SEC detects insider trading by executive at Alliance Fiber Optic Products(sec.gov)
sec.gov
SEC detects insider trading by executive at Alliance Fiber Optic Products
https://www.sec.gov/news/press-release/2018-142
5 comments
Well, sure. I think the novelty is in the fact that this is not a single huge transaction of a high-profile corporation’s stock. Total profit was $200k over several trades – gross proceeds had to be a tiny blip in overall volume.
> SELECT * FROM trades WHERE works_at = ticker;
Not quite.
Most stocks are held in street name (meaning, by the broker.)
It would take a bit more digging.
The issue, of course, is that there's no such database, nor does the idea of one even make much sense. There's too many complex ways you can structure a transaction so that you gain an economic benefit when a company does well, but you haven't personally made an outright purchase of that company's equity. (Most obviously: You can tip an acquaintance and agree to split the profits, but that's just the start.)
Since we can't get a categorical list of "transactions top executives at company X have made, or caused to be made, or otherwise may benefit from", traditionally enforcement has revolved around looking for super suspicious transactions, and then working backwards to figure out if they were made by someone who shouldn't have been making them. And since normal stock trades basically always look unsuspicious, that generally means looking for people, eg, buying short-dated out of the money call options[1]. It's not proof of wrong-doing, but it's a bit like finding someone who's won three lotteries in the past month: It's probably worth checking to see if they've got an uncle who works for the lottery commission. :)
But the flip side of that is that it's generally been assumed that if you don't do something blatantly dumb like buying short-dated out of the money call options, you won't show up on anyone's radar, and you'll get away with it. But maybe not any longer!
[1]: Hacker News's favourite financial journalist, Matt Levine, talks about this a lot, and with good reason. The vast bulk of SEC enforcement actions for insider trading involve people that seem to be almost trying to be caught.
Since we can't get a categorical list of "transactions top executives at company X have made, or caused to be made, or otherwise may benefit from", traditionally enforcement has revolved around looking for super suspicious transactions, and then working backwards to figure out if they were made by someone who shouldn't have been making them. And since normal stock trades basically always look unsuspicious, that generally means looking for people, eg, buying short-dated out of the money call options[1]. It's not proof of wrong-doing, but it's a bit like finding someone who's won three lotteries in the past month: It's probably worth checking to see if they've got an uncle who works for the lottery commission. :)
But the flip side of that is that it's generally been assumed that if you don't do something blatantly dumb like buying short-dated out of the money call options, you won't show up on anyone's radar, and you'll get away with it. But maybe not any longer!
[1]: Hacker News's favourite financial journalist, Matt Levine, talks about this a lot, and with good reason. The vast bulk of SEC enforcement actions for insider trading involve people that seem to be almost trying to be caught.
surely the company name is stored separately from the stock symbol. you'd probably need to have at least one join somewhere :P
>The SEC appreciates the assistance of the Financial Industry Regulatory Authority and the Options Regulatory Surveillance Authority.
As Matt Levine at Bloomberg is fond of saying, if you don't want to get caught insider trading, don't use options.
https://www.bloomberg.com/view/articles/2014-06-17/there-mig...?
As Matt Levine at Bloomberg is fond of saying, if you don't want to get caught insider trading, don't use options.
https://www.bloomberg.com/view/articles/2014-06-17/there-mig...?
All the transactions detailed in the SEC order are outright sales of stock (not options). He was both selling stock he already owned to avoid losses and selling short to generate additional profit. Before it was acquired, AFOP never had a very substantial market cap so it’s possible AFOP didn’t actually have listed options, or that it did but they weren’t liquid.
I suspect that AFOP was probably a typical low volume small cap and that Li’s selling while not large in nominal terms was probably still pretty significant relative to the average daily traded volume. Large enough to be picked up by a pretty simple screen anyway.
I suspect that AFOP was probably a typical low volume small cap and that Li’s selling while not large in nominal terms was probably still pretty significant relative to the average daily traded volume. Large enough to be picked up by a pretty simple screen anyway.
The press release hints strongly at their toolkit:
> improbably successful trading
Even before considering trading volume they can look at in-the-money trades as a proportion of total trades. Then I expect they would look at smaller denominators to see if timing correlated with the announcement cycle. The use of short-selling would have made it (relatively) easier still to pick up: assuming the company was ~200MM market cap at the end of 2014, of which 28% was held by management and their strategic shareholder [proxy statement 20150417], borrow could have been expensive enough to limit the holding periods of short trades.
As you and other commenters have pointed out, simple screens can indeed be effective. A short-term, infrequent trader (or small group of traders assuming, um, collusion) with a high win rate and presumably high risk-adjusted return would stick out.
> improbably successful trading
Even before considering trading volume they can look at in-the-money trades as a proportion of total trades. Then I expect they would look at smaller denominators to see if timing correlated with the announcement cycle. The use of short-selling would have made it (relatively) easier still to pick up: assuming the company was ~200MM market cap at the end of 2014, of which 28% was held by management and their strategic shareholder [proxy statement 20150417], borrow could have been expensive enough to limit the holding periods of short trades.
