Undisclosed SEC Investigations

One of the hallmarks of the SEC’s investigative process is that it is shrouded in secrecy –– only the SEC staff, high-level managers of the company being investigated, and outside counsel are typically aware of active investigations. We obtain novel data on the targets of all SEC investigations closed between 2000 and 2017 –– data that was heretofore non-public –– and find that such investigations portend economically meaningful declines in firm performance. Despite the materiality of these investigations, firms are not required to disclose them, and only 19% of targeted firms initially disclose the investigation. We examine whether corporate insiders exploit the undisclosed nature of these investigations for personal gain. We find a pronounced spike in insider trading at the outset of the investigation; that the increase in trading is attributable to corporate officers but not to independent directors; and that abnormal trading activity appears highly opportunistic and earns significant abnormal returns. Our results suggest that SEC investigations are often material non-public events, and that insiders trade based on private information about these events.