Hacker News Reader

Comment by craigc | Hacker News Reader

It is good that someone is being charged, but it would be nice if it was someone more senior.

They always make the little guy take the fall. Avoiding $117,000 losses on $1 million is nothing compared to what some people get away with.

The CEO, meanwhile, walked away with up to $90 million:

http://fortune.com/2017/09/26/equifax-ceo-richard-smith-net-...

The other executives were “not aware” when they sold their shares:

> Equifax, the credit report company hacked over the summer exposing the personal information of 145 million Americans, said a special committee has determined that none of the four executives who sold shares at the time did anything wrong.

> The high-level executives sold shares worth a combined $1.8 million in the days immediately after the company discovered the breach.

That is a pretty remarkable coincidence if you ask me.

https://www.mercurynews.com/2017/11/03/equifax-4-executives-...

For reference, the CEO of Intel sold $25 million worth of stock after hearing about the Meltdown and Spectre vulnerabilities before they were disclosed to the public, and he will probably be fine.

View on HN

The SEC complaint linked at the bottom of that page[1] literally has a minute-by-minute account of how the CIO of Equifax's US information systems business unit was told there had been a major incident, started Googling about the stock market's reaction to a previous breach at Experian in 2015, and then an hour later sold all his shares for $950,000.

Maybe the CEO broke the law too, but the CIO left a clear trail of evidence. He is neither a little guy nor a fall guy.

[1]: https://www.sec.gov/litigation/complaints/2018/comp-pr2018-4...

It's always amazed me that the SEC standard is proving insider trading willfully took place. Which is a pretty high bar. How about...

If we can prove you knew about it, we convict you.

If we can't prove you knew about it, but your transactions appear to be insider trading to a jury, then you have to zero out the transactions (either by repurchasing equivalent stock or some other method).

You don't get charged, but there's no "getting away with it" either.

How about "guilty beyond all reasonable doubt" as a burden of proof for our systems of judgment. As much as that sucks sometimes.

If the government can't prove its case, it probably shouldn't be getting to a jury either.

It's pretty easy to cover your tracks if you're not an idiot and know what you're doing, and I assume a lot of the people that make big insider trading plays are neither.

So hamstringing the SEC with an arbitrarily high standard just facilitates continued insider trading.

Agreed on the full burden of proof for penalties. But having your gains clawed back is a different fish entirely.

But having gains taken away is a penalty.

...

If the SEC pursues a civil case where the penalty is only fines and not prison, the standard need only be a "preponderance of evidence." It's much easier to prove that some of these executives probably knew about the news when they sold their shares.

With a lower standard for guilt, a greater number of innocent people will be fined by our government, for which we are ultimately responsible.

A greater number than are currently charged, sure, but a far smaller number in absolute terms causing a far larger amount of damage than the ordinary Americans for whom a criminal charge—which is made essentially entirely at the discretion of the DA—will remain on their records permanently, affecting their ability to travel and obtain jobs.

To zero out someone’s gains in this situation, as suggested by the parent poster in cases where no proof exists, would simply be a regulation to hold one financially responsible for his/her company’s actions. Guilt or innocence doesn’t have to come into play in that scenario.

Ostensibly the market already takes care of that in the form of stock price.

This entire thread is focused on the one situation where the stock price doesn't take care of it: When an employee sells their stock before a major price drop in a way that it's unclear if the employee knew about the reason behind the drop or not.

The article sates that he sold stock in anticipation of the price dropping and by doing so saved himself $117,000.00. The SEC believes this to be an illegal trade so now he is facing charges. If he had traded legally the market would have punished him for the company's failings.

In this situation everything seems to have worked correctly.

If you think the stock price should be lower take it up with your elected representatives and see what happens when regulations are put in place.

You're again missing the entire point of this conversation.

Yes, the evidence was clear in the case of the CIO, and everything worked as it should in the case of that one person. But as craigc noted, three other executives managed to sell shares before the price drop, so there's a question of how likely those three were to have known about the situation but by chance happened to have no clear evidence against them. That leads to the question of what can be done to more effectively prevent executives from engaging in insider trading in situations where they are aware that the evidence will be too scant to prosecute. One solution proposed was to zero the transactions of stock sales by executives that occurred shortly before an event like this. Saying "the stock price will take care of it" makes no sense in this context.

I don't think we can fix the lack of evidence by lowering the standard of proof.

If you wanted to advocate stronger reporting requirements for what executives knew and when then I'd be more comfortable.