As you and other commenters have pointed out, simple screens can indeed be effective. A short-term, infrequent trader (or small group of traders assuming, um, collusion) with a high win rate and presumably high risk-adjusted return would stick out.
Even if they were relatively small trades, senior execs short selling in advance of earnings should set off flags. Heck, it's not that unusual AFAIK for companies to prohibit employees short selling company stock period.
Seriously! What a greedy punk. Grr.
> Li agreed to cease and desist from further violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
Oh thank goodness they worked that out!
Oh thank goodness they worked that out!
And here's the rest:
"... he must pay disgorgement of $196,203, prejudgment interest of $23,062, and a $196,203 penalty for a total of $415,468. Li also agreed to be prohibited from acting as an officer or director of a public company for a period of five years."
The last one is probably the real kicker for an executive.
"... he must pay disgorgement of $196,203, prejudgment interest of $23,062, and a $196,203 penalty for a total of $415,468. Li also agreed to be prohibited from acting as an officer or director of a public company for a period of five years."
The last one is probably the real kicker for an executive.
If he had shorted a correlated stock or bought a competitor stock would it have been:
1) completely legal or much less illegal?
2) just as illegal and just as likely to get caught?
3) just as illegal but less likely to get caught?
I guess the question in general is: does insider trading apply to your company only, or the entire industry / stock market?
1) completely legal or much less illegal?
2) just as illegal and just as likely to get caught?
3) just as illegal but less likely to get caught?
I guess the question in general is: does insider trading apply to your company only, or the entire industry / stock market?
It's hard to prove a link that someone knows something about a competitor's company and thus counting on the stock to tank. However, depending on the prosecution they may charge the miscreant with other crimes e.g. possession of trade secrets. FWIW the CIO of Equifax found out about the Equifax breach obliquely and was charged with insider trading while the CEO made sone suspicious trades before the press release and was not charged.
https://money.cnn.com/2018/03/14/news/companies/equifax-insi...
As for your last point, I think that's the role of the market speculators and usually the SEC or other enforcement agencies do not take an active role in policing these actions unless there is compelling evidence that a crime has been committed.
https://money.cnn.com/2018/03/14/news/companies/equifax-insi...
As for your last point, I think that's the role of the market speculators and usually the SEC or other enforcement agencies do not take an active role in policing these actions unless there is compelling evidence that a crime has been committed.
Any executive team is a conspiracy against the trading public (among other parties), and insider trading laws are used to punish defectors from that conspiracy. Thus these laws harm the trading public and the economy as a whole. By definition, a CEO isn't a defector, since she's running the conspiracy. Jr. VPs like a CIO, though, should definitely be careful when attempting to profit from nonpublic knowledge.
I'm going to take a stab at answering this, but I am not an expert.
Insider trading applies to instances where you have _material, non-public_ information about a company. The criteria of what makes information material and non-public are a little bit of a gray area, but I'm going to just use it to mean "I know something about a company because I am in a position to be trusted by that company"
In other words, your example wouldn't be insider trading. You have no material, non-public information about correlated stocks or a competitors stock. You have a hunch that that stock will perform in a way related to the stock you have information on. AFAIK, theres nothing stopping you from acting on that hunch.
So of the 3 options presented, its probably a mixture between 1 and 3, leaning towards 1.
Insider trading applies to instances where you have _material, non-public_ information about a company. The criteria of what makes information material and non-public are a little bit of a gray area, but I'm going to just use it to mean "I know something about a company because I am in a position to be trusted by that company"
In other words, your example wouldn't be insider trading. You have no material, non-public information about correlated stocks or a competitors stock. You have a hunch that that stock will perform in a way related to the stock you have information on. AFAIK, theres nothing stopping you from acting on that hunch.
So of the 3 options presented, its probably a mixture between 1 and 3, leaning towards 1.
Let me give you a scenario. For simplicity's sake, I'm a senior exec of a company in an industry dominated by two companies: $ME and $THEM. My company is about to release a rotten earnings report because $THEM is eating our lunch. While you're probably less likely to be caught and prosecuted, you're still trading on inside information if you buy a bunch of $THEM stock immediately in advance of your rotten earnings release.
I think this is true. I would have to look to find a case where this was what happened, but I would be surprised if such a case did not already exist.
I think this situation is much more difficult to find and enforce, however. As an executive, you have to file with the SEC for share purchases (I believe its either a certain number of shares or a certain $ amount bought/sold. I also believe the form is form 4)
So it becomes a matter of figuring out when the senior exec knew the information and traded on it, and I think its a bit more difficult to enforce because its not your typical insider case.
I like your example, because it really hits at the edges of what is material non-public information.
Something that just occurred to me: if you are a senior exec, your compensation is probably tied to share ownership in $ME. Even if you trade on $THEM, and make money, you're probably going to take a pretty substantial hit on your own $ME holdings. This isn't to say its any less fraudulent/misleading, but its an interesting thing to consider.
