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From Securities Regulation Daily, August 17, 2017

Data analysis helps SEC uncover $5M insider trading ring

By Anne Sherry, J.D.

The SEC filed charges against seven individuals who traded on confidential information about dozens of impending mergers and acquisitions. SEC staff used data analysis to uncover the alleged trading, all of which derived from tips from a former IT employee of a large bank. The scheme lasted about three years, during which time the traders collectively profited by over $5 million (SEC v. Rivas, August 16, 2017).

The complaint describes three tipping chains by which information from the bank insider made its way down to first-, second-, and third-level tippees. Three of the four direct tippees collectively tipped three more people, and two of those second-level tippees tipped another three traders. The target companies in whose stock the defendants traded include Twitter, Monsanto, and Cabela’s.

One of the direct tippees was the father of the bank insider’s girlfriend. He relayed the tips to a friend, a financial advisor at a brokerage firm, who allegedly traded on the information for his brokerage clients and also passed along the tips to a client. In the second chain, the bank employee tipped two friends who, despite being inexperienced traders, earned $2 million in profits off of $100,000 in investments. Finally, in the third chain, another inexperienced trader traded on tips sent to him through an encrypted smartphone app and passed the information along to another trader.

In addition to communicating through the encrypted messaging app, the traders used shell companies and code words to conceal their activity. But according to the SEC’s press release, "enhanced detection capabilities" allowed the Market Abuse Unit’s Analysis and Detection Center to discern the unusual trading patterns.

The case is No. 17-cv-06192.

Companies: The ADT Corporation; Airgas, Inc.; Air Methods Corporation; Alere Inc.; Auspex Pharmaceuticals, Inc.; Brocade Communications Systems, Inc.; Cabela’s, Inc.; Covance Inc.; Diamond Resorts International, Inc.; Elizabeth Arden, Inc.; EMC Corporation; Infoblox Inc.; Interactive Intelligence Group, Inc.; LifeLock Inc.; Mead Johnson Nutrition Company; MedAssets, Inc.; Medivation, Inc.; Monsanto Company; Nimble Storage, Inc.; NPS Pharmaceuticals, Inc.; Outerwall Inc.; Panera Bread Company; Raptor Pharmaceutical Corp.; St. Jude Medical, Inc.; The Fresh Market, Inc.; Thoratec Corporation; Tumi Holdings, Inc.; Twitter Inc.; ZS Pharma, Inc.

MainStory: TopStory BrokerDealers Enforcement FraudManipulation MergersAcquisitions NewYorkNews

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