We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed. We announce these numbers at a quarterly business review meeting with our top seven hundred or so managers. The financial world sees this as reckless. But the information has never been leaked. When it does one day leak (I imagine it will), we won’t overreact. We’ll just deal with that one case and continue with transparency.
The CEO of Netflix says this in Ch 5 of his book No Rules Rules. The leak is a predictable result and will happen again. He believes the tradeoff in openness is worth it. If this $3 million is the only incident, maybe he is right.
IMO it’d be great if going public meant that you had to publish open, online, real(ish)-time dashboards of your company’s core metrics. Like if it’s a metric in every quarterly report, it goes in the public dashboard, and has to be no more than X stale (1 hour? 1 day? Something like that).
Many public companies already have something like this internally, it’s just really locked down. Open it up and most insider trading goes away.
There's a lot of work that goes into verifying the numbers before they're reported, and you really can't do that on an hourly basis, and a daily basis would really be pushing it.
Generally Accepted Accounting Principles aren't always entirely straightforward to apply; you can't just look at the bank balance every day, and internal dashboards don't have the same rigor that reported data must have.
This seems like it could make public companies even more short-term focused. Execs would be wondering on an hourly basis what stockholders, etc. are thinking about metric fluctuations.
I'm no financial expert, but it seems this would uber-stabilize the stock since algorithms (ingesting via scraping or human data entry) would trade near-perfectly based on the statistics, leaving little speculation for retail investors/other impulse trades.
Great idea. Although it is probably unrealistic for accounting data (profits, losses, cost of sale, etc), other types of data are indeed likely already present in internal systems with at least daily resolution: number of live accounts to show signups and closures, median watch time, total number of hotel bookings made, mining ore yield, vehicle occupancy and miles run for logistic companies, number of cars serviced, etc.
SEC could make a list of required realtime reporting metrics by industry and mandate this information to be published with delay no more than X days.
Honestly it seems like a win-win. Anyone trading on the information is likely to be caught and I doubt they want someone in a position of power who would commit that sort of crime.
As far as I can tell the company isn’t legally or financially liable so I don’t see a downside?
Aren't Netflix essentially enabling market manipulation (which insider trading technically could be a part of) which surely must violate some sort of legal codes (maybe even for the directors of the company! I.e. in Australia we have laws around "Director Duties" where as a director can be held liable for all kinds of behaviour when it reaches a certain scale incl. honesty, debt, insider trading etc.)
I don't think this was a leak from the QBR. The QBR goes into a lot more detail around finances etc. Sounded like this case the person was just trading off of subscriber data, which has other sources besides the QBR.
"Sung Mo Jun, Joon Jun, and Chon allegedly used encrypted messaging applications to discuss their trading in an attempt to evade detection. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme. The SEC Market Abuse Unit's Analysis and Detection Center uncovered the trading ring by using data analysis tools to identify the traders' improbably successful trading over time."
I'm curious which messaging app they used. I also wonder if someone tipped off the SEC or they just uncovered this in their own analysis work - it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface, but idk I'm not an expert... maybe the timing of the buy orders and also looking into what other trades they were making (if any) was easy to spot.
It’s part of their new “EPS Initiative” where they use an analytics tool called ARTEMIS (I forget what the acronym stands for) to assign a risk score to certain transactions and traders. It’s interesting because although the SEC has been pretty tight-lipped about the data inputs it appears there is some degree of “who-you-know” factored into the risk score. So two people can make the exact same trade at the exact same time but if I have a close friend or family member affiliated with Netflix and you don’t then my trade will receive a higher risk score.
It’s part of a broader change in the way the SEC approaches insider trading. Previously they took an “issuer based” approach where a big pop or loss in $ABC triggered a look at all the trades in the right direction prior to the announcement. Now they take a “trader based” approach where they look at person’s pattern of activity over time.
So if your spouse or sibling works in M&A and tips you off to potential deals so you can make (relatively) small investments on the inside information the scheme will be flagged and investigated much more quickly.
How does a system created by the SEC detect that person A is a (close) friend of person B, with accuracy? Family I can understand, if you share the same last name etc, but friends?
I don't think SEC has any encrypted messaging reading capabilities but average guy suddenly making regular killing on the market with the same stock does turn on red flags.
And then it's a matter of connecting the dots - most often the dots between the "lucky" guy and someone within the company.
That's all well and good, but statistical anomalies and potential personal ties to insiders don't prove cases, especially criminal cases. Unless they have the actual texts from whatever "encrypted messaging apps" they were using, they won't people to prove these allegations. If you could go to jail merely for being suspiciously lucky in the markets while knowing corporate insiders, lots of hedge fund managers would be in prison right now.
> it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface
It can actually be harder to make money off of insider information than it sounds. The market doesn't always react in the precise way you might expect. As a result, inside traders usually make large sums of money one of two ways:
1) With single, huge bets placed on huge news that shocks the stock price.
