Lawrencia Afriyie took some risky bets in the market. She bought out-of-the-money options, but made $1.5 million in profits. It just so happens that her son, John, worked for for an investment firm that had material non-public information on the target of those options.
According to the SEC complaint, John Afriyie worked at an investment firm involved in a going private deal for ADT. He accessed documents that were designated “confidential” or several variations of confidential. He must have seen a golden opportunity to make some money on the side.
Since Mr. Afriyie had signed the investment firm’s Code of Business Ethics that prohibits trading on material, non-public information, he could not trade on the information.
Mysteriously, his mother, Lawrencia, bought 2,279 options on ADT from January 28 through February 12. The options were out of the money, with strike prices between $32 and $34 a share, while the stock was trading between $24 and $28. She was most of the trading activity on these options on many days during that period.
On February 16, ADT announced its acquisition at a price of $42. Lawrencia made a profit of $1.5 million on $24,000 in options.
Based on the trading activity in Lawrencia’s account, I would assume the compliance officers on her account saw a big red flag: extremely well timed option trades just prior to a major announcement. The complaint does not say so, but I assume that this option trading was unusual for her account.
Then it was up to the regulators to tie her to the source of information. Did she rat out her son and tell the regulators that it was him trading on her account? Her son had just made her a big pile of cash.
Probably not. FINRA would have seen the suspicious name to the firms involved in the transaction. Someone at the investment firm would have matched the last names and asked John what his mother’s name was. Then compliance would have looked closer, reported the problem and booted him out the door in short order.
Now the SEC has brought charges to recover the gains and the DOJ has brought criminal charges.
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