This is a stock photo for ‘insider trading’ and… I don’t know why. I’m supposed to assume that the guy in the suit is a businessman because why? And why do we need SWAT to arrest him?
Generally, I think people who commit financial crimes should be thrown in a dungeon and forced to eat mealworm casserole. People who commit other non-violent crimes should get treatment — and, potentially, more drugs — but these bankers need to be brought to heel.
But, nuance is a thing. Not everything that looks like a financial crime is one, or even should be one. Over on Bloomberg View, Matt Levine caught a fascinating lawsuit that really makes you philosophically ponder about the very nature of insider trading.
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The Securities and Exchange Commission and the Justice Department have charged Jun Ying, a former senior technology executive at Equifax Inc., with insider trading ahead of Equifax’s announcement that it had suffered a major data breach. But no one told Ying about the breach. Instead, he was asked to help out with a thing called “Project Sparta.”
“Project Sparta” turned out to be Equifax doing some work about what a “theoretical” data breach would do to a client. Ying didn’t work on Project Sparta, but his team did. Ying wasn’t told what Project Sparta was about, and he was reluctant to give up resources to work on some theoretical project without knowing why.
THEN Ying got a call from his boss, again not telling him what Project Sparta was really about, but ordering Ying to work on it.
Turns out, Ying was not an idiot. He texted a direct report: “On the phone with [global CIO]. Sounds bad. We may be the one breached. . . . Starting to put 2 and 2 together.” Then, he dumped all of his stock. He avoided $117,000 in losses that would have occurred had he waited for the information to go public.
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The SEC and the DOJ are busting his balls for this. The Equifax guys who knew about the breach and sold out before people found out, sure, screw them. Pitchforks and torches for everybody. But don’t haul off Ying when you storm the castle. Don’t punish a man for… FIGURING IT OUT because his bosses were too reckless to hide it yet too duplicitous to tell him the truth.
The key to an insider trading case is trading on material non-public information. Ying’s work calls were definitely non-public, but they certainly seem material in hindsight. My boss tells me to do stuff I don’t want to do all the time. If I guessed that he wanted me to do those thing because the company was in imminently dire straits, would I really be forbidden to act on my inference?
I’m not saying that the SEC has no case. If my boss asks me to pick up his dry cleaning, that’s one thing. If he orders me to unload six kilos of product by Thursday, five minutes after payroll tells me my check isn’t coming till Thursday, maybe that order is material information.
Levine has the right of it in how arbitrary the material/immaterial distinction ends up being:
In a sense the weird thing is that corporate executives are ever allowed to trade in their company’s stock. The normal way this is explained is that executives are not allowed to trade when they have material nonpublic information — when they’re negotiating a merger or dealing with a data breach or preparing the quarterly earnings release — but are allowed to trade when they don’t… But this is mostly a polite fiction. The executives always know things about their company that public shareholders don’t, and that the public shareholders would want to know. They know what long-term projects it is working on and how those projects are going, they know which other executives drink too much or spend too much time golfing, they know whether the chief financial officer looks a little shifty when you ask him about revenue-recognition policies. In practice everyone seems to draw a crude distinction between executives who have inside information about obvious short-term stock-moving things (this quarter’s earnings, a merger, a data breach) and those who just have a better overall sense of the company’s operations and prospects than the public does, but it’s not obvious why that better overall sense would not be material to shareholders.
You bring me the law that says executives aren’t allowed to trade on companies they work for, and I’ll boo and hiss when Mitch McConnell and Chuck Schumer quietly agree to light that bill on fire and dance naked around its ashes.
Fictitious though it may be, the standard is material information, not material inference. Let’s not forget, Ying’s intuition seems more obvious after the fact than it would have seemed in real time. He couldn’t have known just how right he was, and he couldn’t have known just how bad the breach was. He saw some ominous signs and panicked, it just turned out he was right this time.
“I’ve got a bad feeling about this” can’t be a crime.
Is Insider Guessing Illegal? [Bloomberg View]
Elie Mystal is the Executive Editor of Above the Law and the Legal Editor for More Perfect. He can be reached @ElieNYC on Twitter, or at [email protected]. He will resist.