Silicon Valley IT Administrator and Friends Charged in Insider Trading Ring
sec.gov
sec.gov
> ..A former IT administrator then at Palo Alto Networks Inc., was at the center of the trading ring, using his IT credentials and work contacts to obtain highly confidential information about his employer’s quarterly earnings and financial performance.
How they were caught:
> This case highlights [SEC's] use of enhanced data analysis tools to spot suspicious trading patterns and identify the traders behind them.
Total estimated profit from this scheme, between 2015~17:
> Defendants’ trades in advance of the announcement generated profits that exceeded $3 million.
EDIT: Oops, I found this line from the same source: "At the peak of their scheme in 2017, [the defendants] achieved more than $7 million in illegal trading profits."
(Source: https://www.sec.gov/litigation/complaints/2019/comp-pr2019-2...)
Selection bias.
They even have code words for the names of well known insider traders, e.g. Jacob Rees-Mogg, the UK politician is known as the “profiteering ghoul” because his massive short on the pound, why else was he pushing Brexit so much? The will of the people? Get real
Which makes sense, do you think that given the financial amounts involved, and the only thing stopping most people is ethics (and knowledge that it’s illegal but easy to get away with) that it wouldn’t happen??
aehm, no it's not.
just google Somerset Capital, e.g. https://ftalphaville.ft.com/2018/02/08/2198570/jacob-rees-mo...
It’s not open to the public, you need a shibboleth
A better question would be "why do you think these specific people are coordinating with each other?".
Uhh citation required
Example: I know for a fact that 9/11 was inside job. I communicate in a private think group, so you can take my word for its truth.
In 2016 or recently? because if its recently then the pound has gone up.
Arguably he paid long term capital gains on a basket that should have been short term capital gains.
But his system of short term, automated, stat arb / signal detection based trades are clearly not based on classified corporate data.
I suggest you read The Man Who Solved the Market for more info.
"There's zero evidence that Simons and Renaissance do any insider trading." Is a better way to state it.
But all evidence points to a system that runs in a mostly automated manner, which would be the opposite of what you'd expect from an insider trader.
Someone who makes "gutsy calls" based on "intuition" like Steve Cohen is what I think most successful insider traders would look like.
Consider the stakes - you have a multibillion dollar sub-portfolio (Medallion has current AUM of $118B according to some random site called InsiderMonkey, idk whether its legit or not). In 2016, the AUM was reported at $76B. His returns literally don't make any sense. You can't be right all the time. Anyways, so literally you wanna use a small fraction of that to fund the construction of a small discreet, strategic team that acquires information to gain edge in public markets. Simons has background in signals intelligence, and despite his later work, wouldn't it be an extremely obvious avenue to just forcibly acquire knowledge that is non-public and then place trades accordingly?
Simplest explanation is its definitely illegal. Every couple years, you hire some algebraic geometry PhD and boom, you chalk up all your returns to magic math. Doesn't make any sense.
If you simply bought the S&P 500 in Jan 2016 and held until now, you are up 78%. (76 goes to 135)
If you bought in Dec 2016 and held til now, you’re up 49% (76 goes to 113)
I find “they roughly tracked the market over the time cited” to be a far simpler explanation than “they’re definitely doing illegal insider trading and covering it up with math mumbo-jumbo.”
Seems like they do well during downturns too?
The entire Renaissance org is pretty walled-in, and in my opinion it is pretty obvious that based on returns they must be exploiting an edge that treads the line of legality.
Take a look at their basket options tax strategy (documented by Levine, look for "incantations+Levine" on your favorite search engine).
Link to article I was referencing: https://webcache.googleusercontent.com/search?q=cache:4l2vAb...
Here's a pastebin of the content in case you can't access the above: https://pastebin.com/43hjkBQe
It's pretty easy to construct a scenario where "oh yes he is omniscient and thereby he can easily draw returns from a bustling market" but it's even easier to construct a scenario where fraudulent activity is occurring and those same returns are being derived from expert-level fraudulent activity.
No one is accusing a buy-and-hold investor like WB of committing illicit activities. Seriously, no one. OTOH, I think it is quite reasonable to suspect that the premier quant trader of all time, with those stellar YOY returns is extracting alpha via strategies that are "dumb" and "always work", i.e. his primary edge. These strats probably exist in the grey area of financial structuring and trading activity (if not worse).
