
Capital One Fraud Researchers May Also Have Done Some Fraud - sirteno
http://www.bloombergview.com/articles/2015-01-23/capital-one-fraud-researchers-may-also-have-done-some-fraud
======
ScottBurson
I'm starting to agree with the editorial linked from the article [0] that laws
against insider trading are pointless. People find ways to do it anyway, but
because the laws exist, the general public thinks it's rare. It might be
better for everyone to know what shark tank they're jumping into.

[0]
[http://www.wsj.com/articles/SB100014240527023042799045795161...](http://www.wsj.com/articles/SB10001424052702304279904579516170211639290)

~~~
rwmj
I wonder if it would be possible to create a parallel stock market where
insider trading is permitted? People could then choose to trade shares (the
same shares?) on the normal stock market, or the new free-for-all stock
market.

~~~
jleahy
People would just look at how the prices move on the 'free for all' market and
then trade the real stock market using that information, thus insider trading
on the real stock market would ensue.

You can't have it both ways, you either allow people to trade on private
information (thus indirectly making the information public by moving the stock
price) or you don't.

------
Zarathust
This reminds me of a quote by Eric Schmidt : "One day we had a conversation
where we figured we could just try and predict the stock market..." Eric
Schmidt continues, "and then we decided it was illegal. So we stopped doing
that."

They probably have thousands of employees who can access this information, I
think it would be foolish to think that absolutely none of them does it for
personal purposes.

~~~
voidlogic
So long as they used public information- why would it be illegal?

~~~
secalex
I once had an interesting discussion with a tech-savvy criminal attorney about
whether security researchers could trade public equities using early
indicators of compromise or private knowledge of 0-day (gained from outside
the company, not under NDA). She thought about it a bit and said "The insider
trading laws are so broad that if the US Attorney didn't like it they would
make it illegal, and if you had talked to anybody about it they would go down
for conspiracy."

My interactions with the criminal legal system as an expert witness since then
have only reinforced my belief in Harry Silverglate's axiom that pretty much
every US adult is merely an un-indicted Federal felon living their lives at
the mercy of the thousands of AUSAs who could plunge them into a living hell.

~~~
olefoo
And that is a problem, that we should solve.

------
tomp
Interesting, as the article notes - if Capital One had terms and conditions
that said, "we can use sales data for unrelated purposes", they would be able
to trade on that information themselves. I wonder who else has information
that they're willing to use/sell to third parties... Facebook? Google? I
wonder how predictive e.g. the ratios of likes of
McDonald's/Starbucks/Chipotle pages are. Or clicks on display ads for
Puma/Adidas shoes.

> Surely lots of Wall Street firms -- Chipotle is followed by 31 analysts --
> and asset managers are doing tons of research to try to estimate Chipotle's
> sales. They're visiting branches and calling investor relations and talking
> to pork suppliers and surveying consumers and generally getting paid a lot
> of money to build a robust estimate of how many burritos Chipotle is
> selling. One more piece of data -- one credit card company's charges at
> Chipotle -- would be helpful, but come on, not that helpful.

Could we get this data any other way? How about putting cameras in front of a
few flagship Chipotle stores and using CV to track the number of people going
in/out? That's legal, AFAIK.

~~~
foobarqux
No one would do business with them if they had such terms.

~~~
dangerboysteve
The sat company, SkyBox, Google purchased mentions using sat images for
predictive analytics that can be applied to investment decisions.

[http://www.skyboximaging.com/products#analytics](http://www.skyboximaging.com/products#analytics)

~~~
TheOtherHobbes
Following the logic in the article, you'd get the most efficient markets by
making all financial transactions public and instantly accessible.

Then everyone would have the maximum possible amount of information, which
would lead to maximally efficient pricing.

For some reason I can't quite put my finger on, I don't expect this to happen
any time soon.

Which is one reason I remain skeptical that 'efficient pricing' has ever been
a genuine goal.

~~~
olefoo
On the other hand "making all financial transactions public and instantly
accessible" is one of the best arguments I've heard for pushing people towards
bitcoin/blockchain style accounting systems.

It would do all sorts of weird things to the theory of the firm forcing
internal transactions to maintain information asymmetry.

------
wahsd
Kind of highlights the true value of data that users are giving away with
every single, in this case, transaction.

I am not quite sure how one would go about an alternate method for assessing
the actual value of user data, but it has always seemed rather obvious to me
that it is hugely downplayed by all the self-interested parties and their
defenders.

Would it, in this case maybe be the change in market cap pre and post sales
figures? But even that, as pointed out, has some increases baked in based on
alternative research to estimate performance. I guess you would need to find a
very specific company that really does not lend itself to outside, tangential
research and that keeps its performance measures and metrics under wraps
really well between announcements. Anyone have any idea of an industry or
company that fits such a profile?

Does anyone else realize we are really in and moving deeply into an era that
is going to add significant opportunities for corruption and economic capture.

