While the driving factors behind this downturn are many, the impact of the pandemic is undeniable. As an at-home exercise equipment company with the ability to connect users from their homes across the world via real-time classes, it’s no wonder the company and its stock soared through 2020’s COVID-19 lockdowns. Less clear, as of now, is Peloton’s staying power as consumer demand wanes, leading the company to hire consultants at McKinsey & Co. to review finances and to halt production on several of its models. [2]

In light of Peloton’s precipitous fall, some have turned their attention to massive stock sales undertaken by Peloton insiders before the downturn began. SEC filings from late 2020 and into 2021 show that insiders at Peloton sold approximately $500 million in stock before the price began to plummet. [3]

Among these insider sales were that of Peloton’s CEO and co-founder, John Foley, as well as the company’s president, William Lynch. First, in November 2020 Foley sold shares worth $119 million as part of a selling plan for “personal financial management purposes.” [3] Then, Lynch sold over $105 million in stock during 2021, the majority of which was sold in February 2021 at an average price of $144. [3]

While the timing of these Peloton insider trades might appear “lucky” in hindsight, the well-timed insider trades certainly were not unique. In fact, 2021 saw a new record for insider selling, which reached $170 billion, up from $94 billion in 2020. [3] As Daniel Taylor, associate professor at the Wharton School of Business succinctly explained, “[o]ne of the most well-accepted facts from decades of research on insider trading is that corporate insiders buy near bottoms and sell near peaks.” [3]

Given this well-established pattern of insider trading, two questions emerge: first, when does insider trading cross the line from legal to illegal; and second, how might everyday investors use knowledge about insider trades to their own investing advantage?

To start, insider trading crosses the threshold into illegality when company insiders trade securities when they have access to material information that the public does not. [4] Such illegal insider trading can be committed by anyone who has material and nonpublic information about a company – whether it be the CEO, a broker, or even an employee’s family or friend. [4]

Conversely, insiders may lawfully trade securities so long as they adhere to trading restrictions which lay out specific timing and other conditions for when trading is legal. [4] As a result, insider trading like that of Peloton and other executives throughout 2021 is both routine and legal, unless shown otherwise.

But how can these trades help individual investors? As described, insiders often sell stock when the price is high. At a base level, this may serve as a signal to investors with a short-term investment plan to consider selling their positions as well, while the stock is still high.

Furthermore, research has shown that executive’s insider trading activities can be extrapolated out to broader trends in the market. A company’s stock tends to outperform the broader market when executives of the company buy shares, and a company’s stock tends to underperform the broader market when executives sell. [4]

Helpfully for individual investors, the SEC requires that all corporate insiders report their stock sales or purchases within two business days of each transaction. [4] This information can then be accessed by the public either on Yahoo! Finance or on the SEC’s EDGAR Database.[4]

With more attention on insider trading as its volume rises, more individual investors may have their sights set on learning from these trades to inform their own investment decisions. When doing so, it is critical to remember that data on insider trades may not always tell the full story. A corporate insider may indeed have different motivations relating to other financial considerations, such as taxes, than would the average investor. Thus, it is possible to view insider trades as a guidepost, but investors should continue to exercise their own due diligence in making personal investment decisions.

Sources:

[1] https://www.google.com/finance/quote/PTON:NASDAQ?sa=X&ved=2ahUKEwivmo7qi8n1AhUSTd8KHYinAHIQ3ecFegQIERAc

[2] https://www.cnbc.com/2022/01/20/peloton-to-pause-production-of-its-bikes-treadmills-as-demand-wanes.html

[3] https://www.cnbc.com/2022/01/19/peloton-insiders-sold-nearly-500-million-in-stock-before-its-big-drop-.html

[4] https://www.investopedia.com/articles/02/061202.asp

In total, the number of new enforcement actions filed by the SEC in FY 2021 increased by 7% over the previous year, with 434 new enforcement actions. While the total number of enforcement actions – including new actions along with other “follow-on” or open proceedings – decreased slightly year over year in FY 2021, the SEC remained committed to its role as “cop on the beat for America’s securities laws,” as described by Chair Gary Gensler. [1] The SEC maintained a sharp focus on protecting the integrity of the country’s capital markets through enforcement actions against bad actors even in the face of the persisting COVID-19 pandemic persisted.

