Retired Controller Returns to Save Firm, Insider Trades

The standard model for an insider trading case has traditionally been the corporate executive who works on a company deal or the upcoming earnings call and trades before the firm discloses the information. Typically, either profits are reaped, or losses avoided. Earlier this week, however, the Commission filed an insider trading case involving a Senior Index Manager that centered on trading in advance of resetting indexes at his firm by adding stocks to or taking them out of an index, not the traditional situation.

Now the agency has brought an insider trading case where the retired controller returned to aid his now floundering firm. Before saving the company, however, he saved himself by selling all of his stock and options after analyzing the firm’s books. SEC v. Kelly, Civil Action No. 1:20-cv-04449 (E.D.N.Y. Filed Sept. 23, 2020).

Defendant Edward T. Kelly is the retired controller of Aceto Corporation. After Mr. Kelly retired the firm had financial difficulties. In March 2018 Mr. Kelly returned to aid the company. After determining that the company had financial issues, he sold all of his firm shares and options. By trading while in possession of inside information he avoided losses of over $85,000.

The complaint alleges violations of Exchange Act Section 10(b). To resolve the action Mr. Kelly consented to the entry of a permanent injunction based on the section cited in the complaint. He also agreed to the entry of an order that bars him from serving as an officer or director of a public company and to pay a penalty of $170,228. See Lit. Rel. No. 24912 (Sept. 23, 2020).

Two Charged with Insider Trading on Changes to Indexes

Insider trading has long been a staple of SEC Enforcement. Typically, the action centers on a corporate event such as a take-over or an earnings announcement. The trader usually obtained the information by either breaching his or her duty to the firm that owns the information or misappropriating it. The trades are placed shortly before the transaction and closed after its announcement. An illicit, riskless profit results. The Commission’s latest action may represent a new variation on the traditional scheme – trading in advance of the addition or deletion of stocks from indexes. SEC v. Yang, Civil Action No. 1:29-cv-04427 (E.D.N.Y. Filed Sept. 21, 2020).

Yinghang “James” Yang and Yuanbiao Chen, respectively, the Senior Index Manager of Company and his friend, a manager at a sushi restaurant, are defendants in the action. Mr. Yang has held his position since September 2018. In that position he helped manage the firm’s Indexes. He also served on the Index Committee during which there were discussions regarding the components of the various indexes. The firm had confidentiality procedures in place to protect their information as Mr. Yang knew.

Prior to the commencement of the scheme Mr. Chen opened a Brokerage Account at Broker. Mr. Chen informed the brokerage that he had five years of experience in trading options. He executed an agreement that would permit trading options through the new account.

Over a period of just over four months beginning on June 24, 2019 Defendants purchased options in the shares of fourteen stocks shortly prior to their addition or deletion from the Indexes. Following the announcement by Company of either the addition or deletion of the stock from an Index Defendants closed the transaction. The trades were placed while in possession of material, non-public information about the actions to be taken for various securities with regard to being added or deleted from the Indexes of Company.

Defendants placed the trade in Brokerage Account with computers using IP addresses at three locations. One was Mr. Yang’s home. A second was the Company. A third was at Mr. Chen’s place of employment.

The transactions netted illegal trading profits of 912.082. The profits were split by the two men. The complaint alleges violation of Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24909 (Sept. 22, 2020).