Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.





Two Internal Auditors Fall Prey to the Temptation of Insider Information

May 10, 2019

by Howard Haykin


It's a sad state of affairs when internal auditors or compliance professionals, often considered the last bastions of ethics and propriety in business, are caught committing a crime or a violative act. Yet, that's what happened according to an SEC filing in charged 2 internal auditors with repeatedly trading and tipping on confidential information that they obtained through their respective employers.
Perhaps the only redeeming aspect of this case is that the perpetrators are not employed in the financial services industry.



WHAT WENT WRONG.    This case concerns multiple instances of insider trading and tipping by an internal auditor (“Auditor #1”) at Verso Corp., and tipping by his close friend who’s an internal auditor (“Auditor #2”) for Ashford Hospitality Trust (“AHT”) and Ashford Hospitality Prime (“AHP”).


In the fall of 2013, Auditor #1 learned material, nonpublic information that Verso, a publicly traded paper company, was going to acquire a privately held paper company, NewPage Holdings. In the weeks preceding the public announcement of Verso’s agreement to acquire NewPage, Auditor #1 accumulated an unusually large concentration of Verso shares, and tipped this material, nonpublic information to a close relative, who also purchased Verso shares. On the morning of January 6, 2014, Verso and NewPage publicly announced that they had entered into a definitive agreement under which Verso would acquire NewPage in a $1.4 billion transaction. Immediately after this announcement, the price of Verso stock surged on heavy trading and closed at $3.21 per share, a 393% gain over the prior trading day’s closing price. That day, Auditor #1 sold all of his Verso stock, realizing total illicit profits of more than $107,000. His relative also profited more than $2,500 on the sale of the shares that were purchased in advance of the announcement.


Later in 2014, Auditor #2, a close friend of Auditor #1, learned information about 3 material, nonpublic events concerning AHT and AHP, publicly traded REITs. Specifically, Auditor #2 acquired advanced knowledge of: (i) January 2014 announcements that AHP would issue 8 million additional shares of common stock; (ii) an April 2014 announcement that AHT would issue 7 million additional shares of common stock; and (iii) a May 2014 AHT quarterly earnings release that exceeded analysts’ estimates. Auditor #2 tipped Auditor #1 in advance of each of these announcements, and Auditor #1 placed timely, beneficial trades in AHP and AHT on the basis of these tips. In total, Auditor #1 avoided losses and realized profits of more than $15,000 from this trading.



To settle SEC charges that they violated Rule 10b-5 under the Securities Exchange Act of 1934, …
  • Auditor #1 agreed to pay $279,000 in disgorgement, prejudgment interest and civil penalties
  • Auditor #2 agreed to pay $15,150 in civil penalties.



FINANCIALISH TAKE AWAYS.    Having served as a public and internal auditor for some 15 years, I’m always saddened to learn when audit or compliance professionals violate laws and regulations. I appreciate that auditing can involve thankless tasks and obligations, and provide infrequent opportunities for gratification. Yet, there's an expectation - a given belief - that auditors and compliance professionals are trustworthy and will maintain the highest levels of ethics and compliance within companies and enterprises.


So much so, that ... if you can’t trust the auditors, who can you trust?


That said, the temptation to make easy money – even through illegal means – can be difficult to resist, even for the “last bastions of ethics and propriety.” This means that no one can be fully trusted and that everyone remains suspect. And for the record, this is the 2nd insider trading case that the SEC has filed arising from Verso's acquisition of NewPage.



For further details on this case, click on SEC Complaint.]