The coronavirus-related market volatility has created investment opportunities for many market participants, including investment advisors and their clients and, apparently, members of Congress.
Recent reports of Sen. Richard Burr, R-N.C., selling certain stocks after receiving information in a closed-door government briefing highlight an issue important for anyone contemplating securities transactions while in possession of material non-public information: You don’t have to actually use the MNPI to face insider trading charges.
Burr tweeted that his trading was based on publicly available information about the coronavirus rather than anything he learned at the briefing, but that may make no difference to the SEC.
Before we turn to Burr’s plight, consider the case of hedge fund manager Doug Whitman, who was convicted in 2012 of criminal insider trading based on information obtained from an independent research consultant who in turn received the information from insiders at several publicly traded companies.
Earlier Insider Trading Case, MNPI
Whitman testified at trial that he never thought his sources of information possessed MNPI about the stocks he traded. Nevertheless, he was criminally convicted of insider trading, and his case found its way to the United States Supreme Court, which declined to hear his appeal.
A long unsettled issue in insider trading law presented by Whitman’s case is whether the government must prove that a trader used MNPI or whether it is sufficient merely to prove that the trader possessed MNPI at the time of the trade.
As one federal appellate court observed, if the government were not required to prove that the trader used the MNPI, that would “go a long way toward making insider trading a strict liability crime.”
In other words, a trader could be guilty of insider trading when in possession of MNPI even if the trade were based on some reason completely unrelated to the MNPI.
In 2000, the SEC attempted to clear up the use/possession muddle by adopting Rule10b5-1, which codifies the SEC’s position that trades are made “on the basis” of material, nonpublic information when the person making the purchase or sale was aware of MNPI when the trade was made.