But my point is that if we implement a policy to rollback but otherwise not punish executives who sell stock right before an event like this (notwithstanding any actual other crimes related to insider trading that could be prosecuted separately; for example tipping someone off), the standard of proof becomes irrelevant.

Personally, I think the solution is to not allow executives to sell stock without publishing a schedule in which the first sale is more than 9 months from the date of the announced schedule.

Not if they sold before, which is what this whole thing is about.

Yeah our civil court system fucking sucks.

Edit: I used to work in the legal industry nearly exclusively in civil court.

Can you elaborate? In what specific ways does it suck? Do you have any suggestions for improvement?

How does charging someone require "guilty beyond all reasonable doubt"? Sounds like a conflation between charging with a crime and convicting someone.

Aware he said "convict" but he probably meant "charge".

Imposition of any penalty is a conviction unless there is a voluntary plea. Charge is absolutely not what he meant, especially since that was a base he already explicitly covered.

How about we stop pretending that information asymmetry isn't a core aspect of the stock market?

Insider trading laws seem tailor made to make sure wall street, and only wall street, is playing with a stacked deck.

This has been looked at before, but the summary from this paper (by the Atlanta Fed) is a good (and as far as I know, unbiased) place to start: https://www.frbatlanta.org/-/media/documents/filelegacydocs/...

Here's a simpler proposal: when an insider sells shares, they go into limbo for 180 days, then they get sold at the then-current price.

Simpler proposal: Existing sale of stock disclosure laws are all we need.

> It's always amazed me that the SEC standard is proving insider trading willfully took place. Which is a pretty high bar.

Systems fail, so you have to ask which way you want it to fail.

We go by Blackstone's formulation: "It is better that ten guilty persons escape than that one innocent suffer". The founding fathers often quoted this and it is an integral part of American law.

Yeah, it often sucks and many guilty people go free. I'm sure you can think of specific topics where it is particularly difficult. But we chose to fail this way because we value freedom so highly. So the prosecutor has the burden of proof. This is often why trials go for so long and it takes a long time to form a case.

tldr: It is purposefully a pretty high bar.

You forgot the addendum:

No member of congress, the administration or closely related shall ever be punished for anything. For instance, for taking legal action to protect the very company this is about:

https://techcrunch.com/2017/10/24/congress-votes-to-disallow...

And I'm sure there were zero financial interests behind that decision.

You might say : this is not insider trading. I agree, this is much worse: this is taking legal action to protect their own financial interests after they were legitimately punished by the market. That's far, far worse and explicitly not what the legislative authority should be used for.

This is a horrifying proposition. Are you seriously suggesting suspending the presumption of innocence and substituting mob rule?

I feel there's a pretty firm distinction between "you get to keep a good thing" and "we're forcing a bad thing upon you."

I don’t think the line is clear and I don’t think it’s relevant either.

You’re still seemingly ignoring the presumption of innocence and burden of proof. You seem to place a higher value on punishment of perceived wrongs than on liberty.

That quite frankly terrifies me.

How is "I'm going to lock you in prison" remotely similar to "I'm going to take away your profits and leave you as you were before the trade"?

If you don't see a difference between the two... we have very different views of the world.

We’re talking past each other.

You have described two punishments. The only difference is severity. Further, your previous comment was far more vague than prison vs clawed back profits.

I value liberty above all else which means all punishment has a high burden of proof and all individuals are assumed innocent in the absence of this proof.

You seem to suggest setting a lower standard because it feels right to you.

That scares the hell out of me.

As you've expressed. And I feel you're being logically disingenuous by failing to gradate levels of punishment.

It's a straw man to say I'm suggesting there shouldn't be a high burden of proof for a severe punishment.

And whether a viewpoint terrified you or not is largely irrelevant.

Personally, I modulate my desire for individual liberty with what I consider a reasonable responsibility to nurture an environment where individuals are afforded opportunities to exercise that liberty.

I don't see how punishing (regardless of severity) someone who can't be proven to have broken a law "affords individuals opportunities to exercise liberty".

What you're advocating is mob rule and that's why it is scary.

Obviously there are different standards of proof but the presumption is always innocence and there is always a standard beyond how it "looks". This is preferable because it maximizes liberty.

Do you accept there are situations in which maximizing individual liberty lowers average liberty?

Mathematically I'm not sure how such a thing could occur.

If you are implying that liberty is zero sum then I disagree.

I'm also uninterested in average liberty. Individual liberty is of utmost importance. Individual rights extend as far as infringing on the rights of others. This is important only in the context of preserving further individual liberty.

Example:

(Case 1) A world in which individuals are completely free to do with their wealth as they will (so, no taxes, regulations, etc).

