Now that you’ve seen what ACA Insight has to offer, don’t be without it. Subscribe now!

The weekly news source for investment management legal and compliance professionals

Current subscribers - please log in to the website in the upper right-hand corner

News October 5, 2015 Issue

Data Analysis Tools Lead to Insider Trading Charges Against Investment Analyst

The SEC’s Division of Enforcement appears to be sifting trade data in an effort to match specific trades with events likely to affect a stock’s price. It’s a recipe likely to produce insider trading charges.

Just ask Ashish Aggarwal, a former J.P. Morgan analyst who was recently charged by the SEC in U.S. District Court for the Central District of California with providing a friend with material non-public information about two acquisitions, each involving one of the investment bank’s clients. The friend then not only allegedly traded on that information in his own account and in those of his father and sister, he allegedly tipped another friend, allowing him to profit. The two friends and the family members involved made more than $672,000 from insider trading, the SEC said.

The analyst and his two friends, Shahriyar Bolandian and Kevan Sadigh, "misused an investment bank’s confidential information for their personal benefit and victimized the bank, its clients and investors," said Robert Cohen, acting co-chief of the SEC Division of Enforcement’s Market Abuse Unit. The agency credited the unit with having "detected the insider trading through trading data analysis tools in its analysis and data center.

"We will continue to proactively identify and combat serial insider trading schemes, particularly when it involves industry professionals," he said.

What SEC units like the Market Abuse Unit and another group, the Asset Management Unit, do is make increasingly sophisticated use of high-tech tools to find fraud. They do this in a number of ways, including searching for anomalies from standard industry practices, and by matching trading activity to specific events likely to affect a stock’s price – which is what appears to have led to the insider trading charges here.

"The number of SEC initiatives, task forces and working groups that analyze large pools of data seems to grow every month: the Division of Economic and Risk Analysis, the Aberrational Performance Inquiry, the Office of Risk Assessment, the Accounting Quality Model, the Market Information Data Analytics System, and the Consolidated Audit Trail," said Zaccaro Morgan partner Nicolas Morgan.

"Data analysis by FINRA and the SEC has for years provided the catalyst for insider trading cases. What has changed more recently is the amount of data available and the tools to sift through it and make connections, he said."

"Enforcement officials in recent years have warned that the Enforcement Division is focused on leveraging new technology and big data to identify suspicious trading patterns," said Foley Hoag partner Daniel Marx. "Given the claim by the SEC that it discovered the alleged insider trading here using advanced data analytics, this case also demonstrates how the SEC is increasingly using such tactics to investigate market abuses and other misconduct."

The Department of Justice, with which the SEC worked on this case, filed separate criminal charges against the three men on August 20. The indictments accuse them of forming a conspiracy so that they could profit from insider trading and tender offer fraud. "As a practical matter, whatever happens with the ongoing controversy about what constitutes criminal insider trading, the DOJ and the SEC will remain aggressive in investigating and prosecuting these cases," Marx said.

The acquisitions

The confidential information that was allegedly misappropriated, the SEC said, involved two J.P. Morgan-advised deals: Integrated Device Technology’s 2012 planned acquisition of PLX Technology, and salesforce.com’s 2013 acquisition of ExactTarget.

"Bolandian and Sadigh bought the same series of call options in PLX Technology and ExactTarget," the agency said. "Their trades were often within hours or even minutes of each other, and typically were 100 percent of the daily trading volume of those option series." What’s more, a brokerage account used by Bolandian was opened in the Bahamas and funded with his credit card just a week before the ExactTarget deal was announced, the agency claimed.

What about Aggarwal himself? According to the complaint the SEC filed with the court, Bolandian conducted some of the trades in his accounts "on Aggarwal’s behalf in an arrangement that enabled Aggarwal to circumvent J.P. Morgan’s pre-clearance rules and potentially share in any profits."

The three men were charged by the SEC with violating Section 10(b) and 14(e) of the Exchange Act and its Rules 10b-5 and 14e-3. Rule 10b-5 prohibits fraud, while Rule 14e-3 prohibits insiders at a seller and a buyer from sharing confidential information about a tender offer. The SEC wants them to pay disgorgement of any "ill-gotten gains," plus interest and penalties.

The attorneys representing Aggarwal issued a statement saying that Aggarwal "denies the allegations against him" and "intends to vigorously defend himself against these allegations." Attorneys representing Bolandian and Sadigh either did not respond to messages seeking comment or could not be located.

The match-ups

Although the SEC did not delineate just which activities it matched through data analysis and which it matched through more traditional means of investigation, it made the following allegations in its complaint:

Aggarwal "repeatedly exchanged telephone calls and text messages with Bolandian, and Bolandian and Sadigh repeatedly texted each other or call each other’s cell phones" during the weeks before the public announcements of the transactions. "In several instances, the communications between Bolandian and Sadigh took place within minutes of Aggarwal’s communications with Bolandian."

Bolandian and Sadigh conducted a series of trades in PLXT and ExactTarget securities prior to the public announcement of the transactions, during the period when the telephone calls and text messages were exchanged between them and with Aggarwal. "These trades included: a) trades by Bolandian in PLXT and ExactTarget securities within an hour of his phone calls or text messages with Aggarwal; b) trades by Bolandian in ExactTarget securities through an off-shore brokerage account that Bolandian opened and funded just one week before the public announcement of the ExactTarget acquisition; c) trades by Bolandian and Sadigh in the same series of call options of PLXT and ExactTarget – trades that frequently constituted all of the day’s trading volume in those series – often within minutes or hours of each other; and d) trades by Bolandian in the brokerage accounts of family members," the agency said.

After the acquisitions were made public – on April 30, 2012 for PLXT, and on June 4, 2013 for ExactTarget – the share prices of the two companies "substantially increased, leading to total illicit profits of approximately $453,000 for Bolandian and his family members, and approximately $219,000 for Sadigh," the SEC said.

In addition, Aggarwal received other benefits from Bolandian, including paid hotel and dining amenities, according to the SEC complaints. These allegedly included two Las Vegas hotel rooms for multiple guests between June 21 and June 24, 2013, and more than $640 for dinner and wine at an upscale San Francisco restaurant. "The bill was paid for in cash," the SEC said.