courthouseOn July 2, 2020, a federal judge sitting in Manhattan sentenced disgraced entrepreneur Telemaque Lavidas to a year and a day in prison for insider trading. In addition to the prison term, the judge sentenced Lavidas to three years of supervised release including community service, restitution, and fines, which together could exceed $200,000. Lavidas’s conviction arose from passing secrets that he learned from his father, who sat on Ariad’s Board of Directors, to a stock broker friend about Ariad Pharmaceuticals.

Lavidas’s conviction is nothing new to the insider trading world—it is illegal for a person who possesses a company’s material non-public information either to directly trade securities on the information or “tip” the information to a secondary source who then trades securities based on the tipped information. But the COVID pandemic has heightened insider trading risks. COVID-19 has impacted supply chains, companies, and individuals worldwide. The coronavirus pandemic has also caused historic market volatility and a steady stream of potentially market-moving announcements by companies, leading to opportunities for insider trading and market manipulation. With fast-changing business conditions that can create material non-public information and significant swings in share prices, the value of inside information has rarely been higher.

Take, for example, Company A’s hostile takeover of another company, Company B. Company A publicly announces the takeover and later halts the takeover to batten down the hatches and weather the COVID-19 storm. Before the initial announcement of the takeover, the insider trading danger lay in what Company A’s insiders knew about the announcement’s effect on the price of Company B’s stock. Mere days after Company A announces the takeover, Company B’s stock price increases dramatically. An insider at Company A who bought Company B shares (or tipped someone who then bought shares) before the announcement could have landed a nice windfall if he had sold at the peak.  This danger also was present before the public announcement that Company A would abandon the bid because someone with non-public knowledge could have sold Company B stock before it dipped or tipped someone to do so, maximizing a potential profit before Company B’s stock plummeted.

The danger, therefore, is clear: insiders with material, non-public, COVID-related information who either trade securities or tip (even unwittingly) friends or family members who then trade on it. Insider trading is not new, but what is new is the danger of leaking fast-changing COVID-related non-public information. For insiders at public companies, even casually sharing their company’s approach to COVID-related business challenges can be viewed as revealing material non-public information. Insiders must take extra care with any material non-public information, not share it with outsiders, and observe trading windows in their companies. Likewise, tippees’ conduct can pose liability risks to unwitting tippers, even if the tipper never trades.

The best approach for those in companies who are being buffeted by the COVID pandemic is the same as that for dealing with the pandemic itself: be safe and take precautions and take care of your friends and family. For insiders, trade only during open windows. For those with exposure to insiders, trade only on public information.

The danger here is real. Lavidas has been detained since his October arrest and received credit for time served in his sentencing and will be released in the Fall. The tipped broker, who allegedly resides in Greece, has been charged (though not extradited); Lavidas’s father has escaped prosecution to date.