Back a few years ago there was blue collar insider trading case. Some workers on a railroad noticed a lot of guys in suits walking around the rail yards. Their boss made some unusual requests about equipment. The two workers put to and two together and took a guess that the railroad was for sale. They backed their guess up with cash and bought some of the railroad stock.
The railroad did sell, the two made some good gains, and the Securities and Exchange Commission accused them of insider trading. They were clearly insiders because they were company employees. The SEC failed to show that they gained access to information that betrayed company confidentiality. At least a jury determined that.
The SEC brought a white collar version of the case. The SEC (and the DOJ) accused Jun Ying, a former senior technology executive at Equifax with insider trading. He exercised his stock options and sold his Equifax stock holdings ahead of Equifax’s announcement that it had suffered a major data breach. The SEC says that Ying used confidential information to conclude that his company had suffered a massive data breach.
Ying claims that he merely guessed.
In Ying’s case, he was told about Project Sparta which was setting up a website for consumers to determine if they were affected by a breach and deploying tools for them. The discussion was that Project Sparta was for unnamed client that had experienced a breach. Ying’s boss made some weird statements and Ying got suspicious that the breach was actually of Equifax itself. He backed up his suspicions with cash and sold hie Equifax stock.
Matt Levine coined the term “insider guessing” for this type of situation and asks if it’s illegal.
It certainly looks illegal. That’s why Ying is subject to charges.
Firms have 10b5 plans to avoid this situation. Stock trading is set for pre-determined times to avoid any indication that the employee is trading on inside information.
As a company employee you have access to non-public information. It’s hard to prove that you didn’t know about a particular piece of key information. It’s hard to prove the difference between insider guessing and insider trading.
Obviously, it’s easier to prove insider trading if there is the document or email that shows the knowledge exists. You’re likely to cause the SEC to dig relentlessly to find that document or email or take a document or email out of context to prove its case. I expect the SEC is spending a bunch resources looking for the document or email that would prove that Ying did not merely guess.
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