The DOJ and the SEC charged a senior index manager with perpetrating an insider-trading scheme. (See here for the DOJ complaint and here for the SEC complaint.)

In the parallel complaints filed in the U.S. District Court for the Eastern District of New York, the DOJ and the SEC alleged that, upon learning of the additions or deletions of companies to the indices maintained by his employer, the index manager and a co-conspirator, a sushi restaurant manager, traded on the material non-public information. According to the SEC complaint, the trades were made in the co-conspirator's account in order to avoid detection by the index manager's employer, with the co-conspirator misrepresenting to his brokerage firm the extent of his experience with the purchase of call and put options in order to secure permission to trade options.

The DOJ arrested the index manager and charged him with securities fraud. If convicted, the index manager faces up to 20 years in prison. The SEC charged the index manager and the co-conspirator with violations of the anti-fraud provisions of the securities laws. The SEC is seeking permanent injunctions and the imposition of civil monetary penalties against both individuals.

Commentary

This case is a reminder that material non-public information about a security is not limited to information from the issuer. As more and more investment decisions are based on indices or other data, this enforcement action signals the need for companies that provide such data, and so have access to material non-public information, to implement robust policies and procedures controlling the access and use of this information. For some index and/or data providers, it may make sense for this to include information walls, watch lists, employee trade approvals, and employee trade monitoring processes that are comparable to the procedures used by investment banks.

Primary Sources

  1. SEC Press Release: SEC Charges Index Manager and Friend With Insider Trading
  2. SEC Complaint: Yinghang "James" Yang and Yuanbiao Chen
  3. DOJ Press Release: Queens Man Charged in Insider Trading Scheme
  4. DOJ Complaint: Yinghang "James" Yang

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