News service Agenda asks Richard Kaplan to weigh in on opportunistic trading in the wake of Covid-19.

‘Tread Lightly’ — Profiting From the Pandemic

By Jennifer Williams-Alvarez  June 12, 2020

Along with a crippling health crisis, Covid-19 has produced market conditions that some have warned create ample opportunity for suspicious insider trading.

The potential for opportunistic trading has been on regulators’ radars for months. Meanwhile, investors have started to pile on with litigation. Still, officers and directors continue to execute transactions that deviate from past practices, instances that an insider trading research and analytics firm has flagged as unusual.

For firms and corporate insiders alike, the risks are significant when trading in this environment. Under normal conditions, insider trading represents the “epitome of mistrust” toward Wall Street, says attorney Tom Hanusik. The perception that insiders have capitalized on a health crisis that has killed more than 100,000 people in the United States understandably ratchets up the criticism, he notes.

“Nobody gets sympathy from the public at large, a judge or a jury if they’re perceived as profiting at the expense of others, just in a situation where so many are suffering,” says Hanusik, a partner at law firm Crowell & Moring.

Hanusik, who represented Cameron Collins, the son of former New York congressman Christopher Collins, against charges stemming from an insider trading scheme, expects government enforcers to be “very aggressive” related to insider trading tied to the pandemic.

“What you’re hearing from the SEC, the Department of Justice … is that they are really not going to tolerate anything that they perceive as profiting off of the pandemic,” says Hanusik. “It’s an area to tread lightly.”

Company insiders additionally face increased reputational risks attached to insider trading, Hanusik says, which may spur decisive action from companies.

“That is something that might lead a company to sever ties even in the absence of an SEC or DOJ charge, just because they don’t want to have the stigma of that association.”

From All Directions

Corporate insiders were warned in March of the potential for suspicious trading activity because of the pandemic. “Given these unique circumstances, a greater number of people may have access to material nonpublic information than in less challenging times,” SEC enforcement division co-directors Stephanie Avakian and Steven Peikin said in a statement, as Agenda reported.

Peikin again stressed the potential for insider trading issues at a securities enforcement forum last month. Current conditions — the Covid-19 crisis, the resulting market volatility and the “regular stream of potentially market-moving announcements” — have created “increased opportunities for insider trading and market manipulation,” he said in a keynote address. As such, the SEC’s Coronavirus Steering Committee is working with the enforcement division’s Market Abuse Unit to monitor trading activity after announcements are made by companies, particularly in industries that have been hardest hit by the virus.

The SEC and the DOJ will “heavily” scrutinize insiders who trade while seemingly aware that a company is doing better or worse than has been reported because of new information that is pandemic related, says Hanusik, who previously held positions in both the SEC and the Justice Department. Hanusik’s sense is that that messaging has created “some hesitation” regarding stock transactions from companies and executives.

Criminal defense attorney Richard Kaplan similarly expects trading to remain under the government’s microscope, particularly related to instances in which companies tout a development intended to help fight the virus. These tend to be announcements that send stock prices soaring, he points out, so it is likely to raise eyebrows if officers and directors dump stock on news that later turns out to be inaccurate.

“I expect to see that kind of scrutiny,” says Kaplan, partner at law firm Kaplan Marino.

To address harm stemming from potentially dubious Covid-19-related claims from companies, the SEC has suspended trading in the securities of more than 30 issuers, Peikin said in his May 12 keynote. “These suspensions,” he said, “followed a broad range of claims by issuers, including those relating to access to testing materials, developments of treatments or vaccines, and access to personal protective equipment.”

Suspicions about trading have additionally reached litigation. Indeed, family members who control online used car retailer Carvana were hit with a derivative suit challenging the decision to issue shares to the controllers at “a bargain-basement price” at the expense of the company. Fears related to the virus wreaked havoc on share prices, which CEO and board chair Ernest Garcia III and others in the company took advantage of by buying the shares while knowing the company was poised to “weather the storm,” the complaint alleges.

“Indeed, Carvana was and is well placed to accommodate an anxious public concerned with the spread of a dangerous disease, as its primary competitive advantage and main selling point has always been that individuals can evaluate, choose, purchase, and receive their cars from their homes,” the court filing reads. Still, the controllers caused, and board members permitted, a “self-dealing transaction” that “robbed the Company of tens and perhaps hundreds of millions of dollars of capital.”