In announcing its progress on enforcement actions during FY 2021, the SEC concentrated on several key priority areas. Some of these priority areas, per a recent SEC Press Release, included “holding individuals accountable,” “ensuring gatekeepers live up to their obligations,” “rooting out misconduct in crypto,” “policing financial fraud and issuer disclosure,” “cracking down on insider trading and market manipulation,” and “swiftly acting to protect investors.” [1]

While focusing on “holding individuals accountable,” the SEC noted that during FY 2021, it successfully lodged charges against top-level executives of corporate powerhouses. including CEOs at both Wells Fargo and Nikola, an alternative-fuel trucking company. [1]

In “ensuring gatekeepers live up to their obligations,” the SEC focused its attention on auditors and attorneys from various backgrounds who had behaved improperly, unprofessionally, or failed in their duties when auditing other companies. [1]

The SEC was able to further its “rooting out misconduct in crypto,” objective by carefully studying misconduct within the emerging cryptocurrency market, and subsequently charging both entities and individuals who fraudulently offered digital asset securities, such as bitcoin, thereby defrauding investors. [1] These actions garnered particular concern, given the largely unregulated state of the cryptocurrency space.

Beyond cryptocurrency concerns, the SEC also proved its focus on “policing financial fraud and issuer disclosure,” by continuing to diligently trace potentially fraudulent activities within the market. In doing so, the SEC uncovered possible violations of securities laws, and also investigated disclosures made by public companies which improperly failed to note potential COVID-19 pandemic impacts on their businesses. [1]

During FY 2021 the SEC also had its eyes on “cracking down on insider trading and market manipulation” by pursuing charges for insider trading relating to a biopharmaceutical company acquired by COVID-19 vaccine manufacturer Pfizer, Inc., as well as an insider trading ring connected to confidential data regarding Netflix’s subscriber growth over time. [1]

In pursing its myriad enforcement actions, the SEC also focused on “swiftly acting to protect investors” throughout FY 2021. Many cases involved the SEC filing emergency actions or restraining orders against defendants in Ponzi schemes, as well as suspending trading of more than 20 “meme stocks,” as concerns about market volatility reached a head in early 2021. [1]

In all, the SEC’s FY 2021 enforcement actions resulted in obtaining “judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties.” [1] Furthermore, FY 2021 was the highest year ever for whistleblower awards, as the whistleblower program awarded $564 million to just over 100 whistleblowers, and surpassed $1 billion in lifetime awards paid out. [1]

As the world rebuilds and adapts to life in the midst of a global pandemic, the SEC looks poised to continue its work in closely monitoring and enforcing federal securities laws through enforcement actions, with the ultimate aim of protecting not only capital markets, but also investors of all backgrounds.

Sources: [1] https://www.sec.gov/news/press-release/2021-238

At the heart of the decision to pivot in this manner has been a focus on steadily rising inflation, which some policymakers fear the pandemic’s longevity will only amplify. [1] This fear stems from the fact that in large part, populations are learning to coexist with the virus.

As time passes and each new wave appears, is studied, and spreads toward dominance, people become generally better equipped to deal with the pandemic’s impacts – economic and otherwise. Whether because of rising vaccination rates or better overall caution and awareness, many now agree that the largest current threat to the economy is inflation rather than COVID-19. [1]

This is, of course, not to say that COVID-19 doesn’t continue to significantly impact the global economy, as it has since it was first discovered about two years ago. When news of the most recent Omicron strain was released near Thanksgiving, stocks and energy prices took a significant dive, with the Dow Jones Industrial Average falling 2.5% for its steepest one-day percentage downturn in over a year. [2] In the several weeks following Omicron’s emergence, however, the stock market has largely rebounded.

Given the many remaining questions surrounding Omicron, including existing vaccines’ ability to effectively protect against the strain, as well as the severity of infection, further economic impacts may certainly come to fruition. As details continue to fill in, however, it is a fitting time to carefully consider some of the myriad market impacts already ushered in by the COVID-19 pandemic.

One of these market impacts has been the meteoric rise in retail investing, fueled by app-based securities trading platforms like Robinhood and Stash, aimed for use by the average main street investor. These platforms empower retail investors to participate in the stock market by facilitating trades on fractions of shares, all from the convenience of a smart phone. The use of these apps also facilitated the “meme stock” frenzy, wherein retail investors gathered over social media and stoked intense interest in stocks like GameStop and AMC – sending their share prices flying.

