading.


On the same day, the U.S. Attorney’s Office for the Southern District of New York today announced a criminal charge of securities fraud against Tsai, who had just completed his undergraduate studies at New York University’s Stern School of Business last year.

The SEC’s complaint alleges that Tsai used material non-public information from an RBC project he was working on regarding Siris Capital Group’s pending acquisition of digital printing company Electronics for Imaging.

EFI had agreed to be purchased by Siris Capital in an all-cash deal valued at about $1.7 billion, representing about a 26% premium to its April 12 closing price. Siris secured committed debt financing from RBC, KKR Capital, Deutsche Bank, Barclays, Credit Suisse and Macquarie Capital.

Tsai allegedly circumvented RBC company policies requiring employees to disclose all individual investment accounts by opening a secret trading account.

Soon after he became aware of the inside information, Tsai used the personal account he had concealed from his employer to buy 187 out-of-the-money call options for $28,410 in late March and early April, according to federal prosecutors.

When the deal was announced on April 15, shares of EFI went up 29%. The SEC complaint said Tsai’s illegal insider trading activity netted him a profit of $98,750.

It’s not altogether unusual for even a junior analyst with less than two years of professional experience like Tsai to come into possession of material non-public information. Tsai worked as a summer intern for RBC in 2017 and started work as a full-time RBC employee in July 2018, just after his graduation from NYU, where he had been president of NYU Stern’s student council.

Prosecutors say that among Tsai’s duties was updating and circulating a confidential internal report that tracked client deals, including mergers and acquisitions. He learned of the impending EFI deal from his work on the report and stole the information for personal gain, according to the criminal complaint.

Insider trading can be very difficult for financial advisory firms to safeguard against. Investment advisors are required to have a Code of Ethics and monitor employee trading, but there are times those measures alone are insufficient.

Every firm should have very detailed policies and procedures on preventing and detecting insider trading. In particular, firms should provide robust training for employees on what to do when they receive inside information. Best practices include creating clean information barriers and enforcing tight supervision of insiders, as well as creating “restricted lists” and “watch lists” in instances where the firm may be at risk for insider trading.

It’s important for employees to know that SEC has a huge department that does nothing but review for insider trading. A firm’s protocols need to keep pace with technological change and constantly be reviewed with the best allocation of internal resources in mind.

The SEC filed insider trading complaints against 56 individuals in 2018, a slight increase over the previous year. Although it’s impossible to eliminate the threat of insider trading at your firm, state-of-the-art controls and processes are the best preventative measures to take to avoid making headlines.

Core Compliance has the specialized knowledge and experience to answer questions and provide guidance to help deter the possibility of insider trading at your firm. Please contact us today for assistance.


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