Imagine this: you work as an engineer at a software company. You know that your boss has been sweating your team on a deadline…and there is no way you can make it. This is a key component of an upcoming release, and failure to deliver will disappoint investors. Knowing your team won’t make the deadline, you decide to change your 401k investments out of company stock and into the stable value fund so that your portfolio won’t suffer if Wall Street doesn’t like the news.
Well, guess what? You just committed insider trading.
What You Think Of Traditional Employee Insider Trading
Last week, KPMG (the big accounting firm) announced that one of it’s partners had been selling information on companies that it was in charge of auditing. This partner had access to accounting statements before the public, and during golf with a “friend”, we would exchange non-public knowledge for cash, jewelry, and other gifts. Then, the “friend” would buy small blocks of the company’s stock, so as to not alert other traders or the SEC.
This was just the latest in a string of big, public cases of insider trading, many involving hedge funds, traders, or other Wall Street insiders. And the government is cracking down on these cases. Total settlements for insider trading cases over the last decade have exceeded $1 billion. Plus, several high profile individuals have ended up in jail.
In some regards, the system is working, but it’s not stopping the majority of insider trading.
What Actually Is Employee Insider Trading
But, in reality, insider trading is happening everyday. I would venture that millions of individuals are involved in insider trading nationwide. How can this be?
Simply for the example I mentioned above. At every publicly traded company, companies all the way down the food-chain to the secretaries have some inside knowledge of how the company is doing. Maybe they hear about upcoming layoffs at the water cooler? Maybe the sales reports roll-up and not only can divisional sales be seen, but low-level employees can see total company sales.
Regardless of how they get information, it’s never a crime to know it unless they act on it. And here is where it can be tough: changing your investments based on your knowledge that is non-public is illegal. So, even something like stopping buying company stock in your 401k could be considered insider trading. Now, is this what’s being cracked down on? No.
But, actually buying and selling company stock (or even sector stock), especially in your 401k, is being looked at more closely than ever.
Millions Have Done It – Now Government and Companies are Cracking Down
So, now that you know millions have done it, what do you need to know? First, the 401k is really being studied for potential insider trading. All 401k plans are administered by a third-party company paid for by the employer. And while the employer has no access to your accounts, the administrator does, and it knows what company you work for. They are also legally required to report potential insider trading issues. Have they been doing it much? No. Will they start? Potentially.
As such, many companies have started rolling out mandatory securities training to all levels of employees, not just C-Level and other senior managers. They are specifically warning employees against trading in their 401ks based on insider or non-public information. They are also reminding employees about the potential for “traditional” insider trading cases.
So, what are the penalties? Well, for an individual, you can face up to 20 years in prison and fines of up to $5 million for each act (or trade). And that’s if you’re just doing it in your 401k.
If you’re trying to be more sly about it, you could face a wide range of charges from wire and securities fraud, to tax evasion, to racketeering. The list goes on.
The bottom line: be mindful of your trading.
What do you think of this new crackdown on average Joes and their 401k trades?