If you trade on inside information you will likely be caught.
The Securities and Exchange Commission and the U.S. Attorney’s Office for the Northern District of Georgia announced civil and criminal charges on Wednesday against former Equifax technology executive Jun Ying.
Tom Gorman, a lawyer with Dorsey & Whitney and former SEC enforcement attorney who publishes a widely-read securities blog, told MarketWatch, “It is popular to think that out of millions of trades it will be difficult to find some specific trade, large or small. Not so.”
Ying allegedly used confidential information he obtained in the course of his employment at Equifax to sell shares for nearly $1 million in proceeds before a massive hack attack was made public in the fall of 2017.
Ying, who was a chief information officer for an Equifax business unit at the time, found out about the breach on Friday afternoon, August 25, 2017, but was initially told it had affected an Equifax customer, according to the SEC’s complaint. Company executives had begun mobilizing key executives on a “need to know” basis to address the breach, so not everyone was initially told that it was Equifax itself that had been hacked.
Project Sparta, a confidential internal team, was set up to respond and an email was sent to several Equifax IT personnel responsible for fixing the breach as well as the CIOs of certain business units, including Ying. Ying apparently caught on later that day that the victim was actually Equifax, and texted a co-worker, “Sounds bad. We may be the one breached.”
Ying confirmed his suspicions with his boss later that evening, and he and his team got to work on the company’s response to the crisis, according to the SEC complaint.
However, Ying thought about his own stock options all weekend, according to the SEC’s complaint, and on Monday morning started searching the web for information on how a similar, but much smaller, breach in 2015 had affected the share price of the credit reporting company Experian . The SEC complaint says that Ying’s internet browsing history shows he learned that Experian’s stock price had dropped approximately 4% after the public announcement of the Experian breach.
Later Monday morning, Ying exercised all of his available stock options for 6,815 shares of Equifax stock that he immediately sold for over $950,000, and a gain of over $480,000, according to the SEC and DOJ complaints.
Douglas I. Koff and Craig S. Warkol of law firm Schulte Roth & Zabel who are representing Jun Ying declined comment.
The SEC complaint says that on Aug. 30, the global CIO for Equifax officially told Ying that it was Equifax that had been breached. One of the company’s attorneys, unaware that Ying had already traded on the information, told Ying that the news about the breach was confidential, should not be shared with anyone, and that Ying should not trade in Equifax securities. According the SEC complaint, Ying did not volunteer the fact that he had exercised and sold all of his vested Equifax options two days before.
Equifax finally announced the breach on Sept. 7, and Equifax common stock closed at $123.23 the next day, a drop of $19.49 or nearly 14% per share from the prior day’s closing price of $142.72.
Trading volume increased dramatically, too, to nearly seventeen million shares, more than a thirty-fold increase from the previous day’s volume of approximately 518,000 shares. According to SEC complaint, Ying avoided more than $117,000 in losses by selling early before the public knew about the breach.
The SEC and the exchanges, including securities industry regulator FINRA, now regularly monitor trading activity that occurs before, during and after a large company announcement using sophisticated technology.
Dorsey told MarketWatch, “First FINRA monitors the markets and large trades shortly before a corporate event are easy to find and look at. Second, the SEC has a huge database of trading and for any given corporate event they can obtain all the trading that took place and examine it quickly for timing to the event, size and eventually who placed the trades. There is a record of every trade in a U.S. market and the SEC has decades of experience and very sophisticated computer programs to sift the trades and track down the traders whether it is thousands of shares or just a few.”
After that it’s easy to figure out how someone could potentially have obtained inside information, especially if the trader is an executive at the company that was impacted by the news.
When the SEC announced insider trading charges in June 2016 against Christopher Salis, then a global vice president at SAP America who tipped a friend in advance of SAP’s impending acquisition of Concur Technologies, the press release quoted Scott W. Friestad, associate director of enforcement, saying, “we are working aggressively to root out and identify insider trading by connecting patterns of trading to sources of material nonpublic information.”
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