2) With many, medium bets placed around regular earnings reports.
In the first case: If someone never trades options and then suddenly places a single, large, highly-leveraged trade that happens to pay out handsomely, that's an easy red flag to spot.
In the second case: If someone is pattern trading in the right general direction around most earnings releases and they happen to work for the company (can be as simple as a public LinkedIn search) then it's obviously a red flag.
The encrypted messaging app is a red herring. The SEC isn't eavesdropping on their comms. They're getting one or more of the conspirators to flip on the others in exchange for reduced sentences. One of them gladly gave up the messages as part of a bargain.
> "They're getting one or more of the conspirators to flip on the others in exchange for reduced sentences. One of them gladly gave up the messages as part of a bargain."
That's possible but they also could have just seized one of their phones or whatever and recovered the chat history that way.
Some of these guys just buy weekly options ahead of an earnings call, after a few hits it's basically screaming to some statistical algorithm at the SEC "hey, please put me in jail!". Digging up admissible evidence is harder, though.
Not legal advice but in many common jurisdictions that would not necessary be a offence since they aren’t acting on inside information but rather executing planned trades.
Though it would likely raise eyebrows and one would need to be mindful of related concerns like closed periods in the securities, which are far easier to monitor.
> Some of these guys just buy weekly options ahead of an earnings call,
Obviously working for the company in question makes it different, but this doesn't seem crazy or unusual.
I've worked placed where it was very easy to predict the stock movements ahead of earnings call since the company's success/failure is in public eye a lot (same true for netflix?).
The top 5 companies in terms of market cap get lots of attention and analysis. I bet most people could review that data before the earnings call and guess the movement of the stock enough to make money.
Again, i would never touch my companies stock on the market but it doesn't seem like you need insider knowledge at a lot of big companies.
The article goes on to say that tools the SEC uses made the success of the trades look improbable.
The only fine I see listed is for about $72k. I can't tell if the scheme was profitable or not because that was just one person. I assume the others are going to trial, so we won't know for a while.
> it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface
It is often the manner in which this money is made. Very concentrated bets, like buying far out-of-the-money options, that let you get enormous leverage - buy the option for pennies, exercise for $50. Combined with the absence of activity on other stocks, lack of other regular trading etc.
If you just had a "hunch", bought some shares of Netflix, maybe some other techy stocks for camouflage, and made your "measly" 10% return a few times, you'd probably never be caught. But that's not life-changing of course. To make the $3m over, say, 4 trades, you'd need to have $7.5m to play with, which is quite a lot.
"Encrypted messaging application" is probably used as a scare phrase to bolster their case. iMessage, WhatsApp, Facebook Messenger, Signal, Telegram and lots more would qualify.
Basically don't make outsized short dated option bets on earnings stocks if you want to stay out of jail.
Almost every case of insider trading is because of this pattern.
It makes sense. You have information that you think gives you an edge. Trading "linear" stocks is boring. You need something that will give you an asymmetric payoff to compensate you for the asymmetric info you just stole.
I think the word "allegedly" probably indicates SEC did not use the messaging app as the route to uncover this.
If I were a part of SEC, unless there is some regulatory hurdle, I'd use some other information (e.g., some gov documents? linkedin?), and use that to construct a giant watch list for insider trading even before trades are made.
The word allegedly indicates the accused haven't been convicted of a crime, yet. Not using that word implies guilt, which the SEC hasn't proven, yet. It's pretty standard practice to see that word used like that.
Can the SEC get a search warrant to seize the endpoint devices and search them? (If not, can they use evidence gathered by the parallel criminal inquiries?)
Here's what I don't understand: How does knowing the growth numbers actually translate into an actionable buy-or-sell plan? To my naive eye, the market effect of key metrics always seems fairly random. And besides, in recent memory, all the FAANGs have been reporting positive numbers for all metrics, with just a few exceptions.
I mean it's like, here's my "insider tip": FAANGs saw usage and revenue growth this quarter. Ok, now are you gonna make money off this secret info?
There are numbers attached. FAANG saw growth of X%, which is above/below expected growth which analysts projected at Y%. There's an entire industry that's dedicated to calculating Y, it's not a back-of-the-envelope calculation that took a couple hours or a weekend. If X is > than Y, buy shares and sell them after. If X is < Y, short them instead. You can also gamble on their competition's stock rising/falling on the news if they're also publicly traded.
I’m financially illiterate, ignorant, and as a result my net worth is not significant, but I was excited to actually know this answer. Maybe there’s hope for me!
