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).