
SEC detects insider trading by executive at Alliance Fiber Optic Products - newman8r
https://www.sec.gov/news/press-release/2018-142
======
nostromo
> “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
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
> SELECT * FROM trades WHERE works_at = ticker;

~~~
Lazare
The issue, of course, is that there's no such database, nor does the idea of
one even make much sense. There's too many complex ways you can structure a
transaction so that you gain an economic benefit when a company does well, but
you haven't _personally_ made an outright purchase of that company's equity.
(Most obviously: You can tip an acquaintance and agree to split the profits,
but that's just the start.)

Since we can't get a categorical list of "transactions top executives at
company X have made, or caused to be made, or otherwise may benefit from",
traditionally enforcement has revolved around looking for super suspicious
transactions, and then working backwards to figure out if they were made by
someone who shouldn't have been making them. And since normal stock trades
basically always look unsuspicious, that generally means looking for people,
eg, buying short-dated out of the money call options[1]. It's not _proof_ of
wrong-doing, but it's a bit like finding someone who's won three lotteries in
the past month: It's probably worth checking to see if they've got an uncle
who works for the lottery commission. :)

But the flip side of that is that it's generally been assumed that if you _don
't_ do something blatantly dumb like buying short-dated out of the money call
options, you _won 't_ show up on anyone's radar, and you'll get away with it.
But maybe not any longer!

[1]: Hacker News's favourite financial journalist, Matt Levine, talks about
this a lot, and with good reason. The vast bulk of SEC enforcement actions for
insider trading involve people that seem to be almost trying to be caught.

------
mwerd
>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...](https://www.bloomberg.com/view/articles/2014-06-17/there-might-be-a-
lot-of-insider-trading)?

~~~
minimax
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
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
> 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
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
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?

~~~
arawde
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.

~~~
ghaff
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.

~~~
arawde
I think this is true. I would have to look to find a case where this was what
happened, but I would be surprised if such a case did not already exist.

I think this situation is much more difficult to find and enforce, however. As
an executive, you have to file with the SEC for share purchases (I believe its
either a certain number of shares or a certain $ amount bought/sold. I also
believe the form is form 4)

So it becomes a matter of figuring out when the senior exec knew the
information and traded on it, and I think its a bit more difficult to enforce
because its not your typical insider case.

I like your example, because it really hits at the edges of what is material
non-public information.

Something that just occurred to me: if you are a senior exec, your
compensation is probably tied to share ownership in $ME. Even if you trade on
$THEM, and make money, you're probably going to take a pretty substantial hit
on your own $ME holdings. This isn't to say its any less
fraudulent/misleading, but its an interesting thing to consider.

I wish I had a better answer to this scenario.