~~~
willis77
The problem with ascribing dollar values to data (a.k.a. facts) is that you
can make up a million untestable hypotheses about how data could theoretically
have worth. To give an extreme but illustrative example: let's say that by
typing this comment to you, I raise the temperature in my router by a
millionth of a degree, which alters the wind pattern in my room, which causes
butterfly to flap its wings, which... you get the point.. causes a hurricane
in some remote part of the world. Does this make the "expected value" of my
comment negative billions of dollars?

You can back this argument out to less extreme versions and see that it's very
difficult to economically value a fact. E.g. what if the traders named in this
article had 100X the capital on the line for the same trade. Is the data now
100X more valuable because of the added economic value they derived from it?
What if their trade netted them more than the change in market cap?

~~~
Dylan16807
That's an interesting counterargument, but it defeats itself. Expected value
is about averages.

------
jlev
These guys should start their own credit card transaction aggregator (ala
Mint), and gather user data that is expressly made available for market
research. Make the analysis for privacy tradeoff more explicit and distribute
profits.

~~~
snowwrestler
Or, use the trading profits to subsidize the processing fees.

A credit card processor that charges 0% fee on transactions would have a huge
advantage when pitching retailers.

~~~
mcherm
> A credit card processor that charges 0% fee on transactions would have a
> huge advantage when pitching retailers.

So why, you may ask, do we have such high fees for credit card transactions?
And believe me: they ARE high. No more than a hiccup when debit card fees were
restricted to roughly $0.15/transaction but CREDIT card fees (which use the
same systems) continue to be a substantial fraction (a few percentage points)
of every purchase.

It's because no one is pitching retailers. The cards are sold to the consumer
(who pays nothing). The retailer pays, but the contracts they are offered do
not give them space to do much other than refuse to take a type of credit card
(and give up a bug chunk of their business) or to accept them and pay the
fees.

~~~
PeterisP
Huge barriers of entry. In order to make a card product that is really
competitive to Visa & Mastercard, it's a chicken and egg problem - you need on
board both a lot of merchants (to make the product useful to customers), a lot
of customers (to make the extra effort viable to merchants), and a lot of
money (measured in billions, not millions) to get it started - even major tech
companies like Ebay/Paypal and Stripe are too small to afford this kind of
effort on their own.

If you make the product really attractive to merchants, then you will have a
problem getting customers. You will have to compete with the existing credit
card products. Banks make a lot of money on those existing products and are
highly motivated to ensure that the product you propose never, ever gets off
the ground. History shows that they are both willing and able to (a) use this
money to "buy" customers over with bonuses that you won't be able to match
because you aren't charging the merchants so much; and (b) aggressively try to
keep you out of all the infrastructure - there are many 'moats' that they
control, including the large settlement systems, technical infrastructure
installed at merchants (forget about using the same POS terminals to read your
cards and Visa/MC, even if it's technically easy), etc.

There have been and are many attempts to make new alternative card products,
but they aren't realistic to succeed. EU considers a wish for such a card
system every couple years, but it turns out to be unfeasible even given the
combined financial resources of the interested governments. Right now Russia
has a strong motivation to support and subsidize such a system, but again,
they don't want it _that_ much to warrant the huge expenses for the relatively
low expectations of success.

------
joncp
I see a lot of comments about how they could have figured out this data by
just counting customers outside some Chipotle restaurants. This misses a key
point: using their massive database, they were able to sift through thousands
and thousands of businesses and actually figure out that Chipotle was one to
watch. Without that data, they wouldn't know where to put their customer
watcher.

If they were a little savvier, they could have used their data from CapitalOne
to decide which businesses to research and then create shill research, much
like the FBI's "parallel construction" of evidence. I wonder whether that
would have put them in the clear; when the SEC came knocking, they could have
pulled out their research, saying "Look, we figured this out fair and square."

~~~
pbhjpbhj
Wonder how closely footfall at high-street traders equates to their revenue -
pretty close I'd imagine?

I'm thinking whether a firm running city centre CCTV could do this with some
computer vision systems. Mobile phone operators and ISPs that serve businesses
must have similarly closely correlated signals to hand too.

