It’s clearly insider when a company’s high-level executive trades on pending earnings data not yet released to the public. It’s clearly not insider trading when you count cars in a retailer’s parking lot to get insight to sales. A recent SEC case falls somewhere in the middle.
The Securities and Exchange Commission brought charges against two men who worked at a credit card company. The two crafty traders tracked credit card use to determine revenue trends for retailers and then traded based on that data.
Their plan was solid. They made over $2.8 million on a $147,300 investment, a return of 1,819%, according to the complaint. Those returns are too good. I would bet that their brokerage accounts were flagged by compliance.
The credit card company was not disclosed in the complaint, but Capital One has acknowledged that they’ve “been working closely with the SEC on this investigation, which involves two former employees.”
This case reminds me of the Railroad Insider Trading case where an employee noticed a bunch of “suits” walking around the railroad and some unusual activity in the office. He surmised that the railroad was getting sold, traded on that assumption, and made some money on the trade. The SEC thought he was engaged in illegal insider trading. A jury thought otherwise.
In this current case, the two men were subject to the credit card company’s rules on protection of this information. According to the SEC, they broke those rules.
They “knew or were reckless in not knowing that they owed their employer a fiduciary duty, or an obligation arising from a relationship of trust and confidence, to maintain the confidentiality” of the data.
In looking at the portions of Capital One’s insider trading policy, it probably should have addressed this particular topic. The portion of the code excerpted in the SEC complaint is a rather standard ban on illegal insider trading. It seems to fail to address the use of data at the company.
What the two traders did is certainly enough to get them fired. It was enough to get them charged by the SEC. It may be harder to get a jury to agree. Unlike some other recent insider trading cases, this one was filed in federal court. So it will be up to a jury, not one of the SEC’s administrative judges, to determine guilt.
Sources:
- SEC Charges Two Employees of a Credit Card Company with Insider Trading
- Huang Complaint
- Capital One Pair Accused of Trading on What’s in Your Wallet by Sophia Pearson in Bloomberg
- U.S. regulators sue former Capital One employees for insider trading by Nate Raymond for Reuters
- Working on the Railroad is Not Insider Trading
IANAL. It sounds to me like a clever scheme that probably should have gotten them terminated from Capital One, but insider trading? If I was on the jury I’d have to spend quite a bit of time thinking about it.
Good blog, although I feel like something of a rubbernecker at a car crash site.
At a car crash you can’t learn from what went wrong. I’m trying to show what others did wrong so we can learn from their mistakes.