(Case 2) A world in which individuals are absolutely prohibited from wealth transfer. At the time of their death, all individual assets / privileges are seized, then redistributed evenly to the next generation.

Select a random individual from a new generation in each case.

Would you disagree that they have different effective individual liberty? That is, the options available to them to pursue in life?

Essentially, I see effective liberty as the product of rights and means to exercise those rights. And I believe the greatest individual liberty cannot be created without balancing both requirements.

Or better yet, treat trading & holding market assets as a privilege and not a right. Maybe it’s not worth pursuing criminal charges for any multitude of reasons, but having a quick release valve to make sure bad actors only get 1 shot.

And who decides the members of this privileged class?

If I get a speeding ticket do I lose my ability to trade? What about a fealony? What if I am on a no-fly list without due process?

Your "what-ifs" are just completely ludicrous, to the point where it does not appear that you are wanting to actually discuss the topic.

They are not ludicrous at all.

A few years ago it was suggested we use the no-fly list to prohibit gun purchases. And that's an explicitly granted constitutional right. Felons already lose rights such as voting. How "quick" would this release be?

If we treat participation in the stock market as a privilege I think it's entirely reasonable to ask who gets that privilege.

well the thought was that it would strictly be tied to actions dealing with the market. there’s a lot of other people’s money in the market, bad actors are capable of creating markedly more damage than personal benefit. this is more about making sure someone with capital can’t repeatedly do dodgy things.

but yeah, it’s a weird hypothetical and the SEC is going after a bad actor here, so maybe the system is working

As Stringer Bell said, https://www.youtube.com/watch?v=pBdGOrcUEg8

These days Google hands out your info to LE like its a street candy; it wasn't like this back in a day when I was a Noogler at least they had whole team looking at every single LE request; these days, I bet its just a blanket [select all], [accept].

Just another reason to switch to DuckDuck go, whether you are doing something shady or not.

Are you sure the information about his search history came from Google, as opposed to IT network logs or forensic examination of his computer?

The complaint makes reference to "Ying’s internet browsing history" which sounds more likely to be one of the latter...

The complaint doesn't actually say what search engine he used. Sorry, I probably shouldn't have used "googling" interchangeably with "searching".

Or, and hear me out on this, maybe, just maybe, don't do shady things? This guy didn't get in trouble because he used Google. He got in trouble because he was breaking the law.

I'm surprised a C level exec can sell their shares like that. I thought they all had to announce ahead of time? I'm a lowly employee at a big tech company and I have blackout periods.

They typically not required to provide advance notice (by law, at least,) but they often do set up a sell schedule in advance to show that they're not selling in response to non-public information. Sort of like developing data retention policy to avoid obstruction/anticipatory obstruction charges.

In the SEC briefing, it is noted that there were two teams deployed: Project Sierra and Project Sparta. Only Sierra had knowledge that Equifax itself was breached and thus a blackout period was instituted. But not for Sparta where the CIO was assigned.

I'm an Equifax employee...I can confirm this. I heard about "Project Sparta" constantly, but didn't know until the day of the public announcement what it was. I had no idea it was Equifax that was breached until everyone else did. I never even heard about "Project Sierra" at my level.

It’s not as black and white as it seems: the CIO was not directly told that Equifax itself had suffered a breach, simply that one of their clients had been.

[1] https://www.bloomberg.com/view/articles/2018-03-15/is-inside...

[2] page 6 of https://www.sec.gov/litigation/complaints/2018/comp-pr2018-4...

I have to agree. He literally knew about the breach and then sold them. He's definitely got to go down, I'm sure he knew that what insider trading is.

Just clarifying this in case it wasn't clear for others.

There is an Equifax global CIO above the Equifax US Info Systems business unit CIO. Global CIO knew, Info Sys CIO inferred.

> They always make the little guy take the fall

Taking the fall means "to bear the blame or punishment for another person's failure or misdeed" [1]. Ying is being charged with his own crimes alone.

Furthermore, we have no evidence about whether (a) the other executives actually committed a violation, (b) Ying is the only one who left a prosecutable paper trail or (c) Ying will take a plea deal and co-operate against the others.

[1] https://en.wiktionary.org/wiki/take_the_fall

You are right. I am not stating a fact. It is my opinion that this guy is being used as a sacrificial lamb because I have seen things like this happen time and time again.

Also seems like a pretty big coincidence that the others sold off their shares immediately after hearing about the breach, but it was unrelated.

> but it was unrelated

That has not yet been concluded. This could be the first move in a series of charges.