~~~
poikniok
What exactly does your first sentence mean? Trying to parse it and do not
understand what "footfall at high-street traders" means.

~~~
pbhjpbhj
as mkehrt says.

>"Wonder how closely footfall at high-street traders equates to their revenue
- pretty close I'd imagine?"

To put it another way: I was thinking that the number of people who go in to
shops in the high-street might correlate well with the revenue for those same
shops.

------
antr
I genuinely think this is a grey area, and it's far from "insider" trading. Is
it moral, I don't think so. Should Capital One sanction these employees,
probably. But I think this is far from ilegal.

Huang and Huang had access to a db which is not open to everyone, granted, but
they had to extrapolate the stock direction based on data from a subset
(customers who buy Chipotle with a CC), of a subset (with a Capital One
card)... and then compare that to analyst expectations, etc. but then, would
it be insider trading if I stood outside a Chipotle polling customers who
exited on the dollar amount spent? That is also proprietary information, and
one I can use to trade stocks on. I'd like to know if they did any trades
where the return went south. I know of sector investment funds which pretty
much do this all day long, forecasting all sorts of industries, and it's not
ilegal.

I'd like to know what others think.

~~~
nhstanley
Well, in the article the make clear that there is case law that this is
illegal and considered "misappropriation" insider trading.[1]

Even if we decide it isn't insider trading, Capital One is on the hook for
what it's employees do. Chipotle or whoever could sue CapOne for breach of
contract, and CapOne could sue these guys for that. So even if we decide as a
society it's not criminal, another group of guys doing the same thing
somewhere else might not get to keep all that sweet dough they made purely on
civil grounds. I don't know. It's interesting.

[1]
[https://supreme.justia.com/cases/federal/us/521/642/case.htm...](https://supreme.justia.com/cases/federal/us/521/642/case.html)

~~~
discardorama
> Well, in the article the make clear that there is case law that this is
> illegal and considered "misappropriation" insider trading.

I'm not sure that is the exact same thing. These guys had to do some research.

Consider, for example, a large pork supplier. If they see orders from Chipotle
trend up by (say) 30% over a quarter, are they free to buy call options on
CMG? What if you're a feed supplier _to_ this pork supplier, and you know that
Chipotle is their biggest customer, and see that this pork supplier's demand
for feed has gone up by 30%; can _you_ then buy call options?

This is a gray area, and I'm not sure the line is really that clear cut.

~~~
will_brown
>This is a gray area, and I'm not sure the line is really that clear cut.

Your examples are not novel issues, certainly there would be case law on
point. I can not cite the case law, but I would tend to believe your examples
fall within the classification of insider trading (i.e. trading based on a
companies non-public information). I know for example as an attorney if I am
working on a merger and I buy/sell stock or inform someone else who buys/sells
the stock that would be insider trading.

Generally, think of the Martha Stewart allegations, she was informed by a
friend/corporate officer that the FDA was rejecting the companies cancer drug.
Based on that non-public information her brother sold the stock and then the
FDA decision became public and the stock dropped. It is a stretch from your
hypothetical, but the non-public information paradigm would seemingly still
apply.

~~~
lmm
I don't think that example is insider trading. Insider trading is trading on
material nonpublic information _that was obtained in violation of a duty of
confidence_ (and for a benefit). Do Chipotle's suppliers have a duty of
confidence regarding their order sizes? I suspect either it's explicit in the
contract, or they don't.

~~~
mkehrt
Is that ("that was obtained in violation of a duty of confidence") true? I
don't think it is. I'm pretty sure you can't trade on information you overhear
in a bar, for example.

~~~
lmm
The SEC _might_ argue that bar patrons have such a duty of confidence - they
have previously done so for roommates, and golfing partners. Or they might
charge the person you overheard with violating the Reg FD selective disclosure
rules. Or they might let you both away with it (IANAL). But yes, it absolutely
is part of the law;
[http://www.law.cornell.edu/cfr/text/17/240.10b5-2](http://www.law.cornell.edu/cfr/text/17/240.10b5-2)
is the detailed version.

------
ChuckMcM
It reminds me of how search engines know about things like shopping cart
exploits right away because all of a sudden there are thousands and thousands
of queries for a particular shopping cart software package being used on a web
page.

Personally I agree with Matt that this is a not the usual kind of thing.
Clearly Chipotle could anonymize their sales with dummy purchases but the
actual numbers would still be there. Like a search engine, for the data stream
(credit card charges) to work you are forced to put enough information in the
transaction to identify it.

This is also something I see happening with IoT type technologies, when it
becomes possible for someone to collect data on their own at thousands of
locations for relatively small numbers of $, like the helicopters trying to
estimate oil availability, you'll have data streams that can inform economic
activity. Imagine something like a cellphone sized thing with a camera that
just counts customers using OCV to note blobs at the counter, in a restaurant
and texts a tally once an hour. Seems ridiculous but its quite possible to do,
and much more cheaply than just repurposing disposed cell phones (although
that works too).

------
coob
Wow. I'm actually quite impressed, in a 'that's impressively evil' kind of
way.

Maybe anonymized CC trend data should be made public?