I wish I had a better answer to this scenario.
I think this situation is much more difficult to find and enforce, however. As an executive, you have to file with the SEC for share purchases (I believe its either a certain number of shares or a certain $ amount bought/sold. I also believe the form is form 4)
So it becomes a matter of figuring out when the senior exec knew the information and traded on it, and I think its a bit more difficult to enforce because its not your typical insider case.
I like your example, because it really hits at the edges of what is material non-public information.
Something that just occurred to me: if you are a senior exec, your compensation is probably tied to share ownership in $ME. Even if you trade on $THEM, and make money, you're probably going to take a pretty substantial hit on your own $ME holdings. This isn't to say its any less fraudulent/misleading, but its an interesting thing to consider.
I wish I had a better answer to this scenario.
Suppose you have done proprietary analysis on satellite imagery to estimate sales of a company. Since you have no relationship with the company, you aren't betraying any relationship of trust. I don't think* this is insider trading, to trade on the estimates you produced. However, the information is not public and nobody else has it. So I think a layperson might well regard it as unfair and expect it to be illegal.
*This is not legal advice
*This is not legal advice
It may seem unfair, but I think the reason I would give as to why it isn't is: you have to pay for that source of data. Using satellite imagery to analyze sales, imho, sort of falls into the same area where HFTs pay for feeds from exchanges so they can take advantages of widening gaps in bid/ask spreads.
When it comes to insider trading, it really seems to boil down to: did I obtain the information in a way where no outsider would have possibly done so? With your example, it certainly seems possible that other groups could perform the same analysis. So as you said, it wouldn't be insider trading.
I think another one of the aspects of insider trading is _certainty_. If you're an insider, and you know your company is going to miss earnings, the likelihood of you making a wrong bet are near 0. If you're analyzing imagery of parking lots to see if sales at Wal-Mart are going up, theres still a non-insignificant chance that you could bet wrong. Maybe the reason theres so many cars it that they are running promotions that actually don't increase revenues in an expected way. Maybe there aren't any cars because people are taking public transit. When you're an outsider, theres way more variables that go into your trade, compared to when you're an insider and its a simple question of "how will this information about my company get reacted to?"
Insider trading is probably one of the most interesting aspects of modern finance. As you can probably tell, I take most of my information from Matt Levine (he gets linked here pretty often, but his column is Money Stuff on Bloomberg (also an email newsletter so you don't use up your free articles))
Again, not an expert, take everything I say with a healthy pinch of salt.
When it comes to insider trading, it really seems to boil down to: did I obtain the information in a way where no outsider would have possibly done so? With your example, it certainly seems possible that other groups could perform the same analysis. So as you said, it wouldn't be insider trading.
I think another one of the aspects of insider trading is _certainty_. If you're an insider, and you know your company is going to miss earnings, the likelihood of you making a wrong bet are near 0. If you're analyzing imagery of parking lots to see if sales at Wal-Mart are going up, theres still a non-insignificant chance that you could bet wrong. Maybe the reason theres so many cars it that they are running promotions that actually don't increase revenues in an expected way. Maybe there aren't any cars because people are taking public transit. When you're an outsider, theres way more variables that go into your trade, compared to when you're an insider and its a simple question of "how will this information about my company get reacted to?"
Insider trading is probably one of the most interesting aspects of modern finance. As you can probably tell, I take most of my information from Matt Levine (he gets linked here pretty often, but his column is Money Stuff on Bloomberg (also an email newsletter so you don't use up your free articles))
Again, not an expert, take everything I say with a healthy pinch of salt.
Not an expert but probably #3. It's trading based on non-public information.
You don't mention but is certainly just as illegal is passing on stock tips either unilaterally to friends and family, based on an arrangement to split profits, or otherwise profit indirectly. Obviously the more obfuscated (and smaller dollar) insider training is, the more difficult it is to detect.
You don't mention but is certainly just as illegal is passing on stock tips either unilaterally to friends and family, based on an arrangement to split profits, or otherwise profit indirectly. Obviously the more obfuscated (and smaller dollar) insider training is, the more difficult it is to detect.
"It's trading based on non-public information."
I don't think this can be an accurate characterization. Any time you buy or sell a stock, you should have non-public information in some sense - since the current price theoretically reflects all the public information.
Matt Levine has written some stuff from time to time about popular misunderstanding of insider trading law in the US. One point he makes is that it's outlawed in a kind of indirect way, rather than being based on a layman's idea of fairness.
I don't think this can be an accurate characterization. Any time you buy or sell a stock, you should have non-public information in some sense - since the current price theoretically reflects all the public information.
Matt Levine has written some stuff from time to time about popular misunderstanding of insider trading law in the US. One point he makes is that it's outlawed in a kind of indirect way, rather than being based on a layman's idea of fairness.
jessaustin(3)
I mean... he worked for the company and shorted their stock before earnings releases. This isn't exactly rocket science.