Once Again: Do Not Insider Trade While Posing As Your Own Mother

Also, don't google “how sec detect unusual trade” while doing so.
(Getty Images)

(Getty Images)

Ever since the SEC decided that its raison d'etre was rooting out every inside trader in existence, no matter how puny or inconsequential, we've gotten pretty used to reading about the sorry attempts at tracks-covering people tend to make while profiting off of material nonpublic information. And although there's a relatively small range of tactics people use, we didn't expect the posing-as-your-mom technique to become a thing.

And yet here we are. On Wednesday the SEC charged research scientist Fei Yan – and his mom – with insider trading ahead of two corporate deals. The trades netted Yan more than $120,000 as well as top spot (perhaps) in the running for Worst Son Of The Year 2017.

According to the complaint, Yan's lawyer wife (known affectionately as Attorney A) picked up tips about acquisitions her law firm advised on and divulged these tips to her husband. As any good husband and son would do, Yan immediately took his wife's material nonpublic information and “submitted an application to open a brokerage account in the name of his mother Wu, a citizen and resident of China.” From the complaint:

In the following weeks, as the Steinhoff-Mattress Firm negotiations continued, Yan funded the newly-opened brokerage account (the “Wu Account”) from his own bank account, and then proceeded to purchase 300 shares of Mattress Firm stock in the Wu Account. The Mattress Firm tender offer was announced on Sunday, August 7, 2016. On August 8, 2016, the first trading day following the announcement, Yan sold his entire Mattress Firm position, profiting by over $9,700.

That was just a practice run. The real money was to be had in a deal between Stillwater Mining Company and Sibanye Gold Limited:

Later that same year, on November 22, 2016, approximately three months after Attorney A joined the Sibanye-Stillwater deal team at Law Firm A, and eight days after Law Firm A delivered a confidential draft of the Sibanye-Stillwater merger agreement to Stillwater’s counsel, Yan began purchasing Stillwater call options, again using the Wu Account. Yan bought additional Stillwater call options during the following 16 days, purchasing a total of 766 contracts in advance of the December 9, 2016 pre-market-open acquisition announcement.

He ended up making $109,700 on the options when the deal went through, the SEC said. But lest you judge, Yan did apparently take some precautions while buying thousands of dollars worth of call options in his mother's name ahead of an acquisition his wife was privy to:

In the final days before the announcement, as Yan was purchasing his Stillwater options, he also conducted internet searches for the phrases “how sec detect unusual trade” and “insider trading with international account” and accessed articles about the Commission’s detection and enforcement efforts in the insider trading area.

Needless to say, none of this is very smart. But the real crime is failing to use Incognito Mode while googling for tips about how to insider trade well. It might not spare you an SEC investigation, but it will spare you a bit of embarrassment down the road.

[The case is 1:17-cv-05257: Securities and Exchange Commission vs Fei Yan and Rongxia Wu.]


Art Samberg, Pequot Settle Insider Trading Charges for $28 Million

Like we told you several weeks ago, Art Samberg and Pequot Capital Management today agreed to settle insider trading charges with Securities and Exchange Commission for $28 million. The SEC Division of Enforcement's also brought a case against the alleged tipper, David Zilkha, a former Microsoft employee. That case will continue in an administrative proceeding before the Commission.

After The STOCK Act It Will Still Be Legal To Trade On Congressional Inside Information*

Here's a sort of touching monologue from David Einhorn's call with Punch: If you’ve done the analysis, and come to the conclusion that on it’s own, the company is not going to make it, it makes all of the sense in the world to raise equity at whatever the price is, so that you can know that the company, you know, is – is going to make it. Now, what that brings to my mind though is, you know, obviously we haven’t done your analysis, we haven’t done -- signed an NDA; I don’t know that we’re going to sign an NDA, because we prefer to just remain investors, but from my perspective, and I’ll be just straight up with you, is that gives a lot of signalling value. And the signalling value that comes from figuring out the company has figured out that it’s not going to make it on it’s own is that we’ve just grossly misassessed the -- you know what’s going on here. And -- and that, that will cause us to have to just reconsider what we’re doing, which is not the end of the world to you. You will continue on even if we don’t continue on with you. You could sort of see why the FSA read that to mean that he was insider trading. Like ... (1) You have told me something with signalling value. Sorry - "a lot of signalling value." (2) I will now act on that signal. (3) Don't be mad. "Signalling value" sure sounds like it means "material nonpublic information," doesn't it? Now as we've discussed before, trading on that information would not be enough to make Einhorn guilty of insider trading in the US, though maybe it wouldn't be exactly a great idea here either. Why? Because in our weird but sort of sensible insider trading laws, it's just not illegal to trade on material nonpublic information. It's only illegal to trade based on material nonpublic information that was obtained in violation of some sort of duty of confidence. Since Einhorn didn't sign an NDA, he had no duty of confidence. And since the Punch CEO and bankers weren't tipping him for nefarious purposes, but were instead sounding him out on the company's behalf as a shareholder and potential investor in a new capital raise, they weren't breaching their duty of confidence. You could quibble with the details of that but it's basically the law here. In England not so much. That also seems to be the law for our friends in Congress, who recently passed a law making it illegal for them to insider trade, which is worrying some people who make their living from trading on Congressional inside information: