Front-running involves using knowledge of client trades to place personal trades ahead of them, potentially profiting from the price movement caused by the client's order.
Updated February 12, 2024
Front-running, also known as tailgating, is the illegal act of trading stocks, bonds, or other securities based on insider knowledge of a pending transaction that’ll affect its price.
It is like insider trading in many ways. The major distinction is that insider trading happens when a single investor profits from internal company information that is not available to the public.
Whistleblowers bring great transparency to the markets by reporting front-running to the Securities Exchange Commission (“SEC”) when it occurs. Continue reading to learn more about this illegal activity and how those who report it can be rewarded for their information.
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As Of Counsel at Kohn, Kohn & Colapinto, Allison Herren Lee brings her expertise to support whistleblowers under the Dodd-Frank Act and SEC Whistleblower Program. If you have information about an SEC violation and seeking guidance about such financial abuse, arrange a confidential consultation with Allison Lee today.
Types of Front-Running
Front-running is universally seen as the illegal act of buying and selling stock just before a large market-shifting transaction occurs. These trades are based on non-public information and will result in an immediate profit once the stocks are traded after the large transaction.
For example, a broker may know of huge trade which will make the price of a certain stock soar. Before it does, they’ll quickly purchases shares for themself or on behalf of a client (front-running). Once the trade occurs, the broker immediately sells the shares, reaping a huge profit.
Another form of front-running includes the trading of stocks or assets based on an analyst’s recommendations that have not yet been released to the public. When these recommendations are released, they will affect the price of those stocks.
When It’s Legal
Front-running is only considered legal when the trades happen based on publicly available information. For instance, some investors may buy or sell stocks and make public their rationale behind the transaction. This is to bring greater transparency to the financial markets.
Index front-running is also considered legal because trades occur based on analysis of when a stock is expected to be added or removed from a particular index. Those who are paying attention can-front run trades to exploit this publicly available information.
Notable Front-Running Cases
In 2022, The Securities and Exchange Commission (“SEC”) charged a Lawrence Billimek, an employee of a major asset management firm with securities portfolios worth billions of dollars, and Alan Williams, who previously worked at several financial industry firms, with a multi-year front-running scheme generating at least $47 million in illegal profits.
Williams allegedly leaked information about upcoming market-moving trades to the Billimek, who then used it to gain an unfair advantage. Details about the whistleblower’s role haven’t been publicly disclosed. However, the SEC likely received a tip or complaint that triggered the investigation. This case demonstrates the importance of whistleblowers in uncovering and stopping financial misconduct.
SEC Whistleblowing and Front-Running
Those with information about illegal front-running or other securities violations can file an anonymous whistleblower claim with the SEC Office of the Whistleblower. They are the office who administer the SEC’s whistleblower program, which has the following features:
- Awards: The SEC Office of the Whistleblower provides financial awards of between 10 and 30 percent of the money collected in a front-running case where the case exceeds a sanctions threshold of $1,000,000.
- Anti-Retaliation and Damages: The SEC Whistleblower Program has strong anti-retaliation provisions that allow whistleblowers to file retaliation cases in the U.S. District Court to obtain double back pay, reinstatement, reasonable attorneys’ fees, and reimbursem*nt for certain costs.
- Anonymous Filings: The SEC offers protection and preserves the confidentiality of whistleblowers and allows for anonymous filings with the help of a U.S. based attorney.
- International Scope: Foreign citizens who blow the whistle on front-running committed by publicly traded companies outside the United States are eligible to receive awards.
Money is not taken or withheld from harmed investors to pay whistleblower awards. Payments to whistleblowers are made from an investor protection fund, established by Congress, which is financed entirely through monetary sanctions paid to the SEC by securities law violators.
Learn More:
SEC Whistleblower Program: Qualifying for Rewards
Reporting Process
For whistleblowers to qualify for an award, they must submit their tip about front-running virtually or by mail. If they are not U.S. citizens or would like to submit an anonymously tip, they must do so with the help of a U.S. based attorney. Below are the general whistleblowing steps:
- Information Gathering: collect information about the securities fraud or violation, including dates, times, people involved, and any relevant documents or evidence.
- Submit a Tip: Submit your tip to the SEC online or by mail. You can also contact the SEC’s Office of the Whistleblower by phone.
- Patiently Wait: wait for receipt of your complaint from the SEC. They will provide you with a unique whistleblower identification number (WIN).
- Provide Additional Information: if the SEC decides to investigate your tip, they may contact you requesting additional information.
- File for an Award: If the SEC is successful in an enforcement action, you may be eligible for a monetary reward. To file for a reward, submit a completed Form WB-APP to the SEC within 90 days of a final judgment or settlement.
It is important to note that filing a whistleblower complaint with the SEC is a serious matter and should be done with the guidance of an experienced SEC whistleblower attorney.
Obtaining Legal Assistance
Since 1988, we’ve bene helping whistleblowers win their cases and get rewarded for their brave action. Our team is dedicated to bringing fraudsters to justice while protecting client anonymity.
If you’re thinking of reporting illegal front-running, contact Kohn, Kohn & Colapinto for a free case evaluation. If we decide to represent you, a partner will be assigned to your case.
Related FAQs
Our Firm’s SEC Cases
SEC Dodd-Frank Act Confidential Informant. Protecting the confidentiality of Wall Street whistleblowers is among the most important breakthroughs in federal whistleblower law. Under the Dodd-Frank Act, whistleblowers can file anonymous cases, and everything about their case, including who they sued, remains secret.
Our SEC whistleblower law firm has prevailed in significant cases, including one of the largest SEC awards granted to date. To maintain the secrecy of this whistleblower, we can only report that he or she obtained a reward within the top-five ever given by the SEC – a whistleblower informant award of over $30 million.
Kohn, Kohn & Colapinto represented an anonymous whistleblower, who on May 17, 2021, received a whistleblower award of almost $13.5 million. The SEC Issues More Than $31 Million in Whistleblower Awards related to this case, which involved securities law violations.
Founding partner KKC Stephen M. Kohn commended this whistleblower for his or her courage, perseverance, and determination for speaking out against the fraudster. The whistleblower was compensated for the years of sacrifice and suffering, and will continue seeking full justice.
Awards such as these further demonstrate that the Dodd-Frank Act whistleblower laws covering securities, commodities and foreign bribery crimes work. They deter crime, put fraudster in jail, recover billions for investors, and protect the integrity of the markets. The SEC has created the safest reporting system ever devised to incentivize the disclosure of fraud.
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