One thing I miss about my former BigLaw firm is having the IT department around to help when something goes wrong with my computer. One thing I don’t miss is having the IT department tell me to reboot my computer every time I called them, no matter what the problem was.
An IT systems administrator at Green Mountain Coffee Roasters, however, may have done more than simply tell people to reboot their computers. Instead, supposedly abusing his access to shared documents and other employees’ email, Chad McGinnis tipped his friend Sergey Pugach about upcoming earnings announcements at the company. The SEC charged them under Section 10(b) and Rule 10b-5, and under Section 17(a), claiming that they profited by approximately $7 million over the three-year scheme.
This case is a good example of why companies need to worry not only about insider trading by the typical corporate insiders who access nonpublic financial information—the CFO, an accounting or investor relations department employee —but also about insider trading by the behind-the-scenes people who make the company operate.
Mr. McGinnis’ Access to Computer Files
Mr. McGinnis worked in Green Mountain’s Information Science and Technology Department and was in charge of the company’s SharePoint software. SharePoint allows employees to work collaboratively on documents. According to the SEC, Mr. McGinnis also had “access to other employee’ email accounts” and to documents from Green Mountain’s Investor Relations Department.
Interestingly, the SEC does not allege any specific information that Mr. McGinnis actually obtained from these email accounts or shared documents, only that he had “access.” Presumably, though, the SEC has obtained enough information through its pre-complaint subpoenas to the company to nail down what documents Mr. McGinnis accessed over the years to support its case.
These days, it’s nearly impossible to hide your electronic trail. The SEC does not claim that Mr. McGinnis tried to hide his trail at all.
How the Defendants Knew Each Other
Mr. McGinnis and Mr. Pugach were “friends,” according to the SEC complaint. They went to the same college and worked at the same company for a few years. However, there are no allegations that they actually knew each other at college or at that company, so it sounds like the SEC simply matched up their resumes to find a supposed connection.
If that was all the SEC had, the case probably wouldn’t go very far. But the SEC has done its homework. It alleges that between January 2010 and March 2013, the two men engaged in 116 communications by text and phone. That doesn’t seem like all that much for even casual friends over a three year period—only about 3 a month. However, 90 of the 116 communications occurred in the two days surrounding earnings announcements by Green Mountain.
There were also 137 phone calls between the cell phones of the two men’s wives that occurred in the week before or the day of the company’s earnings announcement.
Ok, yeah, when the SEC describes it like that, it does sound a bit suspicious. Still, it is circumstantial at best.
The Actual Scheme
The scheme itself is straightforward. The SEC claims that Mr. McGinnis tipped Mr. Pugach with nonpublic information ahead of Green Mountain’s quarterly earnings releases. Both men’s brokerage accounts were allegedly accessed from the same physical location, based on the IP address located near Mr. McGinnis. They would frequently buy out-of-money call options (a risky purchase if you don’t know what is going to happen to the share price).
The complaint includes a handy flowchart of the scheme on page 6. I particularly like the use of the image of a little man holding a big bag of money at the end of the chart. The complaint also has some straightforward allegations of the their trades before and after earnings announcements.
In the end, the supposedly wrongful trades made the two men a profit of about $7 million over three years.
There are no allegations in the complaint about specific texts or phone calls related to individual trades. No wiretaps here so it appears DOJ is not part of this investigation. It would have made for a more compelling case if the complaint had quoted some of Mr. McGinnis’ texts that supposedly tipped Mr. Pugach. It begs the question whether the SEC’s case is purely circumstantial—there were a lot of communications and they both made consistently profitable trades over the years. This may be enough to win at trial. It likely is enough to force a settlement by the two defendants.
Why Companies Need To Worry About All Employees
The complaint quotes Green Mountain’s clear policy against insider trading that applied to all employees. It is impossible for the company—like all companies—to police every communication by every employee. And, I would bet that most companies worry more about the obvious suspects when it comes to insider trading. Employees in the financial reporting or investor relations department have the most access to insider information.
This case, however, is a good example of why public companies need to be sure that they are educating all employees about the legal impropriety of leaking nonpublic information. This includes secretaries who have access to the email accounts of key executives, administrative support staff who help with word processing duties and IT department personnel who necessary must have access to documents containing nonpublic information.
This is dangerous territory. Companies cannot stop every leak nor should they monitor every communication. They should, however, understand that a broad group of people has access to their financial information ahead of earnings announcements and consider crafting policies to limit who can look at those documents.
Fascinating article and I agree the diagram on page 6 makes it all the more understandable and funny too! Your three summary paragraphs indicating that ALL employees need to be educated about the possibility of leaking non-public information was very informative and “educational”. gk
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