While these app-based platforms have empowered more investors than ever to enter the market, they’ve also posed potential financial pitfalls along the way. One such pitfall involves margin investing, wherein investors may supercharge their potential gains in the market by investing not only their own money, but also money they’ve borrowed. While the rewards of margin investing may be great, the risks are potentially even greater. [3]

Specifically, investor’s trading with margin are subjected to a minimum balance in their accounts. If their balance falls below this minimum – as can very well happen during a sudden market downturn or sell-off like the one effectuated by the news of Omicron in late November – the investor may be subjected to a margin call. When a margin call is issued, the investor is required to deposit additional money into their account in order to meet their required minimum balance.

Furthermore, many equate excessive levels of margin investing with “euphoric” behavior in the market – which can often be a sign of a serious impending market downturn. [3] As of now, the market does not appear to have reached dangerous levels of such market euphoria. [3] But as inflation continues to rise and COVID-19 continues to impact our lives in new ways, investors should exercise caution, as always, when making decisions about margin investing.

Sources:

[1] https://www.wsj.com/articles/central-banks-worry-omicron-could-sustain-inflation-11639909805

[2] https://www.wsj.com/articles/global-stock-markets-dow-update-11-26-2021-11637901748?mod=article_inline

[3] https://www.wsj.com/articles/black-friday-rout-shows-dangers-of-margin-borrowing-11638100800

Stock fraud may occur when a company defrauds investors when convincing them to buy shares in their company. The investment fraud may be a market manipulation scheme. It may be an unethical brokerage firm forcing their brokers to sell the ‘stock of the day’ knowing full-well the stock is not worth a fraction of what the price the sell to you.

But, perhaps the worst form of stock fraud, to my mind, is the stock fraud that takes advantage of people’s fear about current events. Understandably, potential investors or victims of fraud are today extremely concerned and frightened about catching Covid-19. This is especially true for that frequent target of fraudsters, older people. Not only is this segment of the population more vulnerable to Covid 19, but their fears are likely at a higher level. This set of circumstances just creates a more fertile ground for investment fraud that takes advantage of loneliness and fear such as we have today with the pandemic. So, it is vital to get the word out to older people and their children or caretakers to be especially vigilant about investment fraud phone calls.

Everyone should also take the time to connect with their parents and grandparents to make sure they understand the significant risk associated with potential Covid-19-related stock fraud. Of course, we should all take any claims of huge potential profits with a healthy dose of skepticism. But we all want to believe in the huge investment upside; these outsized profits do occur, but not that often or that quickly. And probably not from the slick-talking stockbroker pitching his or her idea.

There are fraudsters are out there right now working to capitalize on the public’s fear created by the Covid-19 pandemic and the millions of Americans who have tested positive and the more than 150,000 (as of this writing) Americans who have died from Covid-19.

Covid-19 is ripe for stock fraud because investors are rightfully very worried about Covid-19, for which there is no known cure or vaccine. There are many companies are trying to develop a response to Covid-19. With the uncertainty about the pandemic and vaccine creation coming from the government, it is easy work for an unethical salesperson to convince an investor that their recommended stock has the cure or an effective treatment almost ready. It should strike you as odd that some cold-calling stockbroker is letting you in on the greatest investment of all time. People want good news and want to believe the rosy predictions spewed by a fraudster. So, an unethical stockbroker will create and tell a tantalizing story of a company well-suited to make enormous profits from their ‘vaccine’ or ‘treatment’ – “and you, mister or missus investor can get in on the ground floor!”

Most people would understand that the first company to come out with a cure or vaccine for Covid-19 will likely make huge profits. Most would want to participate in that profit. These facts combined with a convincing stock salesperson is a dangerous mix and ripe for investment scams.

Fraudsters are pushing investments in companies that make and sell N-95 masks, or alleged Covid-19 cures, home testing kits for the disease, or even products they falsely claim give people immunity from Covid-19. In fact, according to the SEC in June 2020, it had temporarily halted trading the shares of 30 companies to protect investors and had charged companies with Covid-19 related fraud. The SEC filed charges against a company that made the false claim that they were negotiating the sale of millions of N-95 masks. Another company that the SEC charged had put out a press release stating that they had a home test kit for Covid 19 that would give results in less than 15 minutes. The SEC charged that the test kit was not intended for home and could only be used with the help of medical professionals.

Be wary of a cold-call from a slick stockbroker that purports to get you in on the only stock that cures Covid or effectively treats Covid. Reach out to your loved ones to make sure they understand the risks and to talk you before making any investment based on their fears and concerns.