Federal employees and contractors are often privy to insider information about major defense and aerospace contracts that haven’t yet been publicly announced. A multi-million or multi-billion-dollar contract award for any publicly-traded company, not to mention a start-up, can do wonders for the company’s stock price.

The converse is also true. News that a publicly-traded government contractor has lost a major contract bid they were expected to win or, worse yet, that they’ve been debarred from contracting work for fraud or other malfeasance can annihilate the company’s stock price.

For some, the natural temptation in either scenario is to take advantage of that insider knowledge, buy or sell the stock before the news breaks, and reap the rewards. But doing so is criminal – and many federal employees and contractors may not even realize it.

The fact is that the scenarios I describe above both constitute what the law deems “insider trading,” a form of securities fraud. In decades past, insider trading prosecutions ensnared primarily high-level corporate executives who arguably should have known better and were profiting to the tune of millions of dollars. But in recent years, the government has shown a willingness to go after “the little guy” for the same conduct. Indeed, the fact that the defendant is a low-level employee or profiting only thousands doesn’t make insider trading any less illegal.

This trend of prosecuting lower-level workers has been increasing recently due to the work-from-home era. Spouses, partners, and roommates of corporate employees – not just the insiders themselves – have been drawing the attention of federal prosecutors for trading on the basis of information gleaned during what the Wall Street Journal calls “the daily humdrum of two adults doing their jobs remotely.” For example: an innocent glance at an open email.

This brings up another important point: anyone trading based on insider, non-public information is also guilty of violating insider trading laws. So, federal employees and contractors who engage in pillow talk or after-hours banter with significant-others or roommates should be cautious about what they’re sharing that could be misused by the other party, even in ignorance of the law, for financial gain. That, of course, is in addition to the obvious caution about sharing classified or otherwise controlled information.

Fortunately, there is an easy way for federal employees and contractors to inoculate themselves against insider trading charges: don’t trade individual stocks. Some employees may already be subject to this requirement due to government ethics and financial disclosure laws. But for the vast majority of cleared workers who aren’t categorically barred from trading individual stocks, buying broad, non-sector-specific mutual funds or exchange-traded funds (ETF’s) is still the way to go. (Ironically, most financial experts also say this is sound advice financially; attempting to “beat the market” is a fool’s errand). Think “total stock market,” or “S&P 500”-type funds. For anything else, always obtain a written opinion from your employer’s Designated Ethics Official before acting.

 

 

This article is intended as general information only and should not be construed as legal advice. Although the information is believed to be accurate as of the publication date, no guarantee or warranty is offered or implied. Laws and government policies are subject to change, and the information provided herein may not provide a complete or current analysis of the topic or other pertinent considerations. Consult an attorney regarding your specific situation. 

 

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Sean M. Bigley retired from the practice of law in 2023, after a decade representing clients in the security clearance process. He was previously an investigator for the Defense Counterintelligence and Security Agency (then-U.S. Office of Personnel Management) and served from 2020-2024 as a presidentially-appointed member of the National Security Education Board. For security clearance assistance, readers may wish to consider Attorney John Berry, who is available to advise and represent clients in all phases of the security clearance process, including pre-application counseling, denials, revocations, and appeals. Mr. Berry can be found at https://www.berrylegal.com/.