That or Ying was uniquely stupid. He texted his direct report “on the phone with [global CIO]. Sounds bad. We may be the one breached. . . . Starting to put 2 and 2 together" [1] before exercising "all of his vested options to buy Equifax shares, and then immediately [selling] those Equifax shares for total proceeds of more than $950,000" (§ 49) an hour after searching for "(1) 'Experian breach'; (2) 'Experian stock price 9/15/2015'; and (3) 'Experian breach 2015'" on the Internet (§ 42).

[1] https://www.sec.gov/litigation/complaints/2018/comp-pr2018-4... § 31

It really is NOT. From what I've read prosecutors care a lot about their "success rate".

I think the consensus here is Equifax hired this guy to take the blame pretty much. That's why we call him the fall guy.

Look at Wells Fargo. Or even HSBC. Apparently, even Toyota tried to cover up its sticky accelerator? Don't forget about VW.

I think when something like this happens the CEO and the board must go to prison even if there is no direct evidence. You must take responsibility for the actions of your reports. I can't see things improving any other way.

> I think the consensus here is Equifax hired this guy to take the blame pretty much.

What are you on about? Your theory is that Equifax execs presciently knew there would be a breach, and that they’d want to engage in insider trading, so they hired this guy and waited until the breach then told him to break the law too so he could ‘take he fall’?

*Scape goat

> Scape goat*

"Scapegoating is the practice of singling out a person or group for unmerited blame" [1]. Ying's blame is merited. What happened here is multiple people may have violated securities law and one has been charged. We don't know yet if it's one period or one so far.

[1] https://en.wikipedia.org/wiki/Scapegoating

There is another way of looking at this. This executive is the only one being charged even though there were other executives with similar breaches. It appears that Equifax is allowing him to be charged to placate the public anger. Hence, the phrase "little guy takes the fall".

> It appears that Equifax is allowing him to be charged

Why would Equifax even have a say in that? It's not like he's a sacrificial lamb. There's evidence against him, it will be used. If evidence is discovered against other individuals, it will be used, regardless of the opinion of Equifax.

And yet, nobody's going to jail for the breach itself, and Equifax is probably going to avoid any penalties whatsoever. I'd like to see someone held responsible for mishandling the personal financial information of millions of Americans.

Before people go to jail, you must make it a crime. Is it?

Criminal negligence is a thing. I would say that storing that much personal data about people, and not taking the efforts to secure it properly, should count.

Don’t most C-level execs typically trade on a preset schedule to avoid insider trading allegations? In fact, I’m pretty sure that’s why you never here about them insider trading their own stock.

Yes, they do - the problem is when they schedule sales after being made aware of insider information but before it is released to the public.

Obviously a CEO will have knowledge of some things that won't me made public during a scheduled stock sale, like upcoming product roadmaps that may not be released yet, etc. It's impossible to completely avoid this, but scheduling a sale after a breach or major security vulnerability in your products is discovered and well before public disclosure is not okay.

I'm glad this Equifax exec got what he deserved, Krzanich should get the same treatment.

Yes and no.

>After Rule 10b5-1 was enacted, the SEC staff publicly took the position that canceling a planned trade made under the safe harbor does not constitute insider trading, even if the person was aware of the inside information when canceling the trade. The SEC stated that, despite the fact that 10b5-1(c) requires trades to be irrevocable, there can be no liability for insider trading under Rule 10b-5 without an actual securities transaction, based on the U.S. Supreme Court's holding in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).[0]

Without knowing the 10b5-1 schedule you can't say if insider knowledge was used when executing the plan. The simplest and dumbest version of this would be unique individual sale plans for each share you own for every day of the year. You just cancel the ones you don't want to sell, until you do, and everything is legal.

[0] https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loo...

Wow! Sounds like a loop hole to me.

It's not a bug, it's a feature Congress refused to remove.

Judges are not stupid. I doubt this would fly in an actual court.

Reality begs to differ.

https://www.casebriefs.com/blog/law/securities-regulation/se...

>Held. (Rehnquist, J.) No. We embrace the holding of the Second Circuit in the 1952 Birnbaum case, 193 F2.d 461 (2d Cir. 1952). That rule demands that a plaintiff must be either a seller or a buyer to seek a remedy under 10b-5 and we reinforce this rule both through contemplation of legislative history and by policy deliberations. The SEC had attempted to get Congress to amend 10b-5 to contain “any attempt to purchase or sell a security”, but Congress had declined to do this. Congress desired to restrict 10b-5 to cases of “actual damage”, and without Birnbaum, evidence of damage would be too theoretical. Regarding policy considerations,the Birnbaum rulemay incite the offerees, knowing that they would not be subject to summary judgment would sue to push the corporate defendant to settle out of court,would lead to “strike suits”. The evidence presented by an offeree at trial would be too subjective, seeing as no objective criteria could assistin measuring plaintiff’s dependence on the prospectus. In conclusion, Manor Drugs has no contractual right to a Birnbaum rule. Manor Drugs was a member of a limited class, but permitting them to utilize the rule would lead to a breakdown of the Birnbaum rule. Reversed.

