Virgin Galactic’s successful flight may have brought joy to Mr. Branson, but it will also bring some after-party headaches.
The entrepreneur and space explorer is accused of basic earthly financial misgivings for this same flight – a pretty serious insider trading issue.
- On its inaugural flight this last July 11th, Branson’s spacecraft deviated from its trajectory.
- The yellow light warning, a big deal for pilots, was ignored. The plane did not abort its descent as should have been expected. Instead, it flew out of the permitted cone for 1 min and 42 seconds.
- An uncontrolled descent carries a significant risk of explosion. It’s a big deal for the FAA, which automatically suspends the plane until an investigation is completed and its result is favorable.
- The next day, on July 12th, Branson announced to the SEC that he would sell shares in the company. Branson did not mention the flight incident in doing so.
- On July 23rd, the FAA started an investigation.
- Mr. Branson sold 10.5m shares worth $300m on August 10th, 11th, and 12th. He confirmed the sale publicly on August 13th.
- The flight deviation became public knowledge on September 1st, in an investigative article from The New Yorker (below)
- On September 2nd, the FAA grounded the plane until further notice.
Could this sale fall into the insider trading fraud? Here are the ingredients required:
- Was Mr. Branson a “controlling person”?
- Did he execute a securities transaction?
- Did he possess non-public information?
- Was the information material?
- Did he breach his fiduciary duty?
- Was there scienter?
What do you think? The court will decide, but he may have a challenging time ahead.
Tom Hardin’s initial comment
Tom Hardin is known as “TipperX”, one of the most prolific informants in securities fraud history, helping to build over 20 of the 80+ individual criminal cases in “Operation Perfect Hedge.” He now lectures on the insider trading topic. Here is his initial comment on the case:
“While it appears to be (1) material, (2) non-public information on which Mr. Branson traded, illegal insider trading must also include a third element: deception and/or breach of fiduciary duty. In other words, when the insider illegally acts on their information, they do so despite their duty to the company; they’re keeping a secret from the firm which doesn’t want traders acting on this information yet. This takes advantage of the trust placed in them by a company’s owners and shareholders. That breach of trust is the heart of why insider trading is illegal. Not knowing all of the facts of the case, in a hypothetical situation, Mr. Branson would most certainly try to argue there was no breach of duty.”
The potential outcome
Insider trading is seriously punished in the US, with both civil and criminal penalties. They include
- Disgorgement of profits, forfeiture
- Penalties: the greater of $1 million or 3x profits
- Fines: up to $5,000,000 or 2x profits
- Disbarment, as a director or as a broker-dealer/investment advisor
- Up to 20 years imprisonment
Enough stakes for a great party…
You actually don’t need to be a “controlling person” anymore these days, as the fraud has been extended to “tippees” and “tippers”, since they also breach fiduciary duties.
So let’s see how that goes, but this story is not likely to disappear any time soon.
- Business Insider, September 9th, 2021: Virgin Galactic and Richard Branson sold $800 million in stock before investors knew about an in-flight ‘mishap’ that would trigger an FAA investigation
- The New Yorker, September 1st, 2021: The Red Warning Light on Richard Branson’s Space Flight
- Elements of Insider Trading, CalSTRS.com