The company, which has yet to respond to the May 28 complaint in a court filing, did not respond to a request for comment.

At the same time, InsiderScore, which analyzes insider trades for public companies, has flagged insiders in recent weeks for trading practices, including those who sold shares outside of 10b5-1 plans, a mechanism that enables insiders to trade at predetermined times.

Chipotle Mexican Grill CEO Brian Niccol, for one, accelerated options selling outside of his 10b5-1 plan, according to InsiderScore. “He broke from a pattern of monthly option sales using a 10b5-1 plan to transact an aggressive option sale outside of the plan at $866.40, as the stock quickly rebounded from a collapse to a March 18 low of $415.00,” the firm noted. “His latest sale was nearly triple the number of shares he sold in all of [the first quarter of 2020], an apparent eagerness to take advantage of the stock’s quick reversal, behavior that raises a red flag.”

Niccol’s trades, executed on April 23, were pre-cleared and executed pursuant to applicable laws and Chipotle’s trading policies, a company spokesperson writes in an e-mail. “Mr. Niccol still has a significant portion of his compensation tied to Chipotle stock.”

Meanwhile, Robert Calderoni, chairman of the board at software company Citrix Systems, sold stock outside of his 10b5-1 plan last month for the first time in more than two years. The May 5 transaction, executed following a surge in the company’s share price, was valued at $4.4 million, according to InsiderScore. Calderoni did not respond to a request for comment.

Emergent BioSolutions board member Ronald Richard similarly sold outside of his 10b5-1 plan on May 5, a little over a week after a 10b5-1 sell in late April that was triggered by a stock price threshold. “Richard mostly sells via trading plans, often employing escalating price triggers, and the deviation to sell without a plan on a rally implies opportunism is at play,” InsiderScore noted in flagging the transaction. A spokesperson for the biopharmaceutical company did not comment.

And on June 4, CrowdStrike board chair Gerhard Watzinger sold outside of his trading plan. From January 2020 and into May, Watzinger sold 20,000 shares per month under a 10b5-1 plan. He “initially broke that pattern” at the end of May by selling 50,000 shares, according to InsiderScore, though this transaction was pursuant to a plan. “Watzinger has now bypassed his plan altogether,” InsiderScore notes, “to sell even more aggressively a day after the stock struck a fresh all-time high of $103.80 on June 3.” Watzinger did not comment for this story. A CrowdStrike spokesperson says the trade was made “during an open trading window and in accordance with the company’s policies.”

While the virus has rocked stock prices, current civil unrest sparked by the killing of George Floyd and anger over police brutality has additionally impacted markets. For example, Axon Enterprise, the maker of Taser stun guns, has seen its stock surge in recent weeks, up more than 20% since May 28. All the while, chief revenue officer Josh Isner sold outside of a 10b5-1 plan. According to an SEC filing dated March 3, Isner sold vested restricted stock units pursuant to a plan and executed a transaction valued at roughly $520,000 outside of the plan. Isner tells Agenda in an e-mail that the 10b5-1 plan was in place to cover “taxes and the sale outside of the plan was my decision.”

Axon’s Section 16 officers have “committed” at least $1 million annually to a performance-based stock compensation plan, and named executive officers are required to hold at least 50,000 shares, an e-mail statement from Axon reads. “Three of our Section 16 officers, including Josh, have built their careers almost entirely at Axon, from their 20s onward, and therefore their wealth is tied entirely to Axon stock,” the statement reads. “They simply sell stock to help with their personal finances.”

Stepping Out

Buying or selling outside of 10b5-1 plans, which are meant to protect against claims of illegal insider trading, will inevitably raise questions, says Kaplan. “Once you go outside of that plan, you’re looked at as, ‘Why did you do it, and do you have a legitimate excuse to show it was not material nonpublic information that caused you to do the sale?’” he notes.

There are, however, myriad legitimate reasons to sell outside of a plan, both Kaplan and Hanusik say.

Perhaps an insider took a pay cut and had a mortgage or boat payment to make, suggests Hanusik, who did not comment on specific companies or transactions. Divorce, alimony payments or an investment that is doing poorly could additionally make the list of lawful reasons a person would need access to capital quickly, he says.

“But that would not change the analysis on the other side of the table,” Hanusik adds. “That is, even if you had a good excuse for needing the money, you can’t trade outside of a plan while in possession of material nonpublic information.”

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