The SEC charged a California trust company and one of its fund managers with insider trading, alleging that the fund manager knowingly received and traded upon inside information relayed to him by a subordinate. The case continues a series of cases arising out of investigations into so-called “expert networks.”
The complaint describes information passing from insiders at the subject companies to a network of hedge fund analysts that allegedly regularly shared inside information, as well as information passing from a friend directly to the fund manager’s subordinate. The SEC estimated illicit profits and avoided losses at more than $475,000. Pursuant to the proposed settlement, which is subject to court approval, the trust company agreed to pay disgorgement, prejudgment interest and penalties of more than $1.5 million, and the fund manager agreed to personally pay more than $150,000.
Investment advisers and similar entities should be mindful that they can be held liable for illicit acts of their employees, even when the firm is not complicit in the illegal acts. Firms should consider including in their compliance programs a process to monitor trading activity around earnings or other major announcements and that may be suspected of being related to insider trading. This would assist compliance personnel in determining whether increased scrutiny of trading by particular individuals is warranted.