Recent Insider Trading Case at Amazon Offers Useful Reminders for Compliance Departments

Not even the world’s fourth-largest company by market capitalization is immune to the hazards of employee insider trading.

On September 28, 2020, the Securities and Exchange Commission Exchange Commission charged a former senior manager in Inc.’s tax department and two of her family members with insider trading for a scheme that lasted 2 ½ years.

The SEC complaint alleges that Laksha Bohra used highly confidential information she had access to in advance of Amazon’s quarterly and annual earnings reports between January 2016 and July 2018 and subsequently tipped her husband Viky Bohra as part of an elaborate process that involved 11 separate individual accounts.

Viky Bohra and his father, Gotham Bohra, traded on the accounts maintained by different members of the Bohra family. The insider trading was enabled by Laksha Bohra’s disregard of quarterly reminders from Amazon prohibiting her from sharing material nonpublic information or recommending the purchase or sale of Amazon securities and resulted in illicit profits of approximately $1.4 million.

A Refresher on Insider Trading

The stock market crash of 1929 prompted the U.S. Congress to enact insider trading laws as part of the Securities Act of 1934. Federal and state laws prohibit trading in securities by persons who have material information that is not generally known or available to the public.

Amazon prohibits its employees from trading in stock or other securities while in possession of material nonpublic information or sharing material nonpublic information to others without express authorization from the company. In addition, all Amazon employees are expected to review and follow the company’s Insider Trading Guidelines. Certain employees must comply with trading windows and/or preclearance requirements when they trade securities.

Increased Awareness

The Amazon example is the most recent insider trading case to attract significant attention. While there have been many well-publicized allegations of insider trading over the last 20 years, perhaps none has attracted as much interest as the celebrated case the SEC lodged against businesswoman, television personality, and former New York Stock Exchange board member Martha Stewart.

Generally, I believe a lot of people began understanding what insider trading is about because of the Martha Stewart case. It really put it on everybody’s radar, if they weren’t already involved in the field.

In 2003, Stewart was indicted on nine counts, including charges of securities fraud and obstruction of justice.  The crux of the case was the SEC’s allegation that Stewart had avoided a loss of $45,673 by selling all 3,928 shares of her ImClone Systems stock two years earlier after receiving material, nonpublic information from her broker at Merrill Lynch. The day following Stewart’s sale, the stock’s value fell 16 percent. Stewart was found guilty and served five months in prison.

A few years ago, I read about how two insider trading individuals would meet up in a subway station in New York, kiss, and then walk away. FINRA and the SEC and were trying to figure out how these people would meet and then start trading. They eventually realized the inside traders were meeting up and exchanging a piece of paper in their mouth while kissing and then they would walk away and trade on the account. From a compliance standpoint, the companies did everything they could. They monitored emails and financial information, but monitoring who they kiss in the middle of the day is pretty tough.

Tips to Help Thwart Insider Trading

Educate. Inform. Monitor. Those are some of the best ways to prevent insider trading.

Educating employees about insider trading and adding occasional training sessions are two great steps firms can take. Companies should review their Code of Ethics at least annually. It’s important for employees to know that even if they think they’re being covert and sneaky in finding ways to hide the transfer of information, FINRA and the SEC have very sophisticated computer systems in place.

Companies which are publicly traded, like Amazon, should inform all employees of a blackout in trading dates leading up to any major events, releases, or filings, such as the issuance of a Form 8-k announcing a corporate merger. Anyone who sells stock for the company has to report it to management.

Monitoring emails and information that leaves the site and monitoring people as best as you can is very helpful. But even the most sophisticated safeguards can’t always thwart old-fashioned ways of exchanging information, like speaking at the dinner table. Just doing the best you can with the resources you have with your company is best.

The experienced professionals at Jacko Law Group can provide more information on best practices to prevent insider trading in your company.  Contact us 619.298.2880 or to schedule a strategy session.

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