And of course you can see Congress adding loopholes they can themselves use.

The no insider trading rules are a joke.

TBH, I'm not sure I follow all of that, but it sounds to me like they're saying a trade must be made for there to be insider trading. I'm not sure I like that, but okay. But upthread your suggestion was "cancel the ones you don't want, until you do" - at that point, a trade has been made, so it's at least a different question.

Breaking it down:

1). Set up a 10b5-1 plan selling all your shares each day.

2). Set up a 10b5-1 plan that buys as many shares as possible.

3). Get insider information on the company.

   a). If good for company cancel plan from step 1.

   b). If bad for company cancel plan from step 2.

   c). If neither cancel both plans.

4). Profit.

Yeah, I got that part. The problem is that after 3a) or 3b), you have made trades. So "no trades were made, it can't possibly be insider trading" doesn't apply. It may be that the SEC would nonetheless honor the "it's not an issue if you're just following your plan" thing, but since obviously you're not just following your plan I wouldn't bet on it. I'd be interested to know of examples in either direction if anyone has been bold enough to try this.

You're not choosing to make a trade, you're choosing to cancel a trade. Both are things the FCC has said it will not charge anyone other as long as congress does not change the rules.

Sorry to say but you're looking for a way to defend an indefensible system.

If you want to see it in action look at what the Intel CEO did.

> You're not choosing to make a trade, you're choosing to cancel a trade.

You're also choosing not to cancel a trade, which is the difference from the example you've cited. Choosing not to cancel a trade based on material, non-public information after establishing a pattern of regularly canceling your planned trades doesn't seem to be something that's been tested (at least in anything discussed here so far).

And note that I'm not saying no one pushes - or crosses - lines; nor am I saying that the system isn't exploitable near the margins. I am saying that if you were as flagrant in abusing it as you posted above, I wouldn't bet on your safety from the SEC.

> Sorry to say but you're looking for a way to defend an indefensible system.

No, I'm contesting a claim that seems inaccurate. I quite readily agree there are things that need fixing.

> If you want to see it in action look at what the Intel CEO did.

I don't think we have enough details about what the Intel CEO did to say much - more shares were sold, but it was plausible the formula was set in advance of discovery of the flaw and more shares were sold simply because the stock had gone up. If you have a source with more details, please share it.

Perhaps you should call the FTC and let them know their interpretation of the law is wrong.

Well, that's a garbage response.

It's a useless and snarky dismissal if I had been saying their interpretation was wrong...

But my entire point has been that we haven't observed their interpretation of the law as applied to the extreme circumstance you described.

At this point, I'm sufficiently skeptical that you're engaging in good faith that I probably won't be responding further.

Appellate and Supreme Court judges seem pretty eager to buy this kind of stuff, given many of the rulings over the past 15 years.

He’s being charged for the wrong thing, in my opinion.

Who cares about the insider trading, that’s mostly a victimless crime.

145 million people had personal identity MG information leaked.

Is anyone being charged for that? The CIO would seem like a relevant candidate.

I could be wrong but didn't the Intel CEO have his stock sold on a schedule?

The Intel debacle aside it did seem like a regular transaction that was not directly related to knowledge of the shit show that is spectre/meltdown

He sold more than the scheduled stock down to his bare minimum required to hold as the CEO.

I gather that the loophole to insider trading is that if you sell 0.1% of your shares per month, then decide to sell 99% of it in one month. It's ok, because you were scheduled to sell shares anyway.

It is the shareholders of Equifax who must take fall for the breach, for it is they who own and are responsible for the company.

Many of us own, through index funds, a small amount of Equifax.

While I have no love lost for the shareholders of an evil company like that, I think that's the wrong attitude to take. As you pointed out, most shareholders aren't in any kind of a position to actually exercise any control over the company.

I'd still put this on the executives. They're paid the big bucks to be responsible for the company. Yet, it seems that more and more, we're looking for ways to continue paying them the big bucks, but remove that responsibility. All carrot and no stick, as it were.

I totally agree with you. $117,000 is not even significant...

Reply on news.ycombinator.com