SEC detects insider trading by executive at Alliance Fiber Optic Products

https://www.sec.gov/news/press-release/2018-142

by newman8r • 8 years ago

49 23 8 years ago

nostromo• 8 years ago

“Our agency’s ever-evolving data analytics enabled us to detect Li’s otherwise inconspicuous trading as an overall pattern to profit off multiple earnings announcements,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

I mean... he worked for the company and shorted their stock before earnings releases. This isn't exactly rocket science.

fisherjeff• 8 years ago

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.

darawk• 8 years ago

SELECT * FROM trades WHERE works_at = ticker;

mwerd• 8 years ago

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...?

DSingularity• 8 years ago

Seriously! What a greedy punk. Grr.

ghaff3• 8 years ago

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.

minimax• 8 years ago

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.

schlumpf• 8 years ago

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.

duxup• 8 years ago

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!

danielvf• 8 years ago

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.

daveguy• 8 years ago

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?

brisance• 8 years ago

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.

jessaustin• 8 years ago

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.

arawde3• 8 years ago

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.

ghaff3• 8 years ago

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.

perl4ever2• 8 years ago

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

ghaff3• 8 years ago

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.

perl4ever2• 8 years ago

"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.

SEC detects insider trading by executive at Alliance Fiber Optic Products

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