Front-running leads to criminal charges for hedge fund trader

| Jul 13, 2021 | Securities law

In theory, lucrative trading requires experience, knowledge, skill and some luck. Sometimes, though, traders have material and nonpublic information they use to gain an unfair advantage. If the Securities and Exchange Commission uncovers insider trading, of course, serious criminal charges are possible.

Recently, the SEC filed criminal charges against a Canadian hedge fund trader for illegal front-running. While it is premature to speculate whether these charges are part of a broader enforcement trend, traders, their employers and their clients should take note.

Front-running schemes

Front-running occurs when someone uses insider knowledge to trade securities in advance of an event that is likely to affect their price significantly. For example, traders may know their client is about to make a big stock purchase, so they buy stocks before the order only to later sell them for a nice profit.

The SEC’s recent charges

When announcing the recent charges against the Canadian hedge fund trader, the SEC revealed some unique facts about the case.

Rather than making purchases from his own account, the trader used the accounts of relatives inside the U.S. The criminal complaint alleges the trader’s motivations for taking a unique approach to front-running were to avoid detection. That is, the SEC believes the trader knew his actions were illegal and took steps to cover up his conduct.

Press releases and criminal complaints are far different from convictions and plea agreements, so the Canadian hedge fund trader may not have violated any laws. Ultimately, though, because the SEC has sophisticated ways to find and prosecute front-running schemes, it undoubtedly has gathered extensive evidence to support the allegations in the complaint.