If growth numbers are higher than expected, you can buy stock now before the numbers are released. When they announce the true numbers, the stock will probably rise and you will make money.
but half the time the headline is "X Company beats expectations, stock slides anyway".... unless these are super outliers, it seems like the effect on the stock can be random
Outside analysts, working for banks and other financial firms, using public/non-insider data, will write up a report about what they think the numbers coming out of Netflix's quarterly earnings report will be, to try to predict how the stock price will be affected by the report. This is why sometimes you see amazing, other-worldly quarterly performance, but the stock price doesn't move at all- because everyone had already anticipated the performance and that had already been priced into the stock price.
So if you have subscriber growth numbers - you look at where the analysts get something wrong as part of their calculation. Maybe they think there will only be 1M new subscribers, but in reality there are 10 million.
We suspected (more than a decade ago and the relevant bug has been long-ago fixed) that some research firm was placing orders at the start and middle of each quarter. These were suspicious orders as it was for a customizable product but the customer was not customizing anything (where the customization was the majority of the value). The orders were going to New York, always paid, never any chargebacks, no apparent credit card fraud, or complaints to customer care.
Looking into it, the only thing we could figure is that we were leaking an incrementing integer as part of our manufacturing process and the customer was apparently willing to buy small orders to get access to that ID (and thereby estimate order volumes).
We changed the process to not leak incrementing IDs and the orders stopped after a short time.
Generally speaking, if you significantly beat analyst expectations, stock price goes up, and the reverse if you’re significantly below expectations. If you knew the numbers about to be reported tomorrow were, say, well above analyst expectations, you could buy now and get a reasonably consistent return.
“Usage and revenue up” is already priced in, if that’s the expectation. But “usage and revenue up much more/less than expected” will have a reasonably consistent effect on stock price.
While others have contributed valid points, I think there is another key point here - Netflix stock price is (or was) strongly correlated with that quarter's subscriber growth.
In other words, this might be a method that only worked with Netflix stock in that timeframe where sub growth and stock price is strongly correclated.
It's a matter of comparing growth expectations from analysts with actual numbers. If the actual user growth is higher than the average analyst expectation, you would buy stock/call options just before earnings; otherwise you'd short the stock or buy puts.
It's if it's higher than street expectations. They don't necessarily match analyst expectations, so it's a harder bet to make than you'd think. It's really only easy for a big beat or a big miss.
Perhaps, I am a bit naive, but what qualifies as insider trading?
If I work at a company, I am bound to know things that are not public knowledge. This means that any trade I make is technically insider trading.
Example: I am an engineer, working on a new unannounced product which I think will do well. I buy shares of my company in advance of the release of that product. A few years later, after the product has shipped and delivered the expected gains, I sell my stock.
Typically publicly traded companies have trading window limitations for its employees, and one purpose is to avoid insider trading risks. But that works for “normal engineer”. Executives who have more privileged info might need to consult their lawyers case by case.
One common approach also it to have auto-sell, which will automatically sell your stock on a schedule which is set long in advance, so there's no suspicion of insider trading. Honestly I think that should be the only way to sell stocks of your own company, either that or schedule a sale at least a quarter in advance.
I remember insider trading being roughly defined as "trading on non-public information which can be considered to be relevant to the share price" during our company training. At least in our company, most of the non-public information that the engineers have isn't really going to rock the stock price, since it's usually just feature additions to existing products. I imagine it'd be quite a lot different if you were working at for example Apple and knew that they were going to release a whole new product (and not just the iPhone X+1).
My biggest giveaway from the company training was to just avoid the company stock. Life is much easier that way.
>My biggest giveaway from the company training was to just avoid the company stock. Life is much easier that way.
That has always been my approach, but I also have never worked for a company that routinely gives stock to employees. Having a tilt in your investment portfolio towards your employer is a big risk concentrator (company goes downhill, you might get laid off at the same time), not to mention the potential issues with insider trading or the appearance of insider trading.
Good question. Same thing applies if you decide not to sell your company’s stock because you have confidence in the internal roadmap.
However, at most companies, there’s a segment of data that is kept more confidential, and those people with access have more guardrails on their trading. Netflix is an exception in that most of their workforce is “insider” and thus financial data such as what was shared within this indictment is more freely available.
"This case reflects our continued use of sophisticated analytical tools to detect, unravel and halt pernicious insider trading schemes that involve multiple tippers, traders, and market events."
Lol, I don't think there's a lot of sophistication in this. They want to make it sound like some sort of powerful magic box they have that can find anyone doing something dubious when in reality this is probably a very simple interesection between two datasets:
The one that contains all the people who yielded profits over X amount when trading the stock of a Y company during a timeframe, and another dataset that contains all the current and former employees of that Y company.
That's the thing about insider trading. People who do it are just complete idiots. They think that they can leverage some assymetry of information when in reality there's no such thing. If you trade the stock of your current or former employer (especially before earnings calls) and yield unrealistic gains you're going to get flagged and someone is going to manually review your shit.
