In light of the unprecedented shift to a “working-from-home-economy” due to the pandemic, employees need to be extremely careful with work-related information that can accidentally be shared with their household. Confidential or even material non-public information can involuntarily be shared with family members who overhear Teams or Zoom work calls and virtual meetings and if such information is used to trade on shares, there can be serious consequences for all involved parties. The case of Securities and Exchange Commission v. Tyler Loudon[1](SEC v. Loudon), in the United States District Court for the Southern District of Texas, certainly provides important lessons in that regard.
The Securities and Exchange Commission Complaint
On February 22, 2024, the Securities and Exchange Commission (SEC) charged Tyler Loudon (Loudon), from Houston, Texas, with insider trading ahead of a February 2023 announcement that London-based oil and gas company BP p.l.c. (BP) agreed to acquire TravelCenters of America Inc.(TA) for $86 per share, in cash (the Announcement).
Loudon, who holds a Master of Business Administration degree from Peperdine University and at the time was employed at a publicly traded company, had bought 46,450 shares of TA before the Announcement. Following the Announcement, the TA stock price rose nearly 71% and Loudon made $1.76 million in profits from his illegal trading.
How did Loudon appropriate material nonpublic information about the proposed acquisition?
Unwillingly from his wife, a mergers and acquisitions manager at BP, assigned to work on BP’s potential acquisition of TA in early 2022 and then again from November 2022 onwards, by overhearing her work calls and virtual meetings on the proposed TA acquisition, when both were working from home at the time, close to one another.
More specifically, during the period from early 2022 to the Announcement, Loudon and his wife generally worked in home offices, within 20 feet of each other. They frequently overheard and witnessed each other’s work-related conversations and video conferences. In late December 2022, Loudon and his wife travelled to Rome and stayed in a small Airbnb where Loudon’s wife worked on the TA acquisition and discussed the deal while Loudon was nearby. After returning to Houston, they continued to work in close quarters through the Announcement. Between December 27, 2022 and February 15, 2023, Loudon acquired 46,450 shares of TA without telling his wife.
In late March 2023, the Financial Industry Regulatory Authority requested a deal chronology from BP, including the names of all individuals who were “in the know” prior to BP’s acquisition of TA. On April 3, 2023, Loudon confessed to his wife that he had traded in TA prior to the Announcement, without telling her the number of shares that he purchased or the profits he realized from their sale. Loudon also apparently told his wife that he had bought the TA shares because he wanted to make enough money so that she did not have to work long hours anymore. Loudon’s wife reported the trading to her supervisor at BP and she was placed on administrative leave.
Although BP did not find any evidence that she knowingly leaked the information to Loudon or otherwise knew of her husband’s illicit trading following a review of her emails and texts, BP terminated her employment. She initiated divorce proceeding in June 2023.
The SEC charged Loudon with violating the antifraud provisions of the federal securities laws. According to the complaint, Loudon knew, or was severely reckless in not knowing, that information regarding potential BP deals, including the acquisition of TA, was material nonpublic information that he had a duty to keep confidential, and as such, violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.
Without denying the allegations, Loudon consented to the entry of a partial judgment permanently enjoining him from violating the antifraud provisions of the federal securities laws, imposing an officer and director bar and ordering a complete disgorgement of profits with prejudgment interest and a civil penalty in amounts to be determined by the Court. On March 7, 2024, the Court granted the SEC’s Motion to Enter Agreed Bifurcated Judgment against Loudon.
Criminal charges against Loudon
In a parallel action, the U.S. Attorney’s Office for the Southern District of Texas announced that Loudon had pleaded guilty to criminal charges of securities fraud on February 22, 2024[2]. On May 21, 2024, Loudon was sentenced to 24 months in federal prison to be immediately followed by one year of supervised release. The Court noted that these sanctions were necessary given the seriousness of the offense and the need to promote respect for the law and adequately deter such criminal conduct.
Takeaways under Quebec law
Trading in securities while in possession of material nonpublic information is also a serious offense under the Quebec Securities Act. Section 187 of the Securities Act provides that:
187. No insider of a reporting issuer having privileged information[3] relating to securities of the issuer may trade in such securities or change an economic interest in a related financial instrument, except if (…)
In the case of an offence under section 187, the maximum fine is $5,000,000, four times the profit eventually realized or half the sums invested.[4] Every person who contravenes to section 187 is liable, regardless of the fine provided for in the applicable penal provision, to imprisonment not exceeding 5 years less one day.[5]
A lesson from the Loudon case directly applicable in Quebec is that employees working remotely on corporate transactions or who are in possession of privileged or material non-public information must be very careful about voluntarily or involuntarily sharing such information with family members or friends with whom they share their work environment.
When working from home, appropriate measures should be taken to limit who can overhear work conversations or access work-related documentation:
- Taking calls with a headset in a closed room
- Storing confidential or privileged documents in a filing cabinet
- Having conversations with the people who are sharing the remote working location to make sure that they are aware of their duties of trust and confidence.
[2] Southern District of Texas | Insider trading – Husband illegally profits $1.7M after using wife’s private company information | United States Department of Justice
[3] Privileged information means any information that has not been disclosed to the public and that could affect the decision of a reasonable investor.
[4] Section 204 of the Securities Act.
[5] Section 208.1 of the Securities Act.