Seriously. Just look at the yearly returns time series. (Acquiring the yearly financial statements is left as an exercise to the reader).
I mean yeah I think he's awesome too. But thinking he's some kind of market savant in a post-Madoff world is really quite silly, in my opinion.
Sometimes the news is "good" but doesn't meet expectations, so the stock drops. Maybe it was already priced in. Sometimes the news is "bad", but better than expected, so the stock goes up. Maybe that was already priced in, too.
Either way "just looking at stocks before a major announcement" isn't going to get you anywhere fast.
On top of that, the president and all of congress literally cannot be convicted of any crime while in office and they pretty much all engage in massive and rampant insider trading.
And "Why is this downvoted? This is an openly true fact."
Apparently, they equal influencing the market to insider trading.
Trumpians: Trump is a genius playing 16D chess over everyone's game of chutes and ladders!!!!
OMB-ppl: OM is a baby in a diaper and needs the nanny to wipe his ...
Also OMB-ppl: He's a conniving insider trading, evil, russian puppet!!! Being used by Kim Jong Un and the young turks!!!!
Reality: His tweets are direct thoughts from his head, no one sees them before they're sent out and he doesn't even look them over for spelling and grammar mistakes.
Also Planet Money tried to trade based on his tweets and found you'd be better off just picking a random index fund or using the S&P. (That's including the followup episode where they got a less naive algorithm.)
PS. My opinion: I've only just started watching southpark but it seems they've hit the nail on the head about him, he's probably a tiny bit more charismatic, but really he's just doing this because people mocked him and he didn't think he would win. If you take an objective look at what he's accomplished and what he wants to do he's doing a perfectly average job. Every president in recent memory has abused the office for personal gain: Clinton got sex, Bush got back at the ME for embarrassing pops, Obama deputized the IRS and now Trump asked the Ukrainians to "take care of" Biden. I don't think he's a great president, but anyone calling him satan has an agenda that involves some law-breaking, possibly "light" treason.
At least one of those is clear propaganda talking points you picked up from less-than ingenuous sources:
"In 2013, the United States Internal Revenue Service (IRS) revealed that it had selected political groups applying for tax-exempt status for intensive scrutiny based on their names or political themes. This led to wide condemnation of the agency and triggered several investigations, including a Federal Bureau of Investigation (FBI) criminal probe ordered by United States Attorney General Eric Holder. "
"In January 2014, James Comey, who at the time was the FBI director, told Fox News that its investigation had found no evidence so far warranting the filing of federal criminal charges in connection with the controversy, as it had not found any evidence of "enemy hunting", and that the investigation continued. On October 23, 2015, the Justice Department declared that no criminal charges would be filed. On September 8, 2017, the Trump Justice Department declined to reopen the criminal investigation into Lois Lerner, a central figure in the controversy.[1]
In late September 2017, an exhaustive report by the Treasury Department's Inspector General found that from 2004 to 2013, the IRS used both conservative and liberal keywords to choose targets for further scrutiny.[2][3] " [0]
> ... and now Trump asked the Ukrainians to "take care of" Biden. I don't think he's a great president, but anyone calling him satan has an agenda that involves some law-breaking, possibly "light" treason.
Please elaborate on this agenda, seeing as he's the one openly and admittedly breaking (at least in case of anyone not a sitting president) laws.
> Reality: His tweets are direct thoughts from his head, no one sees them before they're sent out and he doesn't even look them over for spelling and grammar mistakes.
Either he's ignorant of the effects [1] and thus an idiot, or he's aware and rationally acting on said information. Pick one. If he's aware and not wanting to act unethically, he wouldn't keep tweeting the same way.
Timings should be measurable too though.
If the news is already out, his tweet doesn't even change the timing.
And yet a key HDD seems to have failed, Which magically was the only source of all email about this.
I'm not really interested in arguing about this. we could go point for point all week. But the "exhaustive report" is mostly before Obama was president, so it's not surprising that it found both sides were targets. It would be more interesting and conclusive if from 2010-2016 no wrongdoing was found. Wonder why in 2017 they choose to look from 2004 until only 2013....
Also calling my talking points less-than ingenuous while quoting obviously controversial wikipedia articles is not a good look. (especially when we know that both sides use wiki to sow falsehoods).