I happened to have a set of standing instructions for a number of technology companies which consisted of buying stock when it dropped more than 5% below the 90 moving average, and selling stock when it exceeded more than 5% the 90 day moving average.
For a lot of tech companies this was basically a money pump since they rose and fell quite cyclically. Then I went to work at one of the companies on my list (NetApp) and one quarter EMC announced they were going to miss their earnings and all storage companies dropped. Two weeks later NetApp announced their earnings which were better than expected.
When I got my brokerage statement for the month I had a nice gain because they had bought NetApp on the dip, and then when the earnings were announced the stock went up so they sold the shares that had been bought. About three weeks after that I got a call from the SEC. I referred them to my broker which showed both the standing order, and that they had been in place for a couple of years before that event, and the SEC went away. However I did take NetApp out of the mix because, well it is always unnerving when your phone tells you the SEC is calling. :-).
I find it hard to believe this strategy works with any kind of long term horizon. This story reads like easy money. Tell us about some of your losses.
My old man always taught me: People love to brag about their wins (in the stock market), but rarely share their losses. The best traders know: You learn the most from your losses.
If this strategy is so good, why don't you run a prop trading firm doing exactly this? And do you run the same strategy for oil, natural gas, soybeans, and pork belly futures?
It's probably a good thing you removed it, because I bet if the SEC were bothered enough they could argue that NOT changing your standing order is possibly informed by insider knowledge. No idea if that is actually something they'd try to argue though.
I'm surprised they got to you that quickly. Having worked in finance most of my career, some of which involved fielding SEC inquiries, my impression is they are way behind enforcement. Although, to be fair, usually the inquiries I was fielding were more to do with spoofing and manipulation, not insider trading.
It's worse than that. It's also something similar to no true Scotsman, because presumably the act of getting caught is the only piece of evidence used to argue that they're complete idiots.
“ This is selection bias. The people who get CAUGHT doing it are complete idiots.”
I used to know a Wall Street guy sometime around 2005. The way he presented it was that there is a ton of variations of insider trading going on. People talk to each other and insiders are always ahead of the general investors.
I tend to believe that. As creative , greedy, competitive and smart these people are I can’t imagine them not taking advantage of every opportunity they see. Also, in most other industries the regulators mostly go after the smaller guys because the big guys are too hard and expensive to prosecute.
Yea, I'd imagine if you have enough discipline (e.g. don't use your family to make the trades) and use tradecraft well (e.g. don't talk about it on slack or in text messages), it should be possible to get away with it. It would be neat to know how many hedgefunds do it and what process they follow to do it.
> If you trade the stock of your current or former employer (especially before earnings calls) and yield unrealistic gains you're going to get flagged and someone is going to manually review your shit.
There are a lot more sophisticated methods of insider trading. Just for starters, get someone else who has no apparent insider status to make the trades for you. It doesn't take a genius to come up with strategies like burying your insider trades in a much larger number of regular trades to make the profits less conspicuous, or getting fake blog posts written that essentially say to do exactly what the inside trader is planning to do thus creating a plausible explanation besides insider knowledge for an agents strategy.
It's like money laundering: the methods you see on TV are the simple versions that are easy for an audience to understand, they're not what people who have actually taken the time to come up with a strategy do.
Exactly this. Especially in the 21st century world of big data, ML algorithms and all that jazz.
The closer you are to the action, the higher the chances of getting caught.
If you work for a finance firm, its pretty much guaranteed you'll be caught. Firms are hot on it and they take all sorts of layered measures to prevent it and stamp it out. If you work for a finance firm, in most cases its actually harder to obtain the insider information in the first place than it is to act on it as a PA trade. One of the most well funded and well-staffed departments in any finance firm is the compliance department and they have the power to kill your career instantly (you'll get escorted from the office the moment they suspect anything, forced to stay at home on gardening leave whilst they investigate and then once that's over - and assuming it doesn't go legal - you'll find nobody in finance will employ someone who was sacked for compliance reasons).
If you work for a listed company, then like these guys eventually found out, you'll be caught. A bit of data mining at the SEC will soon weed out transactions made by people who likely knew what was going on before the public did.
All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).
Compliance is a cost center. The Redditesque fantasy of compliance departments overflowing with resources because the company loves law for the sake of law or thinks that going above and beyond makes you less likely to get screwed than just doing what your lawyers tell you the laws says you need to do are just that, fantasy.
Compliance departments get tasked with making the company comply, nothing more, nothing less. And they're mostly given the resources to do that, nothing more nothing less.
All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).
When Warren Buffet bought financial stocks in 2008-2009 the deals were done in such a way he could not lose money easily, or at least had a much lower chance than any ordinary investor.
Having recently left a fintech job for just a normal tech job I was surprised to find that 4 hours of mandatory insider trading training was not the standard.
I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else.
Also, what about dark pools?
Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.
