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Working from home makes spilling corporate secrets all the easier

There has been a long line of “pillow talk” cases in which unscrupulous persons have capitalised on information stolen from their partners over the years. But the Covid-19 pandemic has transformed this persistent low-level problem into what could be a much larger one.

With so many people working at home, it is much harder for banks, brokers and other companies to ensure that employees are fully complying with the rules that normally prevent misbehaviour.

With so many people working at home, it is much harder for banks, brokers and other companies to ensure that employees are fully complying with the rules that normally prevent misbehaviour.

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Back when I was a junior reporter, I watched my then newspaper’s White House correspondent compete head-to-head with her husband, who covered the United States president for another publication. 

They had elaborate rules about not listening to each other’s phone conversations at home, not asking about meetings and not looking at each other’s papers. Surprisingly, it worked. 

Other inherent family conflicts are resolved far less happily. 

In late 2018, the US Securities and Exchange Commission charged consultant Peter Cho with civil insider trading, saying he bought options in Virgin America after overhearing his then fiancée, a UBS banker, as she worked on a deal involving the airline from their shared apartment. 

He paid US$532,777 to settle the allegations. 

This is just one in a long line of “pillow talk” cases in which unscrupulous traders have capitalised on information stolen from their partners. 

One of the most serious saw Michael Devlin, a former Lehman Brothers executive, plead guilty in 2008 to criminal conspiracy to commit insider trading for “misappropriating” information about at least 13 deals handled by his wife, a public relations executive then with business advisory firm Brunswick. 

Now the coronavirus pandemic has transformed a persistent low-level problem into what could be a much larger one, by multiplying both the amount of inside information floating around and the opportunities for stealing it. 

“In times of crisis, people tend to be more gossipy, fuelled by fear and anxiety,” says Lisa Zornberg, a former federal prosecutor who is now a partner at US law firm Debevoise. 

“When a company plans to downsize or file for bankruptcy, or has a possible medical breakthrough, these things can spread like wildfire.” 

The problems are myriad. 

With so many people working at home, it is much harder for banks, brokers and other companies to ensure that employees are fully complying with the rules that normally prevent misbehaviour. 

For example, personal mobile phones are banned from most trading floors to guarantee that all voice communications (between traders and clients) are recorded. 

But such rules are all but impossible to enforce when people are working from home. 

The new working patterns have also rendered some compliance tools less effective. Many banks and brokers use market surveillance software and machine-learning tools to identify employees who are behaving suspiciously. 

But the shift to homeworking in the early days of the pandemic completely undermined the models for “normal” practice, making it that much harder to spot someone acting oddly. 

Even when employees are doing their best to comply with the rules, homeworking poses security issues. 

During ordinary times, teams working on high-profile deals usually sit together and, when there are multiple parties involved, much of the negotiating is done face-to-face in secluded conference rooms. 

During the pandemic, everything has to be electronic and people have been spread out widely. That increases the chances of something being hacked or of a communication going astray. Banks and brokers say they are trying to address this concern by ensuring that employees stay within secure electronic networks even when they work at home. 

Demand for one such product, Cloud9’s cloud-based recorded phone lines for trading floors, has jumped 50 per cent since March, says chief operating officer Jim Miller. 

But other companies, where employees may be privy to information about earnings, lay-offs or rights issues, may not have taken the same precautions. 

Cyber hackers have previously broken into news wires where companies put out press releases and the US Securities and Exchange Commission’s electronic filing system for company results. Now that so much company information that was once shared in person is being discussed on email or video calls, the potential for hacking is on the rise. 

Market watchdogs are very alive to this concern. 

The United Kingdom Financial Conduct Authority warned financial firms late last month to watch out for the dangers of market abuse posed by coronavirus. 

Enforcement chief Mark Steward has predicted an uptick in market abuse because so many listed companies are delaying their earnings reporting or raising capital to deal with the pandemic. 

And the co-directors of enforcement at the US Securities and Exchange Commission put out a statement in late March in which they “emphasise[d] the importance of maintaining market integrity and following corporate controls and procedures” during the pandemic. 

“Will some insider trading cases come out of this time period? For sure,” Ms Zornberg says. 

“But smart companies are taking steps to address the risks and limit the spread of material non-public information.” 

Ironically, the easing of lockdowns may make some of these problems worse. 

Many corporate workers will start having face-to-face contact with more people, but won’t yet be returning to their secure offices. That increases the opportunity for mischief — and inadvertent leaks. 

“The immediate market volatility is passed, but this insider dealing issue is not going away,” says Nick Bayley, a managing director at consultancy Duff & Phelps. 

“At the moment, it is the traders who are going back to working in the office, but banks may well want to prioritise their deal teams because there is nothing safer than sticking them in a room behind a locked door.” FINANCIAL TIMES

 

ABOUT THE AUTHOR:

Brooke Masters has been the Financial Times’ Comment and Analysis Editor since 2018.

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