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Enforcement News: With Friends Like These …

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  • Posted on: Apr 4 2022

By: Jeffrey M. Haber

The Securities and Exchange Commission (“SEC”) has frequently brought enforcement actions against those who trade upon material, non-public information. Many of these actions show that insider trading extends beyond the employees of the subject company. In those enforcement actions, an employee of the company shares material, non-public information with a third party, typically a family member or friend, who thereafter trades on the information or shares the information with another third party (again, typically a family member or friend) who traded on the information.

For those who are involved in an insider trading situation, the consequences of an investigation can be devastating. The courts have made clear that non-employees can be criminally liable for using or trading on material, nonpublic information (whether as a tippee or as a trader) just as employees can be criminally liable for disseminating material, non-public information to a third party (if they expect the recipient of the information to trade on it). Thus, it is not uncommon for an employee’s loved ones to be caught up in a situation in which they not only suffer harm to their reputation and standing in the community, but incur economic loss and perhaps serve some jail time.

So, what is insider trading? Insider trading generally refers to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

An insider can include officers, directors, major stockholders, and employees of an entity whose securities are publicly traded. In general, an insider must not trade for personal gain in the securities of that entity if that person possesses material, nonpublic information about the entity. In addition, an insider who is aware of material, nonpublic information must not disclose such information to family, friends, business or social acquaintances, employees, or independent contractors of the entity (unless such employees or independent contractors have a position within the entity giving them a right and need to know), and other third parties. An insider is responsible for ensuring that his or her family complies with insider trading laws. An insider may make trades in the market or discuss material information only after the material information has been made public.

Nonpublic information about a company is information that is not known to the investing public. It may include, among other things, strategic plans; negotiations concerning potential mergers, acquisitions, or dispositions; material new contracts (or the loss of a material contract); financial developments, projections, or prospects; a change in control or a significant change in management; future stock splits, the payment of dividends or changes thereto; and financial results.

Information about a company is considered nonpublic until it is transmitted to the public in a manner that is intended to reach the market through recognized channels of distribution and the public has a reasonable opportunity to digest the information. Recognized channels of distribution include, among others, SEC filings (such as annual or interim reports and prospectuses), press releases, and financial news publications, such as The Wall Street Journal.

Nonpublic information is considered to be material if it might reasonably be expected to affect the market value of the securities and/or influence investor decisions to buy, sell or hold securities. When in doubt, one should act as though the information is material. After all, it is better to be safe than sorry.

In today’s article, we examine SEC v. Sure, et al., 3:22-cv-01967 (N.D. Cal.). Sure concerns insider trading charges against three software engineers employed at Twilio, Inc., a San Francisco-based cloud computing communications company, and four family members and friends for allegedly generating more than $1 million in collective profits by insider trading ahead of the company’s positive first quarter 2020 earnings announcement on May 6, 2020.

According to the SEC’s complaint (here), defendants Hari Sure, Lokesh Lagudu, and Chotu Pulagam were software engineers at Twilio. All were friends who had access to various databases relevant to the company’s reporting of revenue. As alleged, around March 2020, defendants learned through the databases that Twilio’s customers had increased their usage of the company’s products and services in response to health measures taken in light of the Covid-19 pandemic and concluded in a joint chat that Twilio’s stock price would “rise for sure.”

The SEC alleged that despite receiving a company policy that prohibited them from insider trading, Sure, Lagudu and Chotu Pulagam knowingly tipped off, or used the brokerage accounts of, their family and close friends – Dileep Kamujula, Sai Nekkalapudi, Abhishek Dharmapurikar, and Chetan Pulagam – to trade Twilio options and stock in advance of the company’s May 6, 2020 earnings announcement while in possession of the confidential information concerning customer usage. According to the SEC, the scheme generated more than $1 million in illegal trading profits.

“We allege that this insider trading ring took advantage of valuable revenue information related to the pandemic at a San Francisco tech company,” said Monique C. Winkler, Acting Regional Director of the SEC’s San Francisco Regional Office. “We are holding these alleged tippers and tippees accountable for their roles in the scheme.”

The SEC filed its complaint in the Northern District of California. Each defendant is charged with violating the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

In addition to the SEC action, the U.S. Attorney’s Office for the Northern District of California announced criminal charges against Dileep Kamujula (here).

“The charges in this indictment relate to a scheme to profit on the confidential information of a San Francisco-based public company to gain an illegal edge in the stock market,” said U.S. Attorney Hinds. “This Office will continue to aggressively pursue this type of securities fraud because it threatens the integrity of the markets and hurts everyone who plays by the rules.”

“Insider trading is not a game – it’s a federal crime,” said Acting Special Agent in Charge Stone. “This investigation should be a forceful disincentive for those tempted to commit any type of securities fraud. The FBI and our partners will take decisive action against those who seek to illegally exploit material nonpublic corporate information for their own gain.”

The SEC’s press release announcing the enforcement action can be found here.


Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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