Look at companies where stocks dip or rise a few days to the day before earnings are announced. How does this happen if they don’t know something the general public or most other investment firms don’t know?
Agreed that the people getting caught are dumb. Especially making trades about your ex employer when you’ve already started an insider trading ring.
I think it's easy to assume government agencies have weak / outdated tech, but the SEC is notoriously pretty advanced in how they identify bad actors. Think about situations where someone is passing information to a friend who does not work at a company and gets a cash kickback. Somewhere they're getting a graph of relationships, and then merging that with transactions + likely some detail around known public disclosures, and doing this all at a scale of hundreds of millions of people and billions[?] in daily trades.
Your solution is easily sidestepped by trading through an entity that can’t be automatically traced to you. I’m pretty sure it’s more complicated than that and involves some form of anomaly analysis involving high gains on low activity accounts at suss timing
Entity trading is not going to obfuscate things that much. If you trade as an entity you probably have to provide an obscene amount of information to your trading platform like who are the stakeholders of the entity and who are the traders.
Not saying that SEC doesn't have sophisticated tools but I think in most cases they don't need that. Their power lies in their regulatory ability to collect personal information of who trades, when and how much.
There are quite a few foreign hedge funds that hire hackers to breach companies and steal data.
Trades are back-fitted into some model for plausible deniability, and they also purchase political and legal cover, often at the highest levels. I wouldn't surprised some are just a front for an APT that needs more cash for their black budgets.
They generate a lot of asymmetry, billions upon billions.
It's much more sophisticated than just (a) do you or did you work there and (b) did you make money on a trade.
I work at a law firm that does public M&A deals and we occasionally get inquiries from the SEC about, e.g., people that went to my high school (but a different class year) who bought stock in a company my firm did work for in the months leading up to the deal. Obviously neither me or the other person ever worked at either company (or even had any connection to them), but they still identify us as a potential risk because I could have potentially obtained insider info through the firm and then passed it on.
So how would we expect people who want to evade that system to react?
A simple proposal they would quickly grasp is to have insider trading but spread out over two or more companies, let's call them ACME and Weyland-Yutani. They would have the Weyland-Yutani employees make profit off insider info passed from ACME employees, and have ACME employees make profits off insider info passed from employees of Weyland-Yutani. I imagine they would also want to prevent the groups involved from becoming too large.
Your scheme only captures the biggest idiots. There are plenty of ways that require much more sophisticated methods to detect. An example is insider reciprocity: an insider at company A trades inside information with an insider at company B. They both profit from the insider information but neither trades in the instrument for which they could easily be flagged as an insider.
There are insider trading rings on tor. If you work at any billion plus dollar publicly traded company, you post insider information you have in exchange for insider information from others. That way the stock bets you make aren't tied to your place of employment. I've got no idea how legit any of it is, though. My company isn't publicly traded.
What if I tell someone unrelated to me to make the trade. Insider trading can work and has worked in the past, you just never hear about the guys who don't get caught cause they don't just do it as stupidly as you are assuming
"They think that they can leverage some assymetry of information when in reality there's no such thing. If you trade the stock of your current or former employer"
"That's the thing about insider trading. People who do it are just complete idiots."
Maybe in this pumped up bull market certain individuals have restrained from Insider Trading, but it's alive and well.
In college, I was a errand boy at a finance business in SF. The amount of insider tips I heard was staggering. I would be a rich man today if I had a bit of money back then. (The owner of the business did get close to going to jail, but it was over something else. I believe it was tax evasion. It didn't help he was Ed Meese's Financial Planner at the time.
I live in Marin County. A wealthy enclave that espouses liberal values, but are ruthless when it comes to their money. They share info at Wholefoods, or the charity dinner they get tipsy at. Hell, if I had money, I'd be tempted.
They trade a lot of information.
For years, the SEC was very small, and it's not much bigger today.
Hell, the only real money my dad made in the 90's was from an insider tip over thanksgiving dinner from a father in-law. (My dad passed, and the SOL is long gone.)
The people doing it do not trade themselves. And the SEC does not have a list of all current and former employees of the company (only certain officers have to actually report with the SEC). People who do this are not idiots...most of them do not get caught (selection bias, you only see the people who got caught, there are individuals who have made $100m, $200m doing this...never been caught or charged).
Also, the way they do this is by examining trading patterns. The SEC is 100x better at this than most other countries. Insider trading prosecutions are very rare outside the US (not just because it is hard to catch, it is very hard to win insider trading cases at trial). It requires a fairly sophisticated approach to uncover suspicious trades (every day, billions of trades, millions of securities, you have no idea who works where, you have no idea who their family is, you have no idea who their friends are...not easy).
I don’t get why they would do it in the first place. It’s merely $3M over three years for at least four people. Substantial amount, sure, but compared with the risk and their income from Netflix salary and generous options, I just don’t see where the incentive was.