~~~
pc86
Criminal, yes. Immoral, probably. Evil? Of course not.

------
mahyarm
So I wonder how much insider trading occurs via government spooks analyzing
surveillance data that we don't know about. I doubt the SEC would be able to
make a public lawsuit about this .

------
savanaly
Just from reading the title I knew this would be a Matt Levine piece. Great,
entertaining finance columnist.

~~~
Nicholas_C
I thought the same thing. He has very snarky titles. My favorite one is "Law
Firm Accountants Were Bad at Accounting, Law."

------
raincom
Workaday co-CEO Dave Duffield said in some interview that he invests privately
in the companies that buys Workaday cloud hr solution. If he can sees how many
employees are added to a certain company that buys Workaday cloud product, he
can use that an edge.

------
downandout
This is a stretch of insider trading laws, which I assume is why they haven't
been charged criminally (the SEC can only pursue civil sanctions). The data
was in the possession of their employer, not of the publicly traded companies.
They could probably be prosecuted under the CFAA for misusing a protected
computer system, but I cannot imagine them being convicted criminally for
insider trading here, or even losing at trial if they choose to fight the
civil SEC case.

If I pay people to go count the number of customers in line at a
representative sample of Chipotle restaurants during lunch every day, compare
the results to the previous quarter where I was doing the same thing, and
trade on that data, is that illegal? It's nonpublic information. Would my
employees be prosecuted for this if they traded on it?

Prosecutors and the SEC attempt to stretch our laws every day. It doesn't mean
that they are going to win these cases.

~~~
RockyMcNuts
What if Chipotle signed an agreement with Visa and their credit card processor
saying that their data wouldn't be provided to traders to trade their stock
on?

What if Capital One signed an agreement with Visa saying that in exchange for
issuing cards, they wouldn't provide the data to stock traders, and would keep
it safe?

What if they didn't trade on it, just sold the info to Taco Bell?

Seems like a situations I want to avoid, if I'm Chipotle.

~~~
downandout
_> What if Chipotle signed an agreement with Visa and their credit card
processor saying that their data wouldn't be provided to traders to trade
their stock on?_

If they did, then obviously these two would be in violation. But I have seen
no mention of such an agreement.

------
shawnee_
The implications are bigger than for public companies' insider trading.

Think about the success of the Oatmeal's _Exploding Kittens_ card game on
Kickstarter. Aside from the fact that KS's new payment processor Stripe is
leeching an _astounding_ amount of money from this campaign (where most
pledges have probably been made with cash-like debit cards being charged at
the rate of credit cards), there are also implications of aggregation inside
that cartel.

How many playing card printing companies out there are eager to handle that
order? What if you knew ahead of time who they were going to use, based on
that "bank account" info you have to give out when you sign up for a campaign
on KS? Private companies leverage this info all the time, and it's much easier
for them to get away with it.

------
aptimpropriety
Have a look at 1010Data: [https://www.1010data.com/solutions/by-
industry/financial-ser...](https://www.1010data.com/solutions/by-
industry/financial-services/) and
[https://www.1010data.com/partners/detail/data-
providers](https://www.1010data.com/partners/detail/data-providers)

This stuff is already being done legally, with certain industries and within
certain financial institutions. Just seems like these guys were just caught in
an unfortunate legal snag - otherwise they just seem like good traders to me.

------
linuxhansl
The point is not whether somebody does a lot of research or not. The point is
whether he/she had data available that is not available to the public. That is
simply not fair.

Now, using helicopters to track oil tankers - as described in the article -
seems to be a blurry line, but in theory anybody could do that and then use
that information, it is available to everybody... In principle at least.

This data was entirely private, so I would agree with being not fair.

That said, I hope these guys do not have to go to jail, but are simply forced
to pay their gains (or a portion of those) back, maybe as a fine.

------
jliptzin
This is probably going on right now in lots of other companies that have
access to such data. We only hear about the ones that get caught. Seems like
they didn't try too hard to cover their tracks. Just think about all the
companies that have access to credit card data and all the people that are
connected to those companies who could either be selling the data to others or
trading on it themselves. Best thing to do to prevent this unfair advantage is
releasing publicly available CC spend data.

