I found the two recent cases of insider trading to be clear violations that should be easy to spot. Matthew Brunstrum worked at a company with specific restrictions on trading the company’s stock. Yao Li worked a different company, but one that also had restrictions on trading the company’s stock.
In both cases, the two employees learned of negative news about the company that would most likely cause the stock price to drop. Both avoided losses by selling their holdings of the company stock before the news became public. They each made some money through derivatives or short selling the company stock.
Matthew Brunstrum was a second generation employee of Stericycle. His dad was executive at the company and his mother held a bunch of Stericycle stock. In April 2016, Matthew learned of material, non-public information about Stericycle. To avoid insider trading or even the perception of insider trading, Stericycle imposes a blackout period for trading around the company’s earnings announcements.
Brunstrum went ahead and sold his stock and bought out-of-the-money puts. Based on drop in stock price and his trading, he avoided losses and made money on the puts. He also convinced his mother to sell her stock and buy puts.
Yao Li worked at Alliance Fiber Products. The company had an insider trading policy that imposed black out periods around earnings announcements and prohibited short selling. But that did stop Li from doing just that in Q2 2014, Q3, 2015 and Q4 2015. Li sold his stock holdings ahead of bad earnings announcements and short sold stock to earn cash from the decline in stock price.
These are both easy to spot, problematic trading patterns that the brokerage compliance groups should have spotted and flagged for FINRA and the SEC.
I found it interesting that in the Li case, the SEC claims that its Market Abuse Unit’s Analysis and Detection Center discovered Li’s trades and started the case. I think it would be great if the SEC had that capability. But I found it curious that the claim relates to activities that happened so long ago. The Brunstrum trades happened in 2016 with no mention of the SEC’s fancy analysis capability. Li’s first suspicious trades happened two years prior to that.
Sources:
- SEC Charges Former Stericycle Financial Analyst and His Mother with Insider Trading
- SEC Complaint Against Matthew Brunstrum
- SEC Detects Silicon Valley Executive’s Insider Trading
- SEC Order against Yao Li
Pan Mass Challenge
On Pan-Mass Challenge weekend, August 3 – 5, I will bike across Massachusetts to raise money for life-saving cancer research and treatment at Dana-Farber Cancer Institute. 100% of your donation will go to cancer research and treatment at Dana-Farber Cancer Institute through its Jimmy Fund. I have made a personal commitment to raise $8000.00. I hope, that as a reader of Compliance Building, you will support my fundraising effort. You can donate through any of the following links:
Thank you,
Doug