First, I'm sure they thought the probability of being caught, and thus the risk to themselves, was low. And who knows? They may have even been right about this -- without knowing how many people get away with insider trading, it's impossible to say.
Second, nearly all of the profits were allegedly made by Joon Jun and Junwoo Chon, who did not work at Netflix. $3M over 3 years was probably a lot of money for them, as it would be for most people.
Low-mid value insider trading, tax fraud and other similar white-collar crimes are a terrible idea. They are ridiculously easy to detect, and the authorities will go after you because $3M is enough of a haul to set an example and further some careers, but not enough to give you the means to hire fancy lawyers to defend yourself.
Readit News
Many public companies already have something like this internally, it’s just really locked down. Open it up and most insider trading goes away.
Generally Accepted Accounting Principles aren't always entirely straightforward to apply; you can't just look at the bank balance every day, and internal dashboards don't have the same rigor that reported data must have.
SEC could make a list of required realtime reporting metrics by industry and mandate this information to be published with delay no more than X days.
As far as I can tell the company isn’t legally or financially liable so I don’t see a downside?
And why should we care what some old farts at Wall Street think? They can run their company however they see fit.
I'm curious which messaging app they used. I also wonder if someone tipped off the SEC or they just uncovered this in their own analysis work - it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface, but idk I'm not an expert... maybe the timing of the buy orders and also looking into what other trades they were making (if any) was easy to spot.
It’s part of a broader change in the way the SEC approaches insider trading. Previously they took an “issuer based” approach where a big pop or loss in $ABC triggered a look at all the trades in the right direction prior to the announcement. Now they take a “trader based” approach where they look at person’s pattern of activity over time.
So if your spouse or sibling works in M&A and tips you off to potential deals so you can make (relatively) small investments on the inside information the scheme will be flagged and investigated much more quickly.
And then it's a matter of connecting the dots - most often the dots between the "lucky" guy and someone within the company.
Done.
Deleted Comment
It can actually be harder to make money off of insider information than it sounds. The market doesn't always react in the precise way you might expect. As a result, inside traders usually make large sums of money one of two ways:
1) With single, huge bets placed on huge news that shocks the stock price.
2) With many, medium bets placed around regular earnings reports.
In the first case: If someone never trades options and then suddenly places a single, large, highly-leveraged trade that happens to pay out handsomely, that's an easy red flag to spot.
In the second case: If someone is pattern trading in the right general direction around most earnings releases and they happen to work for the company (can be as simple as a public LinkedIn search) then it's obviously a red flag.
The encrypted messaging app is a red herring. The SEC isn't eavesdropping on their comms. They're getting one or more of the conspirators to flip on the others in exchange for reduced sentences. One of them gladly gave up the messages as part of a bargain.
That's possible but they also could have just seized one of their phones or whatever and recovered the chat history that way.
It seems wrong that my personal info is being given out by my brokerage, in a way that lets them identify my personal trades.
Obviously working for the company in question makes it different, but this doesn't seem crazy or unusual.
I've worked placed where it was very easy to predict the stock movements ahead of earnings call since the company's success/failure is in public eye a lot (same true for netflix?).
The top 5 companies in terms of market cap get lots of attention and analysis. I bet most people could review that data before the earnings call and guess the movement of the stock enough to make money.
Again, i would never touch my companies stock on the market but it doesn't seem like you need insider knowledge at a lot of big companies.
The only fine I see listed is for about $72k. I can't tell if the scheme was profitable or not because that was just one person. I assume the others are going to trial, so we won't know for a while.
It is often the manner in which this money is made. Very concentrated bets, like buying far out-of-the-money options, that let you get enormous leverage - buy the option for pennies, exercise for $50. Combined with the absence of activity on other stocks, lack of other regular trading etc.
If you just had a "hunch", bought some shares of Netflix, maybe some other techy stocks for camouflage, and made your "measly" 10% return a few times, you'd probably never be caught. But that's not life-changing of course. To make the $3m over, say, 4 trades, you'd need to have $7.5m to play with, which is quite a lot.
Almost every case of insider trading is because of this pattern.
It makes sense. You have information that you think gives you an edge. Trading "linear" stocks is boring. You need something that will give you an asymmetric payoff to compensate you for the asymmetric info you just stole.
If I were a part of SEC, unless there is some regulatory hurdle, I'd use some other information (e.g., some gov documents? linkedin?), and use that to construct a giant watch list for insider trading even before trades are made.
try { int i = 0; while(true){ someArray[i]; i++; } } catch (IndexOutOfBoundsException ex) { //done }
I mean it's like, here's my "insider tip": FAANGs saw usage and revenue growth this quarter. Ok, now are you gonna make money off this secret info?
So if you have subscriber growth numbers - you look at where the analysts get something wrong as part of their calculation. Maybe they think there will only be 1M new subscribers, but in reality there are 10 million.