~~~
trentnelson
> Best thing to do to prevent this unfair advantage is releasing publicly
> available CC spend data.

Who releases it? Every credit card company? At what frequency?

What if one of the nightly bulk loads into the transaction data warehouse
fails with an integrity error, alerts the DWH team, is picked up by a junior
person because of a staffing anomaly, who forces it through, and then the next
day's data release is off by a couple of million, but the automated trading
bots and manual trading desks don't know this, so they trade on this new
signal...

....I'm sure you see where I'm going with that.

------
kosei
I've always felt this would be a really interesting job to have. The ability
to look at a CC company's data and be able to generalize market trends. There
are so many questions I'd want to ask about socioeconomic status and impact on
debt, fraud, specific types of purchases, etc. It'll never happen, but someone
should give a big data firm unfettered access to answer some interesting
societal and behavioral questions.

------
clebio
> That's amazing! These two like customer-support guys...

> You sometimes see insider-trading cases where someone makes like a thousand-
> percent return...

Am I the only one bothered by the author's writing? Am I getting old?
Conversational is ok, I guess (though, Bloomberg?). But these "like"s? They're
not 'like customer-support guys', they _are_ customer-support guys (or else
they _are_ analysts).

Bah-humbug.

------
unreal37
I think they were primarily a victim of their massive success. If they had
only made $500,000 instead of $2.8 million, they might still be going along
fine.

How did they get caught? Did the SEC see this account has 1,800% return on
investment over 3 years and investigate who owned it? Or did Capital One
discover some odd queries on their production database and report them to the
SEC?

~~~
zaroth
I think generally it's the large unhedged options position that makes 10x
after an earnings surprise that gets noticed. To your point, yes I think in
this case pigs got slaughtered.

------
ForHackernews
Couldn't this kind of thing be easily solved by having companies release sales
data more frequently? It seems like the only reason this is profitable is
because earnings are released quarterly, so there's opportunity for the stocks
to become wildly mis-priced over those months.

What would the downside be for releasing earnings data daily, or even weekly
or monthly?

~~~
ta33
lol

------
adrr
Big question. If they setup a hedge fund and bought the data from the card
issuer, and did the exact same thing. Would it be legal? Don't they use
private satellites to take pictures of mall parking lots and crop fields to
estimate holiday sales and crop yields? Hows is this different. Its data that
public doesn't have access to.

~~~
thedufer
You're describing a world in which said data is available on the market, which
is already a drastically different world than the one we live in. I would be
surprised if they can legally sell that data - surely credit cards come with a
privacy clause?

~~~
adrr
All the banks sell their data. Its aggregated but thats all you need. You
don't care if a specific person went to Chipotle, you're looking for trends.

[http://www.businessinsider.com/credit-cards-sell-purchase-
da...](http://www.businessinsider.com/credit-cards-sell-purchase-data-to-
advertisers-2013-4)

~~~
rwmurrayVT
I think this data is delayed. I don't care if there were 1.000.000 chipotle
customers in Virginia two quarters ago.

------
DevX101
How did these guys get caught?

~~~
nandemo
Not sure about the US but this is more or less what happens in Japan:

Brokerages are obligated to flag and report suspicious orders or trades to the
[equivalent of] SEC.

If necessary, the SEC then asks the brokerage for more information and
investigates it.

The definitions of "suspicious" can be somewhat arbitrary, but those >1000%
returns would definitely be considered suspicious. Two people at the same
workplace getting abnormally high returns would also be considered a red flag.

------
patcon
for better or for worse, the establishment of decentralized prediction markets
will essentially make insider trading laws moot. Who cares if you can't bet on
the original market when you have another unregulated market where you can bet
on the veracity of the first?

[http://www.augur.net/#what-we-do](http://www.augur.net/#what-we-do)

[http://www.truthcoin.info/](http://www.truthcoin.info/)

~~~
harryh
Why would anyone who does not have access to insider information participate
in an unregulated market when you have easy access to a regulated one?

------
fasteo
metafraud, interesting concept

