When Insider-Trading Amazon Stock, Don't Forget To Go Online And Brag About Your Material Nonpublic Information First

“Numbers are so obvious.”
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Here's a way to make some money: Foster a friendship with a guy in the finance department of a tech giant – say, Amazon – and have the guy feed you tips ahead of earnings releases. As long as the Securities and Exchange Commission doesn't notice your suspiciously timed trades and trail of incriminating communications, it's a fool-proof get-kind-of-rich-quick scheme.

Excepting one detail, that's basically the story of Maziar Rezakhani, a former electronics retailer and budding investor, and former Amazon financial analyst Brett Kennedy, per a criminal complaint filed in the Western district of Washington Thursday by the SEC:

On or about April 20, 2015, before the meeting with Rezakhani, Kennedy obtained Amazon’s nonpublic Q1 2015 revenue and earnings information by accessing sections of Amazon’s financial database that he knew he was not authorized to access and were outside the scope of his employment responsibilities. Kennedy wrote down Amazon’s revenue and earnings numbers for Q1 2015 on a slip of paper to give to Rezakhani.

So far so good. The handwritten note is a nice touch. No googling “how sec detect unusual trade” here. No, Rezakhani had a better idea:

After his meeting with Kennedy on the evening of April 20 and in the days leading up to Amazon’s announcement, Rezakhani posted on at least two trading-related internet communication platforms that Amazon’s Q1 2015 revenue would be $22.7 billion and Q1 2015 earnings per share (“EPS”) would be -$0.12, boasting that these were his predictions for Amazon’s financial results.

On the morning of April 23, just hours before Amazon's Q1 numbers went live, Rezakhani cleared up $1.715 million in his portfolio and plowed it all into Amazon shares, the complaint says. But again, he had some business to take care of before the big moment of truth came around:

Around the same time, Rezakhani posted the revenue and EPS numbers again on an internet platform and boasted that the “numbers are so obvious” that a “5 year old can guess what they will do.”

Sure enough, Amazon reported above-consensus earnings – just as the insider numbers suggested – and shares spiked 15 percent. Rezakhani traded congratulatory texts with his trading partner – with whom he planned to open a hedge fund – then immediately offloaded the stock, the SEC alleges. He booked profits of $116,000, $10,000 of which was paid to Kennedy. You can imagine what happened from there.

In all likelihood, it was the SEC's insider-trading detection bot that led prosecutors to Rezakhani, not the blog posts. And Rezakhani isn't exactly low-profile. Earlier this year he got a five-year sentence on federal charges of defrauding a bank and some shipping companies in a case the judge described as “a familiar story of unrelenting greed and lies winning out over hard work.” Rezakhani lived in a penthouse and drove a Ferrari when he wasn't driving his other Ferrari.

But still. If you're going to trade on material non-public information, the absolute least you can do is refrain from announcing it on SeekingAlpha or whatever (the exact “internet platform” Rezakhani used is left a mystery). Then again, it's good to get exposure.

[Securities and Exchange Commission vs Kennedy et al., 2:17-cv-01344]

Related

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:

(Getty Images)

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

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

Members Of Insider Trading "Club" Were Good At Obtaining Material Non-Public Information, Not So Good At Playing It Cool On Conversations Recorded By The Feds

Later this week, Anthony Chiasson, a Level Global co-founder, and Todd Newman, a former Diamondback portfolio manager, will go to trial in Federal Court for allegedly making $67 million in ill-gotten gains, based on inside information they obtained about Nvidia Corp and Dell Inc. According to U.S. Attorney Preet Bharara, Chiasson and Newman, who've both pleaded not guilty, were able to rack up all their profits by teaming up with a bunch of friends and forming an insider trading club, which is a lot like a book club or fight club in that they took roll, traded canapé duties, and drank Pinot Grigio, but different in that instead of discussing The Art Of Fielding or punching each other in the face, they spent every Monday night from 7 to 9 sharing material non-public information with each other. “This case describes a tight-knit circle of greed on the part of professionals willing to traffic in confidential information,” Bharara said when the charges were announced in January. “It was a circle of friends who essentially formed a criminal club, whose purpose was profit and whose members regularly bartered inside information.” In the beginning, when the club was first formed, there was a spirit of camaraderie, as the club members happily traded tips for everyone's mutual benefit. Unfortunately, things started to break down when some people agreed to cooperate with the government by recording their friends admitting wrongdoing, in exchange for leniency. Former Diamondback analyst Jesse Tortora, for instance, gave fellow club member Danny Kuo a call at the direction of the FBI on December 1, 2010, a conversation that Chiasson and Newman's lawyers are trying to use as evidence that Tortora, who will be testifying against them, lacks credibility, based on the fact that when asked by Kuo if his phone was being tapped, Tortora didn't say "Yup! Helping the Feds build a case against you, actually." “What’s happening, man?” Tortora asked during the call, according to a transcript prosecutors submitted to the court. “Dude, is your phone tapped?” Kuo replied. “Wait, is the phone tapped?” Tortora asked, adding, “Why do you ask that?” Despite losing major points for repeating the question-- you never repeat the question!-- and the extremely unconvincing "Oh, why do you ask" attempt to act natural and not like he was working for the government, Tortora ultimately recovered. After Kuo and Tortora discussed defense strategy to explain their trades were made after legitimate research, Kuo concluded the call with a final warning to Tortora about making future calls from a personal telephone, according to the transcript. “I would seriously invest in some quarters, and start calling from 7-Elevens,” Kuo said. Hedge Fund Founder Faces Jury as FBI Raids Yield Trial [Bloomberg]