Looking into it, the only thing we could figure is that we were leaking an incrementing integer as part of our manufacturing process and the customer was apparently willing to buy small orders to get access to that ID (and thereby estimate order volumes).
We changed the process to not leak incrementing IDs and the orders stopped after a short time.
“Usage and revenue up” is already priced in, if that’s the expectation. But “usage and revenue up much more/less than expected” will have a reasonably consistent effect on stock price.
In other words, this might be a method that only worked with Netflix stock in that timeframe where sub growth and stock price is strongly correclated.
It’d be interesting to look at correlation of a rolling average with earnings call metrics.
If I work at a company, I am bound to know things that are not public knowledge. This means that any trade I make is technically insider trading.
Example: I am an engineer, working on a new unannounced product which I think will do well. I buy shares of my company in advance of the release of that product. A few years later, after the product has shipped and delivered the expected gains, I sell my stock.
Will I go to jail for insider trading?
My biggest giveaway from the company training was to just avoid the company stock. Life is much easier that way.
That has always been my approach, but I also have never worked for a company that routinely gives stock to employees. Having a tilt in your investment portfolio towards your employer is a big risk concentrator (company goes downhill, you might get laid off at the same time), not to mention the potential issues with insider trading or the appearance of insider trading.
You can't trade on specific information, but you can definitely trade on sentiment, which is what the rest of the market trades on.
However, at most companies, there’s a segment of data that is kept more confidential, and those people with access have more guardrails on their trading. Netflix is an exception in that most of their workforce is “insider” and thus financial data such as what was shared within this indictment is more freely available.
Lol, I don't think there's a lot of sophistication in this. They want to make it sound like some sort of powerful magic box they have that can find anyone doing something dubious when in reality this is probably a very simple interesection between two datasets:
The one that contains all the people who yielded profits over X amount when trading the stock of a Y company during a timeframe, and another dataset that contains all the current and former employees of that Y company.
That's the thing about insider trading. People who do it are just complete idiots. They think that they can leverage some assymetry of information when in reality there's no such thing. If you trade the stock of your current or former employer (especially before earnings calls) and yield unrealistic gains you're going to get flagged and someone is going to manually review your shit.
I happened to have a set of standing instructions for a number of technology companies which consisted of buying stock when it dropped more than 5% below the 90 moving average, and selling stock when it exceeded more than 5% the 90 day moving average.
For a lot of tech companies this was basically a money pump since they rose and fell quite cyclically. Then I went to work at one of the companies on my list (NetApp) and one quarter EMC announced they were going to miss their earnings and all storage companies dropped. Two weeks later NetApp announced their earnings which were better than expected.
When I got my brokerage statement for the month I had a nice gain because they had bought NetApp on the dip, and then when the earnings were announced the stock went up so they sold the shares that had been bought. About three weeks after that I got a call from the SEC. I referred them to my broker which showed both the standing order, and that they had been in place for a couple of years before that event, and the SEC went away. However I did take NetApp out of the mix because, well it is always unnerving when your phone tells you the SEC is calling. :-).
My old man always taught me: People love to brag about their wins (in the stock market), but rarely share their losses. The best traders know: You learn the most from your losses.
If this strategy is so good, why don't you run a prop trading firm doing exactly this? And do you run the same strategy for oil, natural gas, soybeans, and pork belly futures?
Did you have any legal obligation to do that. What would have happened if you choose to remain silent?
This is selection bias. The people who get CAUGHT doing it are complete idiots.
and/or greedy.
Even if you're "smart" about it, you can only hit so many lottery tickets before you come under suspicion.
I'd bet the best way to get away with insider trading is to do it once, make under $1 million, then walk the hell away and never speak of it.
I used to know a Wall Street guy sometime around 2005. The way he presented it was that there is a ton of variations of insider trading going on. People talk to each other and insiders are always ahead of the general investors.
I tend to believe that. As creative , greedy, competitive and smart these people are I can’t imagine them not taking advantage of every opportunity they see. Also, in most other industries the regulators mostly go after the smaller guys because the big guys are too hard and expensive to prosecute.
There are a lot more sophisticated methods of insider trading. Just for starters, get someone else who has no apparent insider status to make the trades for you. It doesn't take a genius to come up with strategies like burying your insider trades in a much larger number of regular trades to make the profits less conspicuous, or getting fake blog posts written that essentially say to do exactly what the inside trader is planning to do thus creating a plausible explanation besides insider knowledge for an agents strategy.
It's like money laundering: the methods you see on TV are the simple versions that are easy for an audience to understand, they're not what people who have actually taken the time to come up with a strategy do.
they already do that. sometimes the info is passed through many ppl and still get caught.
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Exactly this. Especially in the 21st century world of big data, ML algorithms and all that jazz.
