Share this post
Employees at a European financial regulator (Organisation A) were subject to stringent employee personal trade monitoring procedures following the collapse of a payment processor (Organisation B) under its jurisdiction.
A whistleblower report exposed accounting irregularities and other suspicious practices at Organisation B, revealing that it couldn’t account for nearly €2 billion it claimed to possess. As a result, the company filed for insolvency and criminal investigations were launched into several of its executives.
When Organisation A conducted its own investigation into employees’ trades, it detected a number of transactions that it felt suggested insider dealing had taken place, along with conflicts of interest from its employees.
This anonymous case study outlines the importance of knowing which trades your employees are making to ensure they do not harm your company in the eyes of the law, your clients or both.
The background
Organisation B was a successful financial services provider and payments processor, headquartered in the EU. It had grown throughout the 21st century and expanded across the globe. However, journalists and other interested parties had started questioning its business model and had grown suspicious of the veracity of its financial reporting in the mid-2010s.
In response, Organisation B publicly denied the accusations and suggested they were the work of short-sellers looking to carry out market manipulation by undermining the business and negatively affecting its share price. A subsequent investigation found this not to be the case.
More adverse stories about Organisation B came to light and a major financial newspaper published an account from a whistleblower, along with accounting spreadsheets leaked to the publication.
Despite Organisation B filing a lawsuit against the newspaper for unethical reporting, a special audit at the start of the 2020s found that there was no evidence that nearly €2 billion the company claimed to have in an Asia-based bank account ever existed. Organisation B’s share price fell by more than 70%, senior figures were arrested, some of them jailed, and the company filed for bankruptcy.
Employee trades at Organisation A
The country’s regulator, Organisation A was privy to information relating to the situation at Organisation B as it unfurled. Organisation A undertook an internal investigation regarding the case. It announced months after Organisation B collapsed that an employee of Organisation A had been found to have sold shares in Organisation B the day before it announced that it had no trace of the money it had claimed to possess.
The employee was suspended with the company starting a disciplinary process against them and filing a criminal complaint of insider trading. The accusation being that, due to their privileged position, they were aware that bad news was to be made public about Organisation B and that its share price would drop accordingly. If the employee owned stock in the company, this knowledge gave them an unfair advantage on the market, allowing them to avoid a large loss by offloading the shares, in this case, a day before the announcement.
Organisation A responded to this case at the time by banning employees from making speculative financial transactions, such as short-term trading with shares or derivative financial instruments.
However, within two years of the new rules being in place, the company detected more than 40 breaches of the rules. This led to Organisation A stopping employees trading in securities of companies under its supervision and any company within that country, as well as reporting any transactions of more than €1.
Preventing market abuse by employees
Organisations can help to prevent employees committing market abuse through their personal trades by creating a rigorous employee trading policy. As part of this, creating a pre-clearance procedure helps to prevent non-compliant trades before they take place.
Personal account dealing software like TradeLog automates this process. The organisation sets parameters for what are acceptable trades and inputs that into TradeLog. Employees use the online platform to inform the company of their desired trade and, if the transaction they want to make is not listed they know that they cannot make it.
The case management system in TradeLog enables you to streamline the pre-clearance of employee personal trades, sending you violation notifications so that you can take action immediately. Request a demo of TradeLog to find out how it can help your compliance with the Market Abuse Regulation (MAR) and the Markets in Financial Instruments Directive (MiFID II).
