The SEC has filed insider trading charges against Robert Brian Thompson, a long-time banking supervisor and examiner at the Federal Reserve Bank of Richmond, for allegedly using material nonpublic information to trade in stock and options of two publicly traded banks under his supervisory purview – New York Community Bancorp and Capital One Financial.

According to the SEC’s complaint filed in federal district court in Virginia, in October 2023, Thompson obtained a preview of an upcoming positive earnings announcement by one of the banks in his supervisory portfolio.

Based on that information, he allegedly bought $678,000 worth of the bank’s stock hours before the scheduled announcement, which resulted in $79,346 of ill-gotten profits.

Unexpected loan losses

The SEC’s complaint also alleges that, in January 2024, Thompson learned that a different bank in his supervisory portfolio would be disclosing unexpected loan losses worth hundreds of millions of dollars as part of an upcoming earnings announcement.

In placing each of those trades, the SEC said, Thompson knew or at least recklessly disregarded that he was trading based on information that was material and nonpublic and that using the information to enrich himself through trading was a breach of his duties as a Federal Reserve Bank employee.

Thompson allegedly leveraged that material nonpublic information to buy thousands of options on the bank’s stock two days before the scheduled announcement, which led to $505,527 of ill-gotten profits.

Criminal case

Under the same charges on the criminal side, Thompson pleaded guilty to criminal charges in a parallel action brought by the Department of Justice’s Criminal Division Fraud Section and the US Attorney’s Office for the Eastern District of Virginia.

He is scheduled to be sentenced on March 19, 2025. He faces a maximum penalty of 20 years in prison on the insider trading count, and five years in prison on a false statements count.

Claim for relief

The SEC said Thompson, directly or indirectly, in connection with the purchase or sale of securities and by the use of means or instrumentalities of interstate commerce, or the mails, or a national securities exchange, knowingly or recklessly:

• (i) employed a device, scheme, or artifice to defraud;
• (ii) made one or more untrue statements of a material fact or omitted to state one or more material facts necessary in order to make the statements made not misleading; and/or
• (iii) engaged in one or more acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons.

The SEC charged him under its primary fraud rule – SEC Rule 10b-5 – and the complaint seeks a final judgment ordering Thompson to pay disgorgement with prejudgment interest and civil penalties, and enjoining him from committing future violations of the charged antifraud provisions.

Thompson consented to the entry of an injunction, with disgorgement and civil penalties, if any, to be determined later by the Court, the SEC said.

Interesting bits

One interesting point about this case: The SEC said its investigation originated from the Enforcement Division’s Market Abuse Unit, which used Consolidated Audit Trail (CAT) data to analyze Thompson’s suspicious trading activity.

The SEC can rely on CAT data to conduct studies identifying apparent market problems and inefficiencies to justify major rulemakings, and it uses it (as here) to track aberrant trading activity.

The industry trade group SIFMA has been critical of the SEC’s use of CAT data, noting that it is not able to be reviewed by the public, absent the SEC being willing to and developing a process to make such data available in a sufficiently anonymized format.

And it’s interesting (and disturbing) that Thompson deliberately attempted to evade scrutiny for his unlawful trading by submitting false certifications to the Federal Reserve and that someone at this juncture in his career – in a high stature role in a federal public institution already – would risk his career and reputation (at age 42) for a half million dollars.