> Please elaborate on this agenda, seeing as he's the one openly and admittedly breaking (at least in case of anyone not a sitting president) laws.
Seeking to depose the president because you don't like him is treasonous. So far the drafted AoI don't contain anything that 99% of objective people would consider impeachable.
> Either he's ignorant of the effects [1] and thus an idiot, or he's aware and rationally acting on said information. Pick one.
Easy, he's ignorant. Don't think that makes him an idiot, he's just human. His tweeting pattern hasn't changed much since he got elected. The content is even fairly similar. Is Elon an idiot? Better yet, are all twitter users idiots? they enjoy sharing their ideas online they don't think past the fact that what they consider a joke or insignificant is seen as market moving by others. I think we can all agree that Musk doesn't make the best choices when it comes to twitter but we can also agree that he's far from a fool.
For better or worse most people treat twitter as their personal-public diary and no one is considering the consequences of what they write in their diary.
Your need to seek malice speaks volumes about your ability to be objective about this.
I don't plan on responding to you anymore because I hate this type of argument. you are definitely not gonna be moved and are probably stewing right now at all my alt-facts and "fake news" and I spend all day reading the talking points you're throwing at me from CNN, NPR, vox and already have my responses queued up. Let's just agree that you think OMB and I think he's more of the same.
Or one out of tons of specific companies:
https://www.washingtonpost.com/news/the-fix/wp/2016/12/06/di...
But organised crime is an ongoing concern.
Well, the ones getting caught definitely aren't.
It’s one of Matt Levine’s satirical rules of insider trading not to do that.
That was actually just the take from one earnings announcement, not the entire scheme. It says elsewhere they cleared $7m in the first year.
Fortunately, the world has never had a shortage of idiots.
but if you work for the same company its best not to do the trade at all
instead of looking for an 8% move, just get the 2% move in the ETF that the company is part of. there is a prohibition that extends to derived or linked securities, but this is much harder to detect and prove. its just ammunition without a weapon
but really, better to play the sector as a whole. if I worked for Expedia and saw what affected their earnings, I would trade Priceline expecting exposure to the same trends.
I used to develop and sell novel earnings forecasts which would outperform analyst consensus. Typically my research would have a <1% margin of error on forecasting a specific KPI directly relevant to corporate revenue and profit for an equity. The best hedge funds were able to successfully trade on this information because they combined it with a significant amount of complementary data.
But I would not want to develop a trading strategy based on that data alone. These guys did very well considering the information they had to work with and how primitive trading earnings is. The real money in insider trading is in more illiquid OTC markets, or in mergers/acquisitions.
[1]: http://chloexie.com/pdf/ChloeXie_JMP.pdf
[2]: https://www.bloomberg.com/opinion/articles/2019-11-26/knowin...
This one's easy. Buy shares of the acquisition, wait for a 10%-50% pop on the news.
Trading on earnings is hard. Even if you check earnings against estimates, did they beat the street? How's the forward guidance look? And you only get four shots per year.
How does the FBI get notified in advance when a suspect buys a plane ticket? You read about it all the time in stories like this. Is the FBI being sent passenger manifests for every commercial flight and are they being cross-referenced against a list of names of potential flight risks?
It's very difficult to drive across the border without passing through US border security. And, being sneaky near the border is a good way to get arrested by either side.
US law enforcement works closely with Mexican law enforcement and both countries have an agreement to extradite to the other people who aren't their own citizens semi-automatically.
https://mx.usembassy.gov/our-relationship/policy-history/law...
US law enforcement operate much more in Mexico than in Canada. A lot of the time it's DEA agents working with Mexican police and military on operations funded and supported technically by the US, but the FBI also gets involved.
At many levels individuals in the Mexican government will corruptly hide criminals from the US. But you can't just show up and say you want to join the club. That takes connections.
Well that's just not true. Have you ever driven across the border into either country from the US? You pass through Mexico or Canada's customs checkpoint. It's not until your return that you pass through the US' checkpoint.
As others have pointed out, one can simply drive into Mexico or Canada for a day trip quite easily. After that you could hop on a plane there.
I'm saying this while saying nothing at all about the guilt or innosence of the suspect or investigating agents in this particular case.