The closer you are to the action, the higher the chances of getting caught.
If you work for a finance firm, its pretty much guaranteed you'll be caught. Firms are hot on it and they take all sorts of layered measures to prevent it and stamp it out. If you work for a finance firm, in most cases its actually harder to obtain the insider information in the first place than it is to act on it as a PA trade. One of the most well funded and well-staffed departments in any finance firm is the compliance department and they have the power to kill your career instantly (you'll get escorted from the office the moment they suspect anything, forced to stay at home on gardening leave whilst they investigate and then once that's over - and assuming it doesn't go legal - you'll find nobody in finance will employ someone who was sacked for compliance reasons).
If you work for a listed company, then like these guys eventually found out, you'll be caught. A bit of data mining at the SEC will soon weed out transactions made by people who likely knew what was going on before the public did.
All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).
Compliance is a cost center. The Redditesque fantasy of compliance departments overflowing with resources because the company loves law for the sake of law or thinks that going above and beyond makes you less likely to get screwed than just doing what your lawyers tell you the laws says you need to do are just that, fantasy.
Compliance departments get tasked with making the company comply, nothing more, nothing less. And they're mostly given the resources to do that, nothing more nothing less.
When Warren Buffet bought financial stocks in 2008-2009 the deals were done in such a way he could not lose money easily, or at least had a much lower chance than any ordinary investor.
Also, what about dark pools?
Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.
US Senators would likely disagree with your assessment. [1]
[1] https://unusualwhales.com/i_am_the_senate
Agreed that the people getting caught are dumb. Especially making trades about your ex employer when you’ve already started an insider trading ring.
No not really. Billionaires do it as well and they dont go to jail.
https://en.wikipedia.org/wiki/Steve_Cohen_(businessman)#SEC_...
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Not saying that SEC doesn't have sophisticated tools but I think in most cases they don't need that. Their power lies in their regulatory ability to collect personal information of who trades, when and how much.
Trades are back-fitted into some model for plausible deniability, and they also purchase political and legal cover, often at the highest levels. I wouldn't surprised some are just a front for an APT that needs more cash for their black budgets.
They generate a lot of asymmetry, billions upon billions.
Here's some patsies that got caught: https://www.theverge.com/2018/8/22/17716622/sec-business-wir...
I work at a law firm that does public M&A deals and we occasionally get inquiries from the SEC about, e.g., people that went to my high school (but a different class year) who bought stock in a company my firm did work for in the months leading up to the deal. Obviously neither me or the other person ever worked at either company (or even had any connection to them), but they still identify us as a potential risk because I could have potentially obtained insider info through the firm and then passed it on.
SEC vs Welhouse shows how sophisticated people get and yet get caught via data analytics
https://www.sec.gov/litigation/admin/2015/34-75319.pdf
A simple proposal they would quickly grasp is to have insider trading but spread out over two or more companies, let's call them ACME and Weyland-Yutani. They would have the Weyland-Yutani employees make profit off insider info passed from ACME employees, and have ACME employees make profits off insider info passed from employees of Weyland-Yutani. I imagine they would also want to prevent the groups involved from becoming too large.
It might not just be bragging. Arguably it's in society's interest because some people might believe it and be convinced not to try insider trading.
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That is what friends are for.
or maybe they underestimate the determination of feds
the govt is very good at tracking this stuff.
Maybe in this pumped up bull market certain individuals have restrained from Insider Trading, but it's alive and well.
In college, I was a errand boy at a finance business in SF. The amount of insider tips I heard was staggering. I would be a rich man today if I had a bit of money back then. (The owner of the business did get close to going to jail, but it was over something else. I believe it was tax evasion. It didn't help he was Ed Meese's Financial Planner at the time.
I live in Marin County. A wealthy enclave that espouses liberal values, but are ruthless when it comes to their money. They share info at Wholefoods, or the charity dinner they get tipsy at. Hell, if I had money, I'd be tempted.
They trade a lot of information.
For years, the SEC was very small, and it's not much bigger today.
Hell, the only real money my dad made in the 90's was from an insider tip over thanksgiving dinner from a father in-law. (My dad passed, and the SOL is long gone.)
Also, the way they do this is by examining trading patterns. The SEC is 100x better at this than most other countries. Insider trading prosecutions are very rare outside the US (not just because it is hard to catch, it is very hard to win insider trading cases at trial). It requires a fairly sophisticated approach to uncover suspicious trades (every day, billions of trades, millions of securities, you have no idea who works where, you have no idea who their family is, you have no idea who their friends are...not easy).
Second, nearly all of the profits were allegedly made by Joon Jun and Junwoo Chon, who did not work at Netflix. $3M over 3 years was probably a lot of money for them, as it would be for most people.
3M RIO under their name. How bout under others' names
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They give insider info to corps & non-related individuals to act on.
Good luck tracing that.