Insider Trading Alert: New Study Reveals Possible Insider Trading Ahead of SEC Visits
Companies are often on edge when the SEC pays them a visit, as it could mean trouble. However, a recent study suggests that some insiders may be receiving advance notice of these visits and using it to sell off shares before stock prices drop.
A group of Midwest university professors conducted groundbreaking research on stock behavior, using mobile phone location data to track devices near SEC offices and then traveling to corporate headquarters in the year leading up to Covid lockdowns.
Surprisingly, 84% of companies visited by SEC-tracked phones were unaware of any forthcoming enforcement actions. Yet, three months after these visits, stock prices dropped by an average of 1.94% compared to the market average.
The most alarming discovery was that companies where insiders sold shares around these visits experienced even steeper stock price declines, averaging 4.9% in the following three months.
While the mobile tracking couldn’t distinguish between routine SEC visits and enforcement team visits, the research suggests some intriguing correlations, though it doesn’t explicitly point to insider trading.
Overall, insider selling decreased by 16% in the two weeks surrounding a surprise SEC visit. Insiders at companies facing enforcement actions post-visit were more inclined to hold onto their shares, but at companies where insiders sold off stock quickly after the visit, stock prices plummeted even further.
Researchers proposed theories on why stock prices dropped, such as SEC visits causing distractions or rumors leaking out and spooking investors into selling.
In response to these concerns, the SEC banned the use of third-party messaging apps and texts on employee work phones, aligning with industry standards. The agency has also issued substantial fines to firms for failing to maintain proper records of mobile communications.
As regulatory measures tighten, the study raises important questions about companies’ ability to mitigate insider trading risks.
Image credit: Santeri Liukkonen