I’m aware of one case in specific. 2 brothers killed a person in Sweden, one got caught and got 12 years the other one fled to Libanon which rejected the request to extradite him but chose to prosecute themselves. The sentence was death.
Smart criminals have sophisticated networks, trust funds, art deals and charities to obscure their activities, and do not get caught as frequently.
for ref: Mossack Fonseca.
that is really covering your ass
I'm guessing it's just a spreadsheet on some finance person's computer until it's certified for release?
Are there best practices for making sure data doesn't leak ahead of the official earnings report?
I know of a major investment firm that has a separate GSuite instance that execs from their investments are given accounts on for sharing data.
Security through obfuscation. One wonders how good of IT administrators they were.
I've become quite paranoid about my digital communication, I've worked in the field long enough to know all of them are being scanned. I'm not even doing anything illegal, I'm just uncomfortable with it.
Or just never talk digitally, only talk IRL. All these guys lived near each other and worked at the same company, could have easily just dropped by each others desk with a wink or a nod.
For my sensitive communications I’ve concluded not talking digitally too
Similar to "Florida man"
"Silicon Valley Man found doing insider trading with buddies."
"Silicon Valley Man is pumping the blood of the youth through his veins."
What's Silicon Valley's excuse?
Using a location before the words "man" or "woman" implies that the man or woman is from that location.
When I say "Chicago woman makes thirty pizzas for homeless shelters", you wouldn't ask about the relevance of the word 'Chicago' because it adds to your understanding of the woman.
1. They look at suspicious trades that made a lot of money. Putting all your money into shorting a stock, right before earnings come out qualifies. Doing it multiple times gets them very interested in you.
2. They start asking questions, conducting interviews, and getting search warrants. If nothing suspicious comes up, they drop it. Occasionally, traders get lucky, right?
3. They get wiretap warrants for their core suspects, and place a few friendly phone calls to those people, to ask a few friendly questions about some stock trades.
At this point, they have two branching options.
4.1. Tap the phone lines, and wait to see who the core suspects call.
4.2. Drop by the core supects' homes, slap some handcuffs on them, pretend to thumb through a seven-hundred page thick binder, and ask them very nicely, if they would be willing to share the names and roles of their accomplices, in exchange for a lesser prison sentence. It would also be great if they could call said accomplices, and inconspicuously get them to chat about the financial crimes that the group has been doing in the past few months. (Admitting to financial crimes over the phone makes the subsequent convictions much easier.)
Repeat, recursively, until step 3 fails to add new nodes to the graph.
Very curious to know about the tools and tech which they use.
Would someone apprise on research paper/ blog where I can read it?
Could have surmised a similar trend by monitoring purchase and shipment orders versus staffing headcount, quarter to quarter, month to month, etc.
What I'm getting at is that if they are trading on their own company stock, what's the big deal? Stock markets are volatile anyway.
Stealing from public-market shareholders undermines the very premise of YC / HN -- that it's possible to build businesses strong enough to delight stock-market investors. If any kind of company (like Sili Valley networking companies) gets a reputation for stealing from investors, it will be harder for us all to get funded.
Stealing from option and RSU holders? That's stealing from the guy in the next cube.
It looks to me like the SEC people did their jobs in this case.
The debate around Insider Trading in general is much more nuanced than 'it is STEALING', and is legal in some places.
What he is doing is making the market price reflect reality better, like most trading. Is it stealing if the profit they would've gotten was based on the market having less accurate data?
The test for inside information is that it is "material, non-public information used to inform the trade decision."
This is supposed to mean that the information is not available to normal market investors (nonpublic) and if it were published, eg via stock exchange announcement, it would move the market price more than "noise" (material) so you buy (inform a trade decision).
e.g. we just closed a billion dollar deal with recurring revenue that nobody trading our securities knows about increasing our expected after tax profit by 300%. You work as a lawyer on that deal and buy short dated out of the money call options you're doing an illegal thing.
Hiring is up by 5% this year, some of them were logistics experts. From this and other pieces of small knowledge none of which are by themselves marke moving you infer things are going well and buy. This is ok. The material information was inferred not provided. This is what good investors are supposed to do.
You probably need to be pretty careful trading the stock of a company you work for. Definitely get legal advice.
I'm in Germany, so insider trading rules are different from the US.