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Don’t Google “How SEC Detect Unusual Trade” Before Insider Trading

Courtesy of ZeroHedge. View original post here.

The first rule of insider trading is never to buy calls on the target (although these days the acquiror will also do) days if not hours ahead of a merger announcement. The second rule, as Chinese research scientist Fei Yan just found out, is to never google "how sec detect unusual trade" before (while and after) trading on inside information.

In this case, one trader broke both rules, repeatedly and with impunity, and the outcome is obvious.

In a complaint filed on Wednesday afternoon and titled amusingly enough "SEC Files Insider Trading Charges Against Research Scientist Aiming to Avoid SEC Detection", and spotted by @barbariancap, the SEC claims the following:

The Securities and Exchange Commission today announced insider trading charges against a research scientist who allegedly searched the internet for “how sec detect unusual trade” before making a trade that the agency flagged as suspicious through data analysis.

The SEC’s complaint alleges that Fei Yan loaded up on stocks and options in advance of two corporate acquisitions late last year based on confidential information obtained from his wife, an associate at a law firm that worked on the deals.  According to the SEC’s complaint, Yan made approximately $120,000 in illicit profits by selling his holdings in Mattress Firm Holding Corp. and Stillwater Mining Company following public announcements that they would be acquired by other companies.

So does this mean that the NSA is now cooperating not only with the Deep State over Trump, but also flags the SEC any time key phrases such as the one above, are googled?

Here are the details from the SEC complaint:

This case involves insider trading by Fei Yan (“Yan”), an engineering research scientist, who, between June and December of 2016, generated illegal profits of approximately $120,000 by trading stocks and options in advance of two corporate merger announcements: the acquisition of Mattress Firm Holding Corp. (“Mattress Firm”) by Steinhoff International Holdings N.V. (“Steinhoff”), through a tender offer announced on August 7, 2016, and the acquisition of Stillwater Mining Company (“Stillwater”) by Sibanye Gold Limited (“Sibanye”), announced on December 9, 2016

The SEC alleges that Yan got the inside info about the two mergers from his wife ("Attorney A"), a junior corporate associate at the New York offices of an international law firm who was a member of a deal team at "Law Firm A" which represented the acquiring corporations in the two transactions and, obviously, was in daily contact with Yan, either by phone or in person.

The plot thickened on June 4, 2016, approximately two months after Yan's wife joined the Steinhoff-Mattress Firm deal team at Law Firm A, and eight days after Steinhoff delivered a confidential non-binding letter offering to  acquire Mattress Firm, Yan submitted an application to open a brokerage account in the name of his mother Wu, a citizen and resident of China. Over the next few weeks, as the Steinhoff-Mattress Firm negotiations continued, Yan funded his mother's newly-opened brokerage account from his own bank account, and then bought 300 shares of Mattress Firm stock in the Wu Account. The Mattress Firm deal was announced on Sunday, August 7, 2016. On August 8, 2016, the first trading day following the announcement, Yan sold his entire Mattress Firm position, profiting by over $9,700.

So far so good: nothing that Yan had done to this point had tipped off authorities. However, later that same year, Yan doubled down and on November 22, 2016, three months after Attorney A joined a second M&A deal time, this time for the Sibanye-Stillwater deal at Law Firm A, Yan began purchasing Stillwater call options, once again using his mother's account.

This time Yan got greedy, and violated the first cardinal rule, buying additional Stillwater call options during the following 16 days, purchasing a total of 766 contracts all the way until the acquisition was announced on December 9, 2016.

Now buying up calls every single day into an acquisition announcement would likely have been enough to tip off the SEC, but this is where this particular case went off the rails.

In the final days before the announcement, as Yan was doing everything in his power to set off every possible M&A alarm at the SEC, and was purchasing his Stillwater options, he also conducted internet searches for the phrases “how sec detect unusual trade” and “insider trading with international account”, and also accessed articles about the Commission’s detection and enforcement efforts in the insider trading area.

Yan's electronic trail was not confined to inquiries into the SEC's detection methods, however. Some more from the SEC,

Between November 4 and 6, 2016, Yan visited Attorney A in New York.

On November 7, 2016, upon returning to Cambridge, Yan visited the Yahoo! Finance page concerning Stillwater. Over the next few days, Yan and Attorney A spoke on the phone multiple times each day, as was typical for them

On November 12, 2016, Yan flew from Boston to Germany. The next day, November 13, before information about the Stillwater-Sibanye transaction was publicly available, Yan searched the internet for “stillwater merger” but did not locate any web pages on  this subject matter.

Then, as he had already bought up hundreds of calls, Yan had an idea: let me buy some more options that expire in less than two weeks but look into whether this may tip someone off:

On December 6, 2016, Yan used the Wu Account to purchase 164 Stillwater call options with a strike price of $15 at $0.35 per share, and 177 Stillwater call options with a strike price of $16 at $0.10 per share. These options were all set to expire on December 16, 2016, only ten days away.

Later that same day, Yan conducted a Google search for the search string “how sec detect unusual trade” and visited several web pages concerning the Commission’s detection and enforcement efforts with respect to insider trading.

And then, the piece de resistance:

On December 7, 2016, Yan conducted a Google search for the search string “insider trading with international account” and accessed articles discussing the Commission’s insider trading enforcement actions with international dimensions.

This took place two days before the transaction was announced. And, on the day before the merger became public, seemingly content with his google search discoveries, Yan purchased his final batch of 54 Stillwater call options with a strike price of $15 and an expiration date of January 20, 2017 at $0.75 per share in the Wu Account.

By the end of the day on December 8, 2016, Yan had accumulated 695 Stillwater call options in the Wu Account with strike prices of $15 and $16 per share and expiration dates of December 16, 2016 or January 20, 2017.  Yan purchased these Stillwater call options while in possession of, and on the basis of, material nonpublic information about Sibanye’s acquisition of Stillwater that he had obtained from Attorney A.

Then the profits came:

On December 9, 2016, at approximately 1:04 a.m., Stillwater and Sibanye publicly announced that Stillwater had entered into an agreement with Sibanye under which Sibanye would acquire Stillwater for $18.00 per share in cash. Yan accessed the press release online at 5:30 a.m. that day. He then visited the NASDAQ and Yahoo! Finance pages concerning Stillwater between 5:30 a.m. and 6:09 a.m.

At 9:33 a.m., just after the open of regular market trading, Yan began placing orders to sell his Stillwater call options. In the wake of the acquisition announcement, Stillwater’s stock price increased by $2.64 per share to $17.32 (approximately an 18% increase compared to the previous trading day’s closing price), and the volume increased by 34,644,993 shares to 37,801,686 shares (approximately a 1,097% increase compared to the previous trading day). Over the course of the day, Yan sold his entire Stillwater options position, generating illegal profits of approximately $109,702.

Eight months later, both Yan and his wife Attorney A are googling "why did my googling not prevent this", "will the DOJ go after me next", and "how much is this going to cost."

And no, for those wondering, the NSA had nothing to do with this: the SEC simply subpoeaned Yan's search history.

Here are the links: SEC press release and the full complaint.

